The Center on Budget and Policy Priorities has given its stamp of approval to a controversial provision in the Senate Finance Committee’s health care bill that would impose a 40% surtax on insurers that offer coverage that exceeds $8,000 for individuals or $21,000 for families. The tax would apply to “the portion” of the plan that exceeds those amounts.

The tax enjoys bipartisan opposition. Labor unions and conservative critics both argue that the provision will lead to unintended consequences, inadvertently taxing individuals in high-risk professions, union members with collective bargaining agreements, or older populations whose health care plans aren’t so much ‘overly generous’ as they are just plain old expensive. But proponents of the measure contend that the Finance Committee’s revised proposal would protect individuals in the aforementioned categories — individuals in so-called Chevy plans — slow the rate of health care spending, and help finance health care reform.

The Center has thrown down its gauntlet with the latter, arguing, in a new report released today, that “an excise tax on very high-cost health plans” “represents a sound way to help pay for health reform”:

The excise tax finances nearly a quarter of the costs of the Finance Committee bill over the first ten years ($201 billion out of $829 billion) and makes a major contribution to the deficit reduction that the bill would achieve in later decades. It would help to slow the rate of health care cost growth, without which health care reform is not likely to be sustainable over time….Of particular note, the excise tax produces savings that rise over time at least as fast as the costs of providing health insurance to those now uninsured. Some important aspects of the tax are widely misunderstood. For example, as the Joint Tax Committee’s analysis of the Finance Committee’s proposal shows, over 80 percent of the revenue generated would come not from the tax on insurance premiums itself, but from income and payroll tax revenue on the tens of billions of dollars of higher wages that workers would receive — as employers modified their health plans to avoid the excise tax and converted what they had been spending for health coverage in excess of the tax thresholds into higher wages and salaries. Indeed, one largely overlooked side benefit of the proposal is that by receiving higher wages and paying somewhat more in payroll taxes, most affected workers would qualify for higher Social Security payments when they retire.

Americans would respond to the tax by trying to avoid it and any unnecessary health care spending, the Center concludes. The policy will encourage employers to offer their employees less costly plans and convert the savings produced by the new policies into higher wages or other compensation. As a result, “more than four fifths of the revenue that the government would collect as a result of the excise tax would come from income and payroll tax revenue on the billions of dollars in higher wages and salaries that employees would be paid.” Only $37.8 billion would come from the excise tax itself, the JCT estimates. (Incidentally, only 7.7 percent of tax filing units would be affected by the excise tax in 2013 and 17.6 percent by 2019).

In other words, the Finance Committee provision goes a long way towards micro targeting the tax towards truly exorbitant policies. As the report points out, “the high-cost insurance plans that the tax would affect generally offer unusually generous benefits that are not available to most Americans. The executive medical and dental program at Goldman Sachs, one of the nation’s largest banks, has become the poster child for lavish health insurance plans. Goldman’s top executives participate in a medical and dental plan that costs $40,543 a year for each participant’s family — three times the national average, according to the New York Times.”

All of this is based on the theory that businesses will change their behavior and offer their employees less substantive policies — plans with higher deductibles and co payments — which will be partially offset by the new higher wages. Progressives can’t be thrilled with this result (after all, they would prefer to reduce the rate of growth by focusing on delivery reforms), but they’re happy to see the extra dollars go into financing health care reform.

Sen. Jay Rockefeller (D-WV) has long argued that the Baucus health care bill does not do enough to improve affordability and protect Americans from predatory insurance practices. The Senator voted the bill out of committee with grave reservations — reservations he has spelled out in a 13 page document now posted on the Committee’s website.

The document, which does not does not include objections to the low penalties for the individual mandate, excise taxes on so-called “Cadillac plans,” the so-called young invincibles program or the low creditable coverage standards offered in the bill, offers the most comprehensive progressive critique of the Baucus legislation. Specifically, Rockefeller is concerned about the lack of a public option and the lax enforcement and accountability measures, limited regulation of self-insured plans, the free rider provision, ineffective co-operatives, benefit standards for newly enrolled Medicaid patients, employer wellness programs, the Medicare Commission, and the failsafe proposal. (Be sure to hit “More” to use the above hyperlinks.)

Below is a summary of Rockefeller’s concerns:

CONCERN: The Baucus bill showers private insurers with $461 billion of taxpayer- funded subsidies but does not force insurers to compete with a public option or hold the industry accountable:

- Rockefeller debunks the industry argument that a public option that reimburses at or slightly above Medicare rates would shift costs to Americans with private insurance. As MedPAC explained in its March 2009 report to Congress, “while insurers appear to be unable or unwilling to push back‘ and restrain payments to providers, they have been able to pass costs on to the purchasers of insurance and maintain their profit margins.” The CBO has indicated that many hospitals negotiate higher payments with private insurers as a form of price discrimination to maximize profits. They demand higher reimbursements from health insurers because they can, not because they are shifting costs.

