Baucus health insurance plan aimed at priciest policies

But critics see cost for elderly, middle class

Aides to Senator Max Baucus said his plan would discourage employers from offering so-called Cadillac plans. Aides to Senator Max Baucus said his plan would discourage employers from offering so-called Cadillac plans.
By Lisa Wangsness
Globe Staff / September 19, 2009

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WASHINGTON - Critics say a proposal by Senate Finance Committee chairman Max Baucus to raise money for the health care overhaul by taxing insurers on their most expensive plans could hit middle-class pocketbooks - particularly in New England, where health costs are high.

Baucus has proposed paying for more than a quarter of his $750 billion health care proposal with a 35 percent excise tax on “gold-plated’’ insurance plans. It would be levied on insurance companies, which could pass on the expense to their customers.

The tax was meant to be a compromise, but it has already caused an uproar on both sides of the political aisle, with liberals and conservatives alike complaining it would hurt low- and moderate-income workers and older workers - particularly in high-cost areas.

The tax would hit about 10 percent of plans and 8 percent of taxpayers nationwide, according to Baucus’s aides, who said state-specific estimates were not available. It is designed to not only raise revenue but also to discourage employers from offering so-called Cadillac health insurance policies, generous plans that many economists say encourage people to use more health services than they need, driving up prices for everyone.

But critics say the tax would disproportionately affect workers who are sick - and therefore choose plans that have better benefits - or older, since older workers can be charged more for their insurance.

“A more expensive plan isn’t necessarily a better plan; it just may mean the workforce is older,’’ said Celia Wcislo, assistant division director of Service Employees International Union 1199 and a member of the Massachusetts Health Insurance Connector Authority board. She said people with plans that offer maximum flexibility may have an illness that requires them to see their doctor often or to consult a range of specialists.

The tax would apply only to the marginal difference between the cost of the plan and the price thresholds set in the bill - $8,000 for an individual plan and $21,000 for a family plan - not to the total cost of the policy. Baucus has included a three-year transition period to cushion the blow in the 17 most expensive states, including Massachusetts, which has the highest premiums in the country for family plans. But because the thresholds would rise each year at the rate of inflation - not medical inflation, which is much higher - the tax would probably affect a significant number of New Englanders within a few years.

The average total cost of employer-sponsored insurance in Massachusetts in 2008 was about $4,800 for singles and $13,788 for families, according to the Medical Expenditure Panel Survey, conducted each year by the federal government. About 10 percent of Massachusetts employees have plans that cost more than $6,700 for singles and $17,000 for families.

Insurers this week announced they would increase premiums by about 10 percent next year in Massachusetts, where premiums have doubled in the past decade. Bruce Bullen, interim chief executive officer of Harvard Pilgrim Health Care, said “a very substantial number’’ of his company’s plans would be taxed under the proposal - he could not say precisely how many - and he said many could hardly be called “Cadillac’’ plans.

“Our concern is whether or not this is just a hidden attempt to tax insurers, as opposed to a public policy designed to go after these excessively rich plans,’’ he said.

In fact, it was meant to do both.

Baucus, a Montana Democrat, had originally wanted to limit the income tax exclusion on employer-based insurance, which would not only raise substantial cash but also, economists say, suppress premium inflation. But unions balked. Curbing those tax breaks, they argued, would disproportionately hurt workers who have sacrificed wage increases for years in order to maintain good benefits.

In July, Senator John Kerry, Democrat of Massachusetts, circulated an alternative proposal to tax insurers on high-end plans instead of workers. The Finance Committee’s “Gang of Six’’ bipartisan negotiators considered it more politically palatable approach and snapped it up.

But in a phone interview yesterday, Kerry said he was not so happy with Baucus’s bill - he had proposed higher thresholds that would raise substantially less money but affect fewer plans, and therefore fewer taxpayers. Next week, when the Finance Committee begins voting on Baucus’s proposal bit by bit, Kerry said he would suggest raising the thresholds, as well as alternative ideas for getting the rest of the money somewhere else. But he said he did think it was a good idea to tax insurers because it would force them to contribute something toward a health insurance overhaul. He said insurers would feel new competitive pressure to keep prices down once the “exchanges’’ were set up, offering people a more transparent way to shop for insurance.

“I think the insurance companies have to be part of the solution,’’ he said.

But Robert Book, a health economist at the conservative Heritage Foundation, noted the 35 percent tax rate is close to the income tax rate for the wealthiest earners - so theoretically a low-income worker with expensive insurance could be indirectly taxed at a rate two or three times their income tax rate on a small portion of their benefits.