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Senate’s Tax on High-Cost Health Plans: Democratic Suicide Pact?

A much-vaunted Senate proposal to tax high-cost health plans

A much-vaunted Senate proposal to tax high-cost health plans, once seen as all but inevitable, came under new attacks Wednesday from House Speaker Nancy Pelosi, members of the Democratic caucus and influential health policy experts – even as President Obama was reported as pressing Pelosi to accept the Senate version. The Senate bill would impose a 40 percent excise tax on plans worth more than $23,000 for families and $8,500 for individuals, with the purported aim of raising $150 billion in revenues and reducing health care costs from these so-called “Cadillac” plans.

But something new has entered into the political equation, even in the face of the near consensus among Washington insiders in favor of the Senate excise tax: political panic. Democrats, especially in the House, are justifiably worried how this issue will play out in the 2010 election, although the Senate provision wouldn’t kick in until 2013. One labor lobbyist told Truthout bluntly, “Freshman and sophomore representatives, the front-line Democrats who are most vulnerable, are freaking out about this.”

Indeed, despite the public posture of White House officials that they’re backing the excise tax 100 percent, there’s a growing realization of its political dangers spurring a quiet, back-channel search for compromises that might mollify critics in the House and in unions, while keeping 60 Senators on board. According to a well-connected, knowledgeable labor source, these could include such steps as drastically raising the minimum value of health plans that could be taxed, increasing the inflationary index covering the taxed plans so middle-class families don’t get ensnared and ending the discrimination based on age that’s now permitted. “The White House knows that improvements have to be made,” this source told Truthout. So far, there’s been no public horse-trading over how to reconcile the differences between the House version, which taxes millionaire families, and the Senate version that critics say burdens middle-class families rather than the rich who’ve fared so well over the decade.

For now, the Senate excise tax is “political poison” for Democrats, as The New York Daily News called it. As Rep. Joe Courtney said in a conference call hosted by the Economic Policy Institute, “This is a pretty challenging area for candidates to go out there and defend,” noting that even though John McCain initially came up with a variation of the idea in the White House race, “I don’t think that Republicans are going to give Democrats a free pass on this.”

In fact, the proposed tax Obama once scorned as a candidate doesn’t usually affect genuine, extravagant, Cadillac plans at all, since plans become more costly for other reasons: when they serve older workers, those in dangerous professions, female employees or are offered in costly urban areas – not because they provide lavish benefits.

On top of that, the centrist Congressional Budget Office predicted that based on health care inflation trends, the proposed measure would tax about one in five workers by 2016 – and the Mercer Consulting Group contended it could affect those middle-class workers as early as 2013.

Courtney, who has gathered a letter from 190 members of Congress opposing the Senate bill, also pointed to the stark results of polling showing about two-to-one opposition, and said that some members have conducted their own polling showing it’s “politically toxic.”

“The issue had tremendous potency on the campaign trail in 2008,” Courtney said. “It’s a plan that has great political risks for Democrats.”

So, it’s not just union members who hate the excise tax, as the current journalistic stereotyping of the issue contends, since they only make up about 12 percent of the public and private workforce. RJ Eskow, a health policy expert and Campaign for America’s Future adviser, who is organizing a campaign against the excise tax, summed up the damaging poll numbers about the tax. It seems that few outside of Washington support it: “Now Rasmussen’s tracking poll on health reform has found that the excise tax remains as unpopular as ever. Rasmussen shows 59 percent of registered voters opposing the excise tax and only 32 percent supporting it. Advocates have failed to make their case to the public, and voter disapproval remains strikingly high. The tax is getting no traction at all.”

“It’s not a very popular initiative in the House or in the public. It’s something the President is committed to, and we’ll see how it works out,” Nancy Pelosi told TPMDC yesterday after her meeting with House committee leaders and the president.

In fact, if the Senate bill remains as written on the excise tax, the Democratic Party could find itself squeezed on two fronts on the issue, according to progressive and labor advocates interviewed by Truthout. As Alan Charney, the program director of USAction, the lead grassroots organizing arm for the Health Care for America Now coalition, said, “Our concern on the political side is that union members will feel that they got nothing out of this [health reform], that it’s basically a burden on them, and they’ll be less willing to work hard to re-elect Democrats on the broader level.” That’s a serious blow to Democratic hopes in 2010 and beyond.

But it could get even worse for Democrats, because Republicans are starting to seize on the same talking points that progressives are using on the excise tax – it’s an onerous tax on the middle-class – to bash President Obama and all Democrats as tax-and-spend liberals who broke their promises not to raise taxes on the middle-class. “They’re handing Republicans a perfect vehicle to pound the crap out of us,” said Charney.

Technically, the excise tax on high-cost plans isn’t a direct government-sponsored tax on families, but a 40 percent tax on employers who would then either pass along the extra costs to workers, or, more likely just start cutting benefits and demanding higher co-pays – or possibly drop coverage altogether. As the Mercer consulting firm reported:

Two-thirds of employers would raise deductibles, change insurers or scale back coverage to avoid the so-called Cadillac tax on high-cost benefits proposed in the Senate Democrats’ health care bill, according to a survey released today by consulting firm Mercer.

But all those reductions are not going to lead families to cut back on the mythical lavish perks these plans provide, as the current pro-tax proponents argue. Instead, it will prompt employers to slash benefits and force families to avoid necessary care that could save lives and costs later, critics say. As Robert Reich, the former secretary of labor, noted in Wednesday’s press conference call, “The burden is going to fall on family members who are older and sicker, or who get their care from small businesses that pay 18 percent more than big firms do for equivalent coverage,” because those smaller firms lack bargaining power.

He had a grim view of its real-world impact: “There’s a real danger in the Senate plan that many working families needing health care will be forced to cut back on the care they need, defeating the entire purposes of health care reform,” he said. [Emphasis added.]

Perhaps the biggest myth governing this entire ivory-tower theory of health care taxation is that the excise tax would raise money because so many warm-hearted employers would suddenly decide to offer huge raises to their workers to make up for the losses in health coverage. The Congressional Budget Office said that over 80 percent of the revenues would somehow come from all those raises lavished on employees even though we’re slowly emerging from the worst economic collapse since the Great Depression. In fact, surveys show It turns out that the origins of this fairy tale about raised wages lie in some macro-economic charts from the 1990s that seemed to show that lowered health costs occurred when wages went up. Ergo, the lowered health costs amid a booming Clinton-era economy magically caused the wages to rise! That economic fantasy was blown out of the water Wednesday by an analysis provided by Lawrence Mishel, co-director of the Economic Policy Institute, whose paper summed up the real story: “Employer Health Costs Do Not Drive Wage Trends.” Indeed, the entire press conference call was devoted to debunking what the Economic Policy Institute called “health care urban legends” about the excise tax.

As Mishel pointed out, “Just as the sun doesn’t rise because the rooster crows, moderating health care costs had little to do with why wages rose in the late ’90s.” He noted that the size of health care costs is relatively too small to account for the magnitude of the rise in wages in the late ’90s. What’s more, the rise in wages was most dramatic among lower-paid workers, who are much less likely to have any health care coverage on the job at all.

So, this week, the factual weakness of the case for the excise tax finally began to crumble, even as “Rahm Emanuel is pounding his fist on the desk” to push for it, as RJ Eskow puts it. Among the signs of the shifting winds of elite opinion this week: a story in the Thursday Washington Post that gave respectful treatment to critics of the excise tax and noted that worries about it went beyond unions; and a critical fact-checking column by the policy wonk, respected journalist Maggie Mahar of the Century Foundation, the author of “Money-Driven Medicine,” who has been studying health policy for decades. Her bottom-line conclusion on most of the economic arguments for the measure: “Not true.”

The balanced Washington Post article, “Health-care reform bill’s proposed tax on high-cost plans raises questions,” indicated that even for Washington insiders there are legitimate grounds to wonder if it makes sense to impose this excise tax:

Who would be taxed?

But as the tax proposal takes on an aura of inevitability, pockets of skepticism remain, even beyond labor unions, which are often cast as the main opposition because many union plans would be taxed.

Health analysts recently questioned the assumption that the tax would target only the most lavish insurance packages, nicknamed “Cadillac plans.” The analysts, writing in the journal Health Affairs, found that some less-generous plans could be taxed because they are costly for other reasons. The location of an employer and the type of industry, for example, have as much to do with the cost of plans as the generosity of the benefits and the kind of plan. Smaller businesses, especially those with a preponderance of older workers, tend to have higher premiums, as do certain industries, including the health-care sector.

The Post article also quotes an expert dismissing the notion that consumers can make rational cost-saving choices if out-of-pocket costs for them rise. “The consumer-directed-health-care crowd argues that with high cost-sharing, patients will do the only legitimate … cost-benefit calculus – but that surely is nonsense,” said Princeton economist Uwe Reinhardt. “None of these proponents has ever shown that patients are even capable of evaluating the clinical merits” of treatment options.

It’s worth understanding the import of critiques from Health Affairs and Reinhardt: they’re the gold standard in nonpartisan health care analysis. So, that means that the most respected health economist in the country is calling the central cost-saving premise of the White House-backed Senate excise tax provision “nonsense.”

In sum, as recent research from Health Affairs, the Congressional Budget Office, independent consultant firms and progressive think tanks show, none of the arguments advanced by supporters still hold up in the wake of nearly 20 academic and research papers challenging their high-flying but unproven theories.

The Communications Workers of America, which has been playing a leading role in the labor movement developing critiques of the Senate tax proposal and building support beyond unions to remove it, recently released its summary of 18 such papers (now 19 with the new EPI report on wages and health costs.)

The upshot of all the data? The reports show that the Senate tax on health care plans will affect more than just “Cadillac” plans, result in substantial benefit cuts and increased cost sharing to the middle class, and not bend the health care cost curve.

“These numerous reports make clear that a tax on health care plans is the opposite of reform – it will hit middle-class families and working Americans hard,” said Larry Cohen, president of the Communications Workers of America. “The health plan excise tax will not let families keep the good health plans they have now.”

All that might not be enough to convince the White House and Senate to look instead toward taxing the rich who have benefited from historically low tax rates for years to pay a little more for health reform. If that approach were taken, perhaps 45,000 people wouldn’t have to die each year because they lack health insurance. Grassroots pressure on House members, even at this late stage, could make a difference through such groups as Health Care for America Now.

Or, more likely, they might finally start listening to this warning about the excise tax from the AFL-CIO’s legislative director, Bill Samuel: “We’ve always said it’s bad policy and bad politics.”

Maybe the prospect of losing a majority in either the House or Senate in the wake of Republican-driven anger at Washington and an indifferent turnout by the progressive base of the Democratic Party might cause our legislators to reconsider. Do they really want to inflict a potentially fatal self-inflicted wound to their own political interests?

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