- Therefore, “the real issue is not whether private plans pay doctors and hospitals more than government programs, but what is a fair rate based on the actual cost of providing quality care. “One of the major disappointments of the Committee mark is the lack of leverage over private health insurance industry prices….The Committee mark spends nearly one-half trillion dollars in federal premium subsidies to supplement high private health insurance costs, rather than to bring those high costs down for consumers,” Rockefeller notes. “If an average family premium is $13,375, a family wishing to enroll in the public health insurance option could save $1,338 – $2,676.”

- “The Committee mark does not include any new federal resources or infrastructure to regulate private health insurance companies and make certain they are actually abiding by the new insurance market rules. Without a new, robust federal regulatory role, I remain extremely concerned that private health insurance companies will continue their long-standing practice of exploiting loopholes in the law and skimming on coverage for beneficiaries to increase profits.”

CONCERN: The insurance reforms in the Baucus Bill do not apply to the 50% of Americans who purchase coverage from employers that self-insure and may prove inadequate:

- “The Committee mark only includes two new reforms of self-insured plans – they must provide coverage that is at least equal to 65 percent of the actuarial value of the Blue Cross Blue Shield standard plan offered through the Federal Employees Health Benefits Plan (FEHBP), and they must provide first dollar coverage for preventive health benefits.”

- “The Committee mark eliminates pre-existing condition exclusions in the individual and small group markets. However, these provisions are not phased-in until July 1, 2013….The prohibition on pre-existing condition exclusions is phased-in for large group plans over five years beginning in 2017, and the prohibition does not apply to the self-insured market.”

- “The bill also prohibits large-employer plans (including self-insured plans) from implementing “unreasonable” annual or lifetime limits, although the term “unreasonable” is undefined. I remain concerned that the mark does not implement a complete prohibition on annual and lifetime limits for large employer plans, including those in the self-insured market.”

- “While reporting of medical loss ratios is an important first step, I remain concerned that the Committee mark does not require private health insurance companies, particularly those offering federally subsidized coverage through the state exchanges, to spend the majority of the nearly one-half trillion dollars in federal premium subsidies on actual medical care.”

CONCERN: The ‘free rider provision’ could jeopardize the employment of lower-income Americans:

- “I remain concerned that this provision provides a disincentive for employers to hire or maintain employment for low-wage workers. It would be particularly burdensome for states, like West Virginia, with a higher percentage of low-wage workers.”

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Last week, spurred by two disingenuous industry reports, the Judiciary Committee held hearings to consider revoking the insurance industry’s exemption from Federal antitrust laws. For more than 65 years, insurers have been regulated by the states, and in that time, few markets have become “as concentrated, opaque and complex, and subject to rampant anticompetitive and deceptive conduct.” During his radio address on Saturday, President Obama formally endorsed the effort, condemning the industry for “earning these profits and bonuses while enjoying a privileged exception from our anti-trust laws, a matter that Congress is rightfully reviewing.”

But would eliminating the exemption increase competition or lower health care costs? The short answer is no. “At this point, there is really no need from the industry’s perspective, for an anti trust exemption,” former anti-trust enforcer David Balto explained in an interview with the Wonk Room. “This anti trust exemption permits them to coordinate activities which would be considered collusion in other industries. When you are a monopolist, there is no need to collude”:

It certainly can make a difference. The exemption currently serves as an obstacle to federal anti-trust and consumer protection enforcement. Thus we need to eliminate the exemption so we can finally start bringing anti-trust and consumer protection enforcement to bear, to stop the anti-competitive and egregious practices of insurance companies. [...] The most immediate direct effect will be that the federal trade commission will be able to go after deceptive and egregious conduct by health insurers, that it hasn’t been able to go after before now.

Watch parts of the interview:

Balto, who is now a Senior Fellow at the Center for American Progress, stressed that while removing the exemption won’t have an immediate impact on health care markets, it would allow anti trust enforcers to begin preventing anti-competitive activities and enforcing the new regulations of reform. If “the purpose of health reform is to bring competition to the insurance markets,” Balto said, then “without the elimination of the exemption, once that competition breaks out, the insurance companies can enter into other types of collusive arrangements to really still born any kind of competition that might occur.”

In other words, in order to inject competition, reformers should both establish a new public option and remove the anti-trust exemption. “You need both. You need a public option. An entity which is not beholden to stockholders, which is not engaging in deceptive and fraudulent activities, to disrupt the market, but then you need to buttress that with a very strong enforcement program to go after decades of egregious practices by health insurers.”

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