The Most Clever Part of Baucus' Healthcare Plan

One way Sen. Max Baucus expects to pay for his $800 billion health care reform plan is to tax insurance companies for expensive plans. This tax will probably be passed down to some employers and employees in the form of higher rates, but there's at least a two-part rationale: (1) To cover the cost of extending health care to tens of millions of Americans and (2) To encourage employers to shift to cheaper health care plans. But here's what's so clever about the way Baucus plans on using this excise tax:

The threshold for what insurance plans will be taxed starts off quite high. But Matt Yglesias notes that the threshold

is indexed to the [Consumer Price Index -- a measure of inflation], not to the growth in health costs or health insurance premiums. Since premiums are growing way faster than CPI, this means that each year more-and-more plans will hit the threshold. That will mean some combination of additional payment of the excise tax and some additional switching by employers away from giving people expensive health plans and toward giving them higher wages, with the wages subject to taxation.

This accomplishes two things. One it tends to "bend the curve" over time by encouraging people to consume less health care and more Stuff That's Not Health Care. Two, it means that over time the tax generates more-and-more revenue reducing the deficit over the long haul--thanks to this latter feature, the Baucus Plan looks much better relative to the House bill if you score it on a 20-year time horizon, which presumably is why Kent Conrad wants health care scored on a 20-year time horizon.

Clever alright! But is it a good policy? Yglesias thinks the excise tax on insurance might creep just slowly enough to convince employers to shift pay for their workers away from health care and more toward wages (see bold section above), but I'm not so sure the behavioral economics works that way. Why wouldn't employers pay their workers less overall since their federal tax burden is increasing?

On Capitol Hill the excise tax is getting a chilly welcome. Nancy Pelosi already thinks the Baucus bill doesn't make health care affordable enough for the middle class already. Ezra Klein can see Congress phasing out the tax the same way it "patches" the alternative minimum tax (AMT) to keep most upper tax bracket earners from paying more. I see no reason why he's wrong.

Additionally I can see two forces meeting on this issue: (1) pressure from the left to add an employer mandate to force employers to keep insuring their workers despite the excise tax on insurance plans; and (2) consistent pressure from the right to chip away at the tax to keep expensive insurance from eating away company profits. Taxing employer provided benefits might be the best way to pay for health care reform, but the issue is truly fraught on all sides.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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