Globe Editorial

New taxes will sting, but might help to lower health spending

April 10, 2010

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THE TAX on “Cadillac’’ health insurance plans serves two purposes: to raise money to help lower-income families get coverage, and to give insurance companies a new incentive to keep health costs under control.

The tax, which is applied against insurance companies but won’t take effect for eight more years, will kick in at high enough rates — $27,500 for a family plan — that most Americans won’t be affected. Others will have time to seek lower-cost alternatives.

It’s not surprising, however, that some Massachusetts cities and towns, with their unusually high health insurance costs, would find their plans to be subject to the tax. A recent Globe series demonstrated just how out of whack municipal health plans are with those in the private sector. It also showed how easy it would be for many cities and towns to lower their health costs by joining the state plan or transferring some retirees to Medicare. If the Cadillac tax serves as a wakeup call to Massachusetts communities, it’s a necessary one.

Some Bay State communities already offer their workers policies exceeding $30,000 in which there are no deductibles, $5 copays for office visits, reduced fees for health clubs, and access to every hospital.

Those benefits may sound like a dream, but they carry few incentives for cost control; workers can simply seek out the highest-cost provider whenever they want. Tailoring plans more closely to the actual needs of beneficiaries would promote savings and efficiency.

Meanwhile, some Massachusetts firms have concerns about another funding mechanism in the health reform bill, the tax on medical devices. These range from surgical drapes to bedside monitors to the panoply of synthetic joints, implantable defibrillators, and other spare parts that keep human bodies going past their “use by’’ date. Senator Scott Brown wants to repeal the tax, which will go into effect in 2013.

Massachusetts is a leader in the medical devices field with 225 manufacturers, so it is not surprising that Brown has gone to bat for them. During negotiations over the bite of the tax, members of the state’s delegation helped knock it down from 2.9 percent to 2.3 percent, and Governor Patrick says he is exploring ways to reduce its impact.

But the 2.3 percent will be largely offset by the boost in business created by having 30 million more Americans with insurance, and thereby in a position to use medical devices. All device makers, domestic and foreign, will have to pay the tax, so no firm should gain a competitive edge. The industry argues that foreign makers could benefit slightly since disproportionately more of their sales are overseas and thus not subject to the tax. But US firms, with more sales in this country, will profit more than foreign manufacturers from the boom of newly insured patients.

There is no disguising the fact that some businesses will pay more in taxes because of the health reform bill, and that individuals with the most expensive health plans will probably pay more for them because insurers will be subject to the Cadillac tax. But in creating incentives to trim costs, the Cadillac tax is good public policy. And applying a modest tax on device makers while also giving them 30 million new customers is a fair way to pay for a significant improvement in national health. No benefit comes without any cost, but these are reasonable ways to achieve the greater good of extending insurance to more people and reducing the medical cost spiral.

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