As Congress contemplates taxing insurers for gold-plated health benefits to pay for a health overhaul, it might catch another group in its net: employers who "self-insure"—or pay for their workers' health bills on their own.
The Senate Finance Committee is considering a proposal by Sen. John Kerry, D-Mass., that would impose an excise tax on insurance companies' so-called "Cadillac plans." Some critics argue that the plans, with their rich benefits, tend to lead to the overuse of medical care.
So far, lawmakers have talked mostly about using the tax to compel insurers to contribute more to paying for health care reform. But it's also likely to affect the more than half of covered workers who are insured directly by their employers, rather than by private insurers. In those cases, businesses that "self-insure" take on the risk of providing insurance to employees and pay for health services directly.
Such employers use insurance companies to administer the plans, and workers seldom know that it is their employers, not the insurers, actually paying all the bills. Under the Kerry proposal, employers that self-insure would be taxed, just like insurers. In any case, workers wouldn't be taxed directly, which would provide political cover to those who have opposed taxing employees on their health benefits.
Employers are already calling their lobbying groups in Washington with questions. Gretchen Young, vice president of health policy at the ERISA Industry Committee, which represents more than 1500 companies, said that the issue ranks among the group's top concerns.
"It's funny to me to be treated like a cash cow," she said. "We're providing generous and thoughtful benefits, and yet we're treated like the enemy in all this…We're an overlooked and stepped-on category of individuals in most of these bills."
The tax wouldn't affect every plan sold, just those that exceed a specific threshold in terms of value. The tax would likely be levied only on the amount above the threshold. Lawmakers haven't yet set a number, but many have discussed plans with premiums of about $25,000 a year.
However, that's unlikely to raise much money for a health care overhaul. Less than one percent of workers have health plans worth that amount, according to the Kaiser Family Foundation, a bipartisan, nonprofit foundation that focuses on health care. (KHN is a program of the foundation.) The result: Lawmakers might end up lowering the threshold at some point to raise more money.
Blaine Bos, a principal at Mercer, an employer-benefits consulting firm, said the proposal could prove difficult to enforce. Self-insured employers are not required to report the value of their benefits packages, so lawmakers would "have to come up with a reporting venue and some way to enforce it."
It's also unclear whether the tax would change the kind of benefits offered by employers. Paul Fronstin of the Employee Benefit Research Institute said the tax could discourage employers from offering insurance in the first place. But the U.S. Chamber of Commerce said that the tax would end up being passed on to workers in the form of higher premiums or lower wages.
James Gelfand, senior manager of health policy at the chamber, said the tax is "not going to be taken out of executive pay or insurance company profits. It's going to be passed on to the people who have insurance."
He added, "This is the same thing we've been talking about since the beginning of this debate: It's taxing benefits. It's the same exact policy and will have the same effect on workers, but Congress doesn't have to be the bad guy."
Richard Curtis, president of the Institute for Health Policy Solutions, said the tax would be an obvious substitute for a tax on employee benefits, and "could be a good thing in general because it could increase cost discipline and it's an extra incentive for insurers to be more efficient."
While the advantages and disadvantages are similar to limiting the tax exclusion on workers' health benefits, he said that the insurer tax seems fairer because it "puts the onus on the people who administer the plan."
Nevertheless, the term "Cadillac plan" could be a misnomer because high costs do not necessarily indicate better or more generous benefits. The cost of a health plan also depends on the average age and characteristics of the individuals in a group as well as the region where the plan is administered. Individuals in high-cost regions such as south Florida often end up paying significantly more than people in other regions for the same benefits package.
If included in the final legislation, the tax is also likely to apply to the 42 states that offer self-insured plans to state employees. If the cost is set at $20,000, the state governments of Nebraska and New Hampshire, for example, would have to pay the tax, according to the National Council of State Legislatures. