What a Difference an Index Makes

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"What a Difference an Index Makes"


One element of Max Baucus’ health care proposal is a new “excise tax” on insurers who offer high-value health care plans. This is basically a backdoor way of curbing the tax exclusion for employer-provided health care, since the incidence of the taxes should be the same either way. But it’s politically a bit easier to do. Also helping to ease the path is that the tax threshold is set quite high, so the vast majority of people won’t be impacted at all. But there’s a catch! The threshold is indexed to the CPI, 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.

At any rate, I think this is a great idea—very clever. Ezra Klein, however, tempers my enthusiasm by worrying that it may be too clever: “There seems a substantial chance that it will become like the AMT, and Congress raises it year after year to escape consumer backlash.” Maybe! But this is the part where making it an excise tax on insurance companies rather than a tax on beneficiaries makes a different. Even though the incidence of the two taxes is the same, the administration is totally different. When a new person is hit by the AMT it’s the most obvious tax change in the world—you literally need to go fill out a set of different forms that screams “YOU’RE PAYING A NEW TAX.” Members of congress naturally fear a backlash. But the excise tax structure will help avoid this by making the tax largely invisible to everyone outside insurance companies and corporate HR departments.

All things considered, this is good policy done in an impressive artful way. Any final bill would do well to mimic it. And it’s worth noting that though the House bill is deficit neutral within a ten year window, by year ten expenditures already exceed revenues and that problem would grow worse in years eleven, twelve, etc. Baucus’ excise tax avoids that problem, which is a big plus.


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