Thursday, January 7, 2010

No middle class tax?

President Obama promised Americans that he wouldn't raise taxes on the middle class, or on those families earning less than $250,000. But will the health care reform bill end up doing exactly that? Some think it might:
The federal takeover of the nation's health care system that Democrats are brewing up in Washington will have to be financed by someone. The administration wants to put it on the backs of the middle class in the form of a 40% excise tax on the value of health insurance coverage that exceeds $8,500 a year for individuals or $23,000 for families.

This isn't just another soak-the-rich scheme. This is going to hit the middle class — the schoolteachers, the steelworkers, the everyday folks of whom Bruce Springsteen sings so passionately.

That's why House Democrats and labor unions oppose it.

Those who think they'll be exempt from the tax because their health care insurance isn't one that Obama would define as a "super, gold-plated Cadillac" plan are kidding themselves. Douglas Holtz-Eakin, director of the Congressional Budget Office under George W. Bush, says 95% of Americans who are covered by plans that fit into the Cadillac category make less than $250,000 a year.

How much does your family's health insurance cost? Does it qualify as a "Cadillac" plan? That might depend on what sort of plan your employer or spouse's employer provides, or what you pay for as a self-insured person or business owner. And unless you're paying all of your health insurance costs yourself, chances are good that you don't actually know the cash value of your present health insurance benefits.

And what happens if the kind of insurance you presently have is actually a "Cadillac" plan? Some employers have said that such plans will simply be dropped, and employees given the choice only of less expensive, less comprehensive health care insurance. That makes sense, since neither employers nor employees can readily afford a 40% tax on health benefits. But if "Cadillac" plans are phased out of existence, then where exactly is the revenue to pay for health insurance reform supposed to come from?

Perhaps most troubling is that the kind of coverage that will be taxed here is the kind of coverage most Americans would like to have; in fact, many Americans still think the point of health care reform is to give them access to this level of coverage for much less than they would pay now (or, for those who really haven't been paying attention, for free). Instead, the goal seems to be to eliminate the kind of low-deductible, high coverage plan with access to all sorts of expensive options and low or non-existent co-pays that many Americans would, if asked, say they really want to have.

Obama promised no taxes on the middle class, but this provision of the health care bill may well amount to a de facto tax on the middle class, after all. Then again, Obama also promised that all the health care negotiations would be open to observation, and we can see how well that promise has been fulfilled.


Siarlys Jenkins said...

With all due respect, this is a case of conservatives biting their own tail. There were two ways to finance this -- increase income tax on those making over $250,000, and tax the so-called Cadillac plans. The only reason the tax on more comprehensive health plans is likely to prevail, is because it is impossible to get 60 votes in the senate for a plan which relies on a higher income tax.

Your point is well taken, however, that all health care has to be paid for. There is indeed an infectious entitlement mania about medical insurance. Health care as a "right" does not come out of thin air. Somewhere along the line, premiums (paid by individuals or employers), taxpayers, charitable institutions, or underpaid doctors and hospitals and nurses and CNA's and janitors, are going to pay for every bit of care.

This is a tangled mess, because we can't start all over with a sensible, humane, fiscally prudent plan, designed from the ground up. The field is too crowded with features that someone or other does not want to let go of.

If we could start all over, we should make sure everyone is covered, there should be reasonable copays per visit or per prescription, based on ability to pay, employers should contribute (with due recognition that not all employers have a prosperous income stream), and higher income taxpayers are going to have to subsidize premiums for lower-income patients, otherwise, we can't provide universal coverage. Also, the laborer is worthy of his hire -- budget to pay CNAs $10 to $15 an hour.

Geoff G. said...

In my case, I spent about $2000 last year covering my partner and myself (and who knows how the federal government will run the tax rules on that particular situation...another weird distortion caused by DOMA, but then I suppose the "Catholic" answer to that is make my employer cut health benefits to my partner because gay people don't deserve recognition of their relationships).

It's hard to find out just how much on top of that my employer spends to insure the two of us, but even if I'm only paying a quarter of the true cost of the premiums, insurance for both of us would run about $8000 per year, well under the "Cadillac Plan" cap.

And my health insurance is pretty good. Co-pays are reasonable ($15 for my GP), prescriptions are covered pretty well, etc.

I'd consider myself fairly middle class, btw. Perhaps at the low end of that income bracket (between $30 and $35k). My guess is that most people who are truly "middle class" that have health benefits have insurance pretty similar to mine.

Now, there is a distortion when it comes to a discussion of what "middle class" truly means. Households in the middle quintile of income earn between about $35,000 and $55,000 per year. Households in the top quintile (which I would call "upper class") earn over $88,000. Source.

Bear in mind then, that if there are two earners in the household each earning about $45k, that puts them solidly out of the middle class. In fact, by selecting $250k as a limit for no taxes, Obama set himself a very high bar. The top 5% of households in the US only bring in $157k, so he's talking about "soaking" only the very highest earners in the country.

