COST: Excise and a Healthy Fiscal Diet?

Senate Majority Leader Harry Reid's decision to include a public plan with state opt-out in the Senate bill may have made the headlines this week, but Christina Romer's remarks Monday may tell us more about what's next for health reform

Speaking at the Center for American Progress, the chair of the Council of Economic Advisers highlighted the importance of health reform to our nation's fiscal future. (Full text of her remarks here). In particular, Romer gave a strong endorsement of the excise high value health insurance plans:

The Senate Finance Committee bill includes a tax on high-priced insurance plans, suggested by Senator Kerry. A policy along these lines, designed carefully, will encourage both employers and employees to be more watchful health care consumers. It will discourage insurance companies from offering high-priced plans that would otherwise eat up larger and larger shares of workers' wages. A policy such as this is probably the number one item that health economists across the ideological spectrum believe is likely to stem the explosion of health care costs

The excise tax on high value health insurance (so-called "Cadillac plans") in the Senate Finance legislation, would impose a 40 percent excise tax on each dollar of health insurance premiums above $8,000 for an individual or $21,000 for a family. While the provision raises some $200 billion over 10 years, it is one of the more controversial ideas of reform and potentially one of the biggest sticking points between the House and Senate legislation. Yet, as TNR's Suzy Khimm points out, Romer's remarks (and similar support from OMB director Peter Orszag) could have an important impact on the fate of the excise tax going forward:

But, by framing the excise tax as the most important cost-containment measure that could achieve bipartisan consensus -- if not in Congress, than at least among economists -- Romer made it clear that Obama would push for the measure.

Recently, the Chamber of Commerce, maybe hoping to counter charges of obstructionism on health reform, said it could support a tax on "Cadillac" health plans. Even AFL-CIO president Richard Trumka, whose organization has adamantly opposed the excise tax, said he is open to a tax on true Cadillac plans, as long as it doesn't fall on the shoulders of the middle class.

Over at the Committee for a Responsible Budget's blog, The Bottom Line (the best budget blog around), our colleague Marc Goldwein has a particularly insightful post on the excise tax. He explains how the tax works and its relevance for reform... Acknowledging that the tax is far from perfect, Marc argues that the tax offers two major benefits for health reform: "it grows faster than new health care costs and it helps to slow health care cost growth."

This second point is particularly important. The Joint Committee on Taxes estimates that most of the revenue from the provision will come not from the tax itself, which is technically levied on insurers, but from changes in behavior of employers and employees. As Marc explains, the tax creates an incentive for employers offering these high value plans to restructure their benefits and compensation, offering higher wages in exchange for less generous health insurance. As a result, most of the revenue (80 percent according to the JCT) comes from the additional income and payroll taxes generated by higher wages. Marc concludes:

The fact that most revenue from the excise tax would come as a result of higher cash wages strengthens the thesis that the excise tax could slow health care cost growth. Although cheaper insurance need not mean less health care spending, there is certainly a strong correlation between the two.

This is not to suggest that the excise tax is a perfect policy -- in fact it is far from it. It is also not to suggest that the excise tax would do even nearly enough to slow health care cost growth -- much more is needed.

The Center on Budget and Policy Priorities also has an issue brief on the excise tax, supporting its inclusion in reform. The brief suggests several ways in which the tax could be improved, such as lengthening the transition period for high cost states and exempting collectively bargained contracts.