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Debate over taxes on “Cadillac” health insurance plans among lawmakers

The “Cadillac taxes” on expensive health insurance plans may be a contentious issue as lawmakers in the House and Senate attempt to reconcile their separate healthcare reform bills

The Senate proposal includes a tax on so-called Cadillac insurance plans, but, notably, the House plan does not.

Under the Senate bill, health insurance plans worth more than $8,500 for an individual or $23,000 for a family would be subject to a 40 percent tax. The tax would be levied on insurers who provide the plans, a strategy that is more politically palatable since it doesn’t tax people directly. But in all likelihood, experts say, insurance companies would pass the tax on to policyholders.

The purpose of the tax is twofold: it will provide revenue to help pay the subsidies that the government plans to offer low-income people and discourage the purchase of lavish and unnecessary health insurance. Cadillac plans encourage wasteful spending on medical procedures, tax proponents say.

Taxing Cadillac plans is an important component of the Senate proposal: Tax revenues are the biggest source of funding for the entitlements that the reform bill would provide. It’s estimated that the tax would generate $149 billion in revenue in the next decade.

But, said a health and benefits consultant in a September Wall Street Journal article, many expensive plans are purchased by small businesses because they can’t afford to spread the cost of coverage across a large pool of employees.

Plans “are not necessarily high-cost because they are generous,” Mercer consultant Beth Umland was quoted as saying. Fourteen percent of businesses offer Cadillac plans, the consultancy found.

A December Mercer study found that two-thirds of businesses would raise their employees’ health insurance premiums as a result of the Cadillac tax. In general, tax opponents say, people with lower incomes and dangerous jobs are likely to buy more-expensive health insurance, and those people will be negatively impacted by a tax on expensive policies.

In response to constituents’ outrage over the proposed tax, House Speaker Nancy Pelosi made sure that the House proposal did not include it. Instead, reports say, the House bill would generate revenue through a tax on high earners.

Political website Talking Points Memo reported this week that the White House wants Pelosi to adopt the Senate bill in its entirety. TPM added that Pelosi is “steamed” at the administration’s insistence that a final bill include a Cadillac tax, as it’s one of the key differentiators between the House and Senate proposals.

Labor unions, whose members often have expensive health insurance plans, are some of the tax’s biggest opponents. “There is great potential for blowback” on the tax issue, Connecticut Democratic Representative Joe Courtney said recently to Bloomberg.

But hewing to the demands of the Senate may be vital in passing any kind of healthcare reform bill. The Senate’s proposed bill squeaked through just before Christmas with 58 Democrats and two independents voting in favor – the minimum 60 votes needed to avoid Republican procedural delays. Every Senate vote will count if healthcare reform is to be made law.

Ultimately, policy needs may trump concerns about middle-class Americans’ health insurance costs. And, says Council of Economic Advisers chair Christina Romer, the Cadillac tax could be a bitter pill that people will have to swallow. She called the tax “probably the number one item that health economists across the ideological spectrum believe is likely to stem the explosion of healthcare costs.”

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Posted: January 8, 2010

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