One more consideration: I don't know if a tax hike offset by a larger tax cut counts as not raising taxes (it's kind of a matter of semantics), but Obama did pass fairly substantial tax cuts for most people as part of the stimulus bill.

Deirdre Mundy said...

My husband makes 40K a year, our HSA costs abot 23K. (We pay 1/3, employer pays 2/3)

We're BARELY middle class, and we have an HSA. But we have maternity coverage and my husband's employer is a 'small group,' which means they pay a lot more for insurance than a bigger company.

So we're looking at a Cadillac tax, esp. as our premiums continue to rise.

In that case, we'd end up dropping coverage and going on Medicaid (which we'd be eligible for with the new limits.)

Not something we'd want to do, but we wouldn't be able to afford the extra tax.

The 'cadillac plan' tax is designed to hit small groups (i.e. small businesses) harder, and force us towardds single payer.

BTW-- our plan is good (Anthem Blue Cross), but since it's an HSA we also pay the first 4K of expenses. And a 4,000 deductible shoul hardly count as a 'cadillac plan.' But in a small group with a fair number of cancers and preemies, premiums run high.... (But because the employer chips in, and because we need maternity coverage, and b/c we get a tax break on benefits, it's still cheaper for us than self-insuring...)

Siarlys Jenkins said...

Now why would professed "conservatives" and budget-conscious "blue dogs," all professing concern for small business and independence from government largesse, support a plan which hits small business harder, and forces people with an HSA to go on Medicaid??? Why aren't all these conservatives demanding that their senators back off and support the house bill, which does NOT have the tax on health plans, but does balance the books with a tax on upper incomes?

Geoff G. said...

Dierdre Mundy, one of the ways health care reform is supposed to help people in exactly your situation is by putting small groups like your employer's into a much larger pool and spreading the risk (and driving down the premiums) that way. You're actually one of the biggest targets of the bill as far as reducing costs goes. See here.

In addition, at $40,000, you'd also qualify for government subsidies to help pay for premiums. Here's a discussion of how the Senate bill holds done expenses for families similar to yours via subsidies.

Finally, I'm assuming you have an HSA paired with a high-deductible health plan. This sort of plan essentially has people pay for their own routine care out of the HSA money that they set aside, while the actual insurance only kicks in if you have a big expense (like, God forbid, a hospitalization)

The "Cadillac plan" tax does not apply to contributions you make towards an HSA or FSA. It only counts towards the premiums you pay towards the insurance itself. In other words, it targets plans that have very low deductibles and/or co-pays with little to no out-of-pocket expenses.

Since your deductible is so high, I'd assume your actual insurance premiums (apart from your HSA contributions) are actually lower than the $23,000 you quoted (which I assume is the cost of both the insurance premiums and the contributions to the HSA), so you wouldn't be hit with the tax.

Geoff G. said...

One comment on why taxing Cadillac type plans may actually be a good idea:

One reason that lots of people consume so much health care is that we don't know how much it costs and someone else is footing the bill in any case.

Cadillac plans are the worst offenders here; because out-of-pocket costs are so low, there's no restraint at all on the use of health care services. Which means that the insurance company ends up spending more, so they raise premiums more.

Plans like Dierdre's are meant to expose the consumer to the costs of the health care they're buying. So instead of going into the doctor's office and meekly submitting to every test that the doctor wants to perform (and bill for), she'll discuss what's medically necessary and what's the cheapest way to get the care she actually needs, because she's actually spending her own money.

In short, it's meant to bring greater cost visibility into the system and use that to prevent unnecessary procedures, thus reducing costs for everyone.

Deirdre Mundy said...

Geoff- nope, the Premiums alone are that high-- they were much higher before we went to the HSA.

And we hit the 4K about every other year-- Childbirth runs about 6-8K around here, assuming no C-section. (which is why maternity coverage is so expensive when you buy independantly-- Babies cost $$!!!

But we don't NEED help. We've made a rational choice about how we want to spend our money. Why should other people subsidize my healthcare with their taxes, any more than they subsidize my brother's sports car? If the feds would step back, individuals and communities could set up systems that worked for THEM. All the reform does is take away my HSA (They'll be illegal anyway, at least with decently high deductibles) and replace it with a less comprehensive plan that costs more, even if it doesn't cost MY FAMILY more......

Siarlys Jenkins said...

I'm not sure that individuals and communities would have free choice if the feds just stepped back. The big bad private insurance companies have brought us everything Harry and Louise warned us against -- without a single health care reform bill coming close to passing. But, an effective federal intervention should clear the ground for a wide range of free choices.

I figure with an individual plan costing $250 a month, a $6000 annual deductible, and an HSA, most years I would come out ahead, and they would more than pay for the odd year I didn't. It would be cheaper than what my last employer paid, plus my tangle of dedictibles and copays and share of cost.

To cite cadillac plans for insulating people from the real cost, then pointing out that HSA's leave patients paying for routine stuff is contradictory. I'm fine paying for the routine stuff, as long as my premiums are low and I'm covered for the major catastrophes. Its true that it all has to be paid for -- high premiums soak patients for about what the routine stuff costs.

