Although cast as a tax on gold-plated insurance policies for the well-heeled, it has prompted anxiety among the middle class.
The idea, proposed last Wednesday by Senator Max Baucus, is to help raise money for the nation’s health care overhaul by placing a new excise tax on the most expensive health insurance policies, like the ones offered to partners at Goldman Sachs and other affluent professionals.
The tax is meant to raise more than a quarter of the $774 billion needed to pay for the Baucus plan. But just as much, the tax is intended to discourage the overly generous coverage that many experts say has helped propel the country’s reckless spending on medical care.
As it turns out, though, many smaller fish would get caught in Mr. Baucus’s tax net. The supposedly Cadillac insurance policies include ones that cover many of the nation’s firefighters and coal miners, older employees at small businesses — a whole gamut that runs from union shops to Main Street entrepreneurs.
Under the Baucus plan, insurers selling a plan costing more than $8,000 for an individual and $21,000 for a family would have to pay a 35 percent excise tax on the excess amount.
Although the national average premium is currently $13,375 for a family policy, according to the Kaiser Family Foundation, many are much higher than that — particularly in high-cost parts of the country.
Nationwide, about one in 10 family insurance plans would be subject to the new excise tax, according to the Center on Budget and Policy Priorities, a liberal-leaning policy and research group.
The tax would be levied on insurers — or on employers that act as their own insurers. Either way, the tax would very likely be passed along to workers in even higher premiums than they pay now. But if insurance premiums continue to rise faster than inflation, as they have for years, many more people’s policies could end up setting off the luxury tax in coming years.
“It puts a bigger tax on middle-income Americans who are already paying enough,” said Harold A. Schaitberger, the general president of the International Association of Fire Fighters. The union says some of its members around the country are in plans that would be subject to the tax.
People who live in high-cost areas, like the Northeast or California, would also have a greater risk that their insurance plans would set off the excise tax — not because the coverage is particularly generous, but because the price of their policies reflects the higher medical costs where they live. Massachusetts residents, for example, tend to pay more than a quarter more in premiums, on average, than people living in Idaho.
Bruce Hodson is a state employee in Maine and the president of Local 1989 of the Service Employees International Union, where the cost of a family plan is now running at about $20,500 a year. At the typical pace of health premium inflation, his policy could very likely set off the tax if it goes into effect in 2013, as the Baucus plan proposes.
The plan has a $400 annual deductible per family, and Mr. Hodson has a co-payment whenever he goes to the doctor.
“We really worked hard to keep the cost down,” Mr. Hodson said of the union plan. And that coverage came at the expense of higher salaries, he said. “We’ve given up pay raises for this.”
The tax proposal has also drawn fire from some of Mr. Baucus’s Democratic colleagues, including John D. Rockefeller IV, who been an outspoken critic of the overall Baucus plan. Mr. Rockefeller says he is particularly worried about the effect of the tax on coverage for workers like coal miners, including those in his home state of West Virginia, and firefighters.
“I am concerned that the current excise tax proposal could prevent workers in high-risk professions from getting the health benefits they need,” he said.
Mr. Baucus acknowledges some of the concerns and plans to work with the other members of the Finance Committee to address them, said Erin Shields, a spokeswoman for the senator. The proposal, she said, already sets the thresholds somewhat higher in those states where coverage is the most expensive.
But Ms. Shields defined the tax as vital to discouraging insurance coverage that is overly generous. “High-cost health plans are a major contributor to skyrocketing health care costs,” she said. Employers, she said, would still be able to find meaningful coverage below the threshold.
On Sunday, President Obama said he saw the need to protect union members, but he also defended the tax. “I do think that giving a disincentive to insurance companies to offer Cadillac plans that don’t make people healthier is part of the way that we’re going to bring down health care costs for everybody over the long term.”
Proponents say the tax is squarely aimed at the very richest plans — like the family coverage offered to the 400 or so managing directors at Goldman Sachs and its top executive officers. It carries a premium of around $40,000 a year. The Goldman plan would be subject to nearly $7,000 in taxes. Goldman Sachs declined to comment.
Even if most employees around the nation might initially escape, experts say more people's insurance plans would cross into the taxable range in future years. If the inflation rate in premiums continues its pace of the last 10 years, even the average cost of family coverage would probably cross the threshold within a few years of the tax's going into effect.
"That number is going to grow and grow and grow," said Marissa Milton, a health care policy analyst for the HR Policy Association, which represents large employers' benefit managers.
Ms. Milton drew a comparison to the alternative minimum tax — a tax modified in 1986, supposedly as a way to keep affluent people from using deductions to avoid paying taxes. In reality, it has ended up capturing more and more middle-class taxpayers, Ms. Milton said. Likewise, the insurance excise tax "is going to affect a lot of families," she said.
By his own calculation, Robert G. Hansen, a business professor at Dartmouth, is one of the Americans who might be considered to have luxurious coverage, because the cost of his benefits could easily top $25,000.
But that supposedly "gold-plated coverage," he said, includes the cost of related benefits, like dental coverage and the money in his flexible spending account — all of which would be subject to the excise tax.
And who will pay the $1,450 in additional taxes Mr. Hansen would incur? "In the end, look in the mirror," he said.
"It's the worst kind of economic engineering," he said. "You end up with something that looks like the I.R.S. code."
Small employers would also probably be hit by the taxes — and, again, not because they offer overly generous coverage. Instead, small businesses tend to pay more for their insurance than bigger employers that can negotiate better premiums. And because they do not have large pools of workers to help spread the risk, small employers tend to pay even higher amounts if they have older or sicker workers.
About 14 percent of small employers, counted as those with fewer than 500 workers, now offer policies that would be subject to the excise tax, said Beth Umland, director of research for Mercer, a consulting firm that conducts an annual survey of employee benefits. That compares with just 5 percent of large employers with 500 or more workers.
"That is a very heavy hammer on the cost of your premiums," said Donna Marshall, the executive director of the Colorado Business Group on Health, which represents employers of all sizes in that state. "You don't want to cause a chilling effect on the employers who are trying to do the right thing."
Even union plans, which tend to offer the most generous coverage, are expensive because they frequently cover a number of older workers or some who retired early and have not yet reached Medicare age. Jim Hoffa, president of the Teamsters union, warned that the middle class, not the rich, would bear the brunt. "It taxes the wrong people."