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Some Democrats Want to Reduce Effects of Tax on Insurers

By Richard Rubin, CQ Staff

September 17, 2009 -- Liberal Senate Democrats are trying to soften the effect of the largest revenue-raising provision in the Finance Committee's health care bill.

Committee members Debbie Stabenow of Michigan, Robert Menendez of New Jersey and John Kerry of Massachusetts said they want to make fewer health insurance plans subject to a 35 percent excise tax on high-cost plans. The issue is likely to be the subject of amendments during the Finance markup that starts Sept. 22.

Under the chairman's mark released Sept. 16 by Max Baucus, D-Mont., the 35 percent tax would take effect in 2013 for plans costing more than $8,000 for individual coverage and $21,000 for family coverage.

Kerry, who first floated the concept for the tax several months ago, suggested pushing the threshold to $24,000 for families. He said he originally wrote the provision to raise $140 billion, not the $214.9 billion in the chairman's mark.

"People with a lower level of income get dragged into potentially being affected in their current coverage," Kerry said. "I would rather have that be a pricier or expensive level plan than the one they have targeted."

Stabenow said she worried in particular about retirees who are not eligible yet for Medicare, who may have expensive plans because they are part of a pool of older workers. Employees in dangerous industries and members of labor unions who have negotiated generous benefit packages would be disproportionately affected.

"I think there's just miscalculations about this notion that every high-cost plan is because it has great benefits," Stabenow said.

The numbers in the chairman's mark are indexed to the Consumer Price Index. Because health care costs tend to grow faster than other expenses, over time the number of plans potentially subject to the tax would increase, if insurance companies and employers do not reduce plan costs.

The mark includes a transition rule designed to soften the effect in states with higher-than-average health costs. In the 17 most expensive states, the threshold for triggering the tax would be 20 percent higher in 2013, 10 percent higher in 2014 and 5 percent higher in 2015. Many of those states are in the Northeast, and the transition has been a major issue for Olympia J. Snowe of Maine, the Finance Committee Republican most likely to support the bill.

Finance members Kent Conrad, D-N.D., and Jeff Bingaman, D-N.M., who helped write the chairman's mark, also said they would be open to changes in the tax, but with important caveats.

The provision would raise $214.9 billion over 10 years, making it a vital piece in the effort to keep the overall bill deficit-neutral. Conrad said he would be willing to push the family threshold up to $25,000.

"I'm certainly open to that if it's paid for," Conrad said, adding that he thinks the excise tax as written would affect very few middle-income families.

Kerry said he had an offset in mind for an amendment next week, to make up for the revenue that would be lost by raising the threshold, but he did not detail it on Thursday.

Bingaman also said he would consider a higher threshold, but he said the tax needed to stay pegged to the Consumer Price Index (CPI), because that mechanism helps limit health care costs.

Retaining the CPI as the peg for indexing is crucial "unless you want to give up on controlling cost growth in the future or find some alternative way to control cost growth," he said. "I'm open to any and all ideas as long as there's a way to pay for them that is less objectionable. That's the difficulty."

Pondering the Details

After a closed-door bipartisan meeting of committee members Thursday, Baucus said senators were still learning how the proposed tax would work.

The biggest quirk is that much of the revenue generated by the provision, perhaps even a majority of it, does not come from the excise tax itself.

Instead, congressional scorekeepers assume that employers will pressure insurance companies to keep plan costs below the threshold. Many high-premium plans are expensive because they provide what is known as first-dollar coverage for many expenses, rather than rely on co-payments and deductibles. To keep plans from getting hit by the tax, insurance companies would lower premiums and require employees to pay more out of pocket.

Then, economists argue, because of this effective new limit on tax-free compensation in the form of health insurance, companies would increase wages. Employees would presumably use some of that money for the additional co-payments and deductibles under their newly cheaper plans.

Also, Finance Committee aides said, they would pay more in income taxes, and that is what generates a significant amount of the revenue from the provision.

But Republican Charles E. Grassley of Iowa said he was concerned that insurance companies would pass the tax along to consumers.

"The whole goal here is to reduce costs to the policy holders, not to increase costs," he said. "And that's going to increase costs.

Grassley said the structure of the tax was one of the remaining issues he wanted to resolve with Baucus before their bipartisan negotiations broke up earlier this week.

Drew Armstrong contributed to this story.

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