Anonymous said...

My husband is an ER doc who worked last night. Two different people he saw took ambulances to the ER for ear aches. Another mom brought her 3 kids in for rashes (they had dry skin). None of them paid a dime for their service or prescriptions. And what a waste.

I know health care needs some changes but this proposed plan is nothing more than the redistribution of wealth. Why do we think for a second we just need to tax the "rich". The rich have earned their money and deserve to keep it. Move to Europe, if you want equal everything.

Siarlys Jenkins said...

Anonymous, you are half right, and if we keep talking to each other, perhaps we can work out a really sensible solution. I believe the best control for the kind of abuse you are describing, and I'm also familiar with it, is to have SOME copay for everyone, no matter how small, scaled by income. If family income is $245 a month, a visit to the emergency room costs $1, or even $5 for the second visit in a month. At the ambulance level, paramedics should have some limited protocol for telling someone with a non-emergency that they don't qualify for an ambulance. That's dicey, but sometimes appropriate.

Now, if we're not going to soak the rich at all, then we are not going to have coverage for all. People who have no coverage will simply die of heart attacks. From a Malthusian perspective, that's just fine. One thing I do NOT want is to have legislators pass grandiose schemes for covering everyone, then keep taxes low by giving doctors, such as your husband, next to nothing for their service. The laborer IS worthy of his hire, including those who spent eight years getting a degree and many more sleepless nights as interns and residents. (My sister is a family practice physician).

I don't agree that the rich earned their money. As Bill Gates's business partner said, the one who bought the Portland and Seattle teams, nobody deserves the kind of money they made. Some, not all, became rich by gouging their employees, who work long hours for peanuts and have no time to raise their children properly (and by bot providing medical coverage). Anyone making more than one million dollars a year is fair game as far as I'm concerned, at least up to 50%.

Anonymous said...

Siarlys, a couple of comments. The rich are already being soaked. 95% of all taxes are paid by the top 5% of wage earners. The proper role of government is to protect equal rights, not provide equal things. Why do most Americans have this sense of entitlement. The government owes them or the government can pay for it. It is not the government's job. Our founding fathers didn't set up the country or government to have this role. But in less than a generation, it is where we are. The same people who "need" health care also have and "need" cell phones, cable, vacations just to name a few. I have seen it a million times. My friend who doles out medicaid says that 50% of her cases are fraudulent. They hide or lie about their assets so the government will pay.

I do think we need changes in health care to make it more affordable. No way should a major illness ruin people finacially. We need to look at why the costs are so high. Don't allow people to come to the ER via ambulances. Let's get torte reform so it the doctors/hospitals don't have to charge so much just to cover their insurance bill. And I know I am going to sound heartless here but there is not another country in the world that I could go to and expect to have them pay for my health care. Why do people think they can come to America illegally and expect to get free health care.

And as far as the "rich" are concerned. Yes, they may have more than they could ever use but it is theirs. Taking it from them is nothing but stealing!!!! Those on the recieving end think that it is just to take from the have's and give to the have not's. There is a great book called "The 5000 Year Leap: A Miracle That Changed the World" I strongly recommend you read it. There are some great quotes from our founding fathers about helping the needy and how to go about it. Excellent read.

Siarlys Jenkins said...

Again, I'll meet you half way on tort reform. It is true that we live in a suit-happy society, where too many people believe that "if I am hurt in any way, someone is going to pay out money to make me whole." Life isn't always free of hurts and losses. However, tort reform is pushed most avidly by powerful, well-financed lobbies, put together by businesses who want the freedom to be sloppy and careless and take risks with other people's lives and health, and leave their victims no recourse. There is a sensible balance between the two.

You'd have to show me some extensive cold hard numbers before I would believe that the top 5% pay 95% of all taxes. And frankly, I don't believe that wealth "is theirs." It was, in many perfectly sound senses, stolen. If I have a business with five employees, I make a million dollars, and they make $10,000 each, something is badly out of balance. I could pay them $100,000 each, and still have $640,000 to compensate me for putting up the capital and being on call whenever the business needs me and doing the work of keeping it all coordinated and running. Or, maybe the newest employee is worth $25,000, the two who have been around for a year $40,000, one of the long time employees $60,000, and there is one who is so good I couldn't run the business without them worth $100,000. But our economy is much more out of whack than that. If we imposed a rule that the lowest paid employee of any enterprise must be paid no less than 5% what the highest paid executive receives, then we could begin to consider that maybe the top dogs earn what they are making, and its theirs. Then we could graduate the income tax from 15 to 25 percent, and leave it at that, or it would be fair to make more use of a sales tax.

If you hear of a government program to give everyone a new cell phone each year at public expense, let me know and I will join you in denouncing it. If we are not going to let a major illness ruin a family financially, then the money is going to have to come from somewhere. Heart attacks are expensive to treat, no matter how much fraud you cut out. I think we have both said, don't let people come to the ER in an ambulance if they don't need one.