Over the last several days, White House officials publicly embraced a plan to tax ‘gold plated, Cadillac’ insurance plans valued somewhere between $17,000 and $25,000 a year.

The proposal would levy a tax on the employer and the insurance company offering the coverage in an effort to raise some new revenues for health care reform and “dissuade sales of plans with overly generous benefits.” “A premium charge on top of the most expensive packages is one of the ways to ensure that there’s a lid on health-care costs,” a top administration official told POLITICO. “The president believes this is an intriguing idea”:

- President Obama: What’s being talked about now, I understand, is the possibility of penalizing insurance companies who are offering super, gold-plated, Cadillac plans… it may be an approach that doesn’t put additional burdens on middle-class families. [News Hour, 7/20/09]

- David Axelrod: “That there was– this was an intriguing idea to put an excise tax on high end health care policies like the ones that the– the executives at Goldman Sachs have–the forty thousand dollar policies. His big interest is in keeping the yoke of this, the burden of this, off of the middle class who are struggling in this economy. If– if it– if it meets that task then he’ll– he’ll– he’ll certainly give it a consideration. So I– I think that certainly a possibility.” [Face the Nation, 7/26/09]

- Sen. Kent Conrad (D-ND): Yes. I think we’ve got to [tax "Cadillac plans"]. Again, virtually every economist that has come before us has said, you’ve got to reduce that tax subsidy as part of an overall strategy to really contain costs. [This Week, 7/26/09]

According to the Kaiser Family Foundation, the average family pays approximately $13,000 for health coverage; 9 percent “of workers have family coverage with premiums of $17,000 or more” and “less than one percent have coverage with premiums of $25,000 or more.” Axelrod suggests that the new tax would target “executives at Goldman Sachs,” but a closer examination suggests that other Americans, those with less generous packages, may also pay a price.

While some plans are certainly too generous, others cost more because they insure a sicker workforce, workers in dangerous occupations or higher cost areas. As Merrill Goozner explains, “the only thing ‘Cadillac’ in the health insurance costs of that GM worker is the nameplate of the car rolling off the assembly line. His higher premiums are a direct function of he and his co-workers’ higher claims, not more generous benefits.”

One could presumably design a policy that accounts for occupation or geographic variation, but that would “reduce the tax take.” “To avoid taxation, employers or insurers might tinker with the benefits to drive the premium down just low enough to miss the threshold” or simply pass on the costs to the employee in the form of higher deductibles. In other words, just like capping the tax exclusion, employees of modest means, but with higher than average benefits, could end up financing reform.

In fact, the skyrocketing costs of health care coverage are already leading employers to restructure their packages in a way that shifts greater cost to the employee. As Paul Fronstin, a senior research associate with Employee Benefit Research Institute (EBRI), explains, “over the last few years employers [have been] shifting more of the cost coverage to employees…last year we found that $1,000 deductible was now common for an average small group of 200 or fewer.” A recent Commonwealth Fund study concluded that between 2004 and 2007 out of pocket expenses increased by 34 percent for adults with employer coverage. And according to one survey of businesses, “one-fifth of the companies said they planned to add or switch to a high-deductible or ‘consumer-directed’ health plan with a health savings account, perhaps doubling the percentage of employers who offer such plans.”

This new tax would certainly escalate this trend and reformers must be careful about who the tax hits and at how much. Of course, the more people they exclude, the greater the tax bite for those who fall under the “executives at Goldman Sachs” distinction.

After the CBO’s Douglas Elmendorf suggested that the current health care bills do little to control long-term health care spending, the administration doubled down on its MedPAC-on-steroids proposal. Establish a panel of medical professionals, allow the new committee to push through MedPAC like payment reforms without too much Congressional interference and you ‘bend the cost curve,’ the administration enthusiastically argued.

But on Saturday, the CBO scored the President’s Independent Medicare Advisory Council (IMAC) proposal and identified few actual savings:

CBO estimates that enacting the proposal, as drafted, would yield savings of $2 billion over the 2010–2019 period (with all of the savings realized in fiscal years 2016 through 2019)….In CBO’s judgment, the probability is high that no savings would be realized, for reasons discussed below, but there is also a chance that substantial savings might be realized. Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.

The estimate does not come as a great shock. As Jonathan Cohn explains, as far as the CBO is concerned, “there are a few changes guaranteed to bring down costs significantly over the long run: Change the tax exclusion for group health insurance, so that employers and employees alike have less incentive to purchase generous insurance; write into the law some kind of budget limit on federal health spending, perhaps in the form of automatic spending reductions that go into effect should federal spending get too high; force changes in the way health care is delivered, by pushing doctors into group practices that pay based on salary; change Medicare so that even senior citizens with generous Medigap plans have to pay higher cost-sharing.”

Cohn then suggests that the administration can either strengthen the proposal to achieve a higher CBO score or “ignore the CBO, given the inherent uncertainty in these projections, and to push ahead with the reform plans as they are already written.” Another alternative would be for the White House to produce its own report, in which former CBO chief Peter Orszag could explain why he believes IMAC is such a “game changer” and how the CBO has “a bias toward exaggerating costs and underestimating savings.” In other words, Orszag could defend the proposal and explain how it would produce system-wide savings.

Or, alternatively, as Cohn notes, the administration can design what David Cutler and Judy Feder have called a “fail safe option” that would kick in if productivity improvements, investments in health information technology and payment system reforms fail to slow the growth of health care spending and lower costs. Here is Feder explaining the proposal on CSPAN:

A commission would monitor health care spending and, if we’re spending more than a set target on health care, the panel would work to control spending by placing limits on Medicare spending, and controlling private spending. If the “trigger” is pulled, the actions would be self-executing (unless Congress overturns them), selected by experts (whether a commission or the Secretary of HHS) from a menu of pre-determined, scorable options, and consistent with savings throughout the system (not just shifting costs from government to private payers). Some in Congress may resent the sudden loss of authority, but this kind of mechanism would free the board from the politics of the moment, score better with the CBO (since we are now using a specific target of growth) and could even provide some much needed cover to the Blue Dogs who are oh-so-concerned about deficits and out of control health care spending.