Taxing Health Benefits Debate Proves Resilient

John Commins, for HealthLeaders Media , April 13, 2009

As the ongoing debate flushes out the details about what healthcare reform will look like and how much it will cost, Congress and the Obama administration are expected to re-examine the idea of taxing employer-sponsored healthcare benefits. The Congressional Budget Office estimates the value of the tax-exempt status of employer-sponsored health insurance and other medical spending at about $246 billion annually.

Bill Roper, MD, CEO of UNC Health Care System in Chapel Hill, and the administrator of the Health Care Finance Administration (now CMS) under President Bill Clinton, has long advocated taxing health benefits, even though people "recoil" at the idea.

"The way I would do it is to say we will impose a limit on the tax-free treatment of health benefits," Roper says. "For more generous plans, whatever that level turns out to be, those benefits will be taxed as ordinary income. That will produce at least some revenue. How much depends on the level that the tax cap is imposed."

Roper believes that will create a "dramatic incentive" to change the design of health benefits plans below the tax to make them more cost-effective than they are now. "That is something we badly need to have done to drive down the cost of care," he says.

"Otherwise the only way we can control the cost of this stupendously expensive healthcare system is to control the cost of the system—some sort of government mandate that says, 'You can't have X or Y.' I would much rather have a system that says if you want to have tax-free health insurance from your employer, it needs to be a plan design that has built-in cost-containment features."

Karen Greenrose, president and CEO of the American Association of PPOs, says her organization doesn't necessarily oppose what Roper is saying. However, she believes that all stakeholders in the debate must first determine at what level health insurance is a right and when, if ever, it is a privilege. "We would all benefit much better if we had that discussion, and then you overlay some of the ideas like Dr. Roper's," Greenrose says.

Greenrose says the nation's healthcare safety net should be expanded before anyone starts talking about an overhaul. "We would go a long way toward lowering the cost if we did that instead of just saying 'let's throw everything out that needs to be overhauled,'" she says. "Right now, the discussion is 'the system is broken. Let's fix it. It needs to be overhauled. Now we are going to tax it. We're going to put some money out for HIT.' We are all over the place, not only as an industry, but all the players and stakeholders who are talking about healthcare reform. We haven't started at the beginning and worked our way through."

Helen Darling, president of the National Business Group on Health, says employers are leery about taxing healthcare benefits because it will be seen by employees as a take away. "Employers are worried that they will be expected to compensate for that at a time when that would be very hard. Plus, they would prefer not to do it," Darling says. "A cap that is set high enough that it doesn't really catch anybody right away so there is time for transition is very different from taxing the whole thing."

A tax cap could prove problematic in areas of the nation where healthcare costs are generally higher, such as the Northeast. "The details really matter a lot," she says.

John Holahan, director of the Health Policy Center at the Urban Institute, says that tax-free health benefits disproportionately favor wealthier Americans and encourage waste in the healthcare system. He supports levying a tax on benefits, but agrees with Darling that setting the cap at the correct level is critical. "They shouldn't be fully taxed. To totally eliminate the exemption and try to replace it with something else and move 170 million or so people who benefit from that into something else that doesn't exist at this point is just nuts," he says. "Cap it so that at the highest levels it's treated as taxable income above a certain dollar amount for singles and families. That would be way less disruptive to the current system and provide revenues that would help pay for healthcare reform."

Opponents and supporters of taxing healthcare benefits say they are left with few options because of the high costs of reforms and the increasing difficulty in accessing healthcare services. "If the larger goal is to get everyone covered, then people will have to give on something they might not otherwise support," Holahan says. "I'd try to set the cap at a level at which the people who would defend it would have a fairly weak argument." Given that the country is in desperate straits, Darling says nothing in the healthcare reform debate is off the table. "There is not even an idea of a line in the sand in this day and age," she says. "We just have to be realistic about the future."

John Commins is a senior editor with HealthLeaders Media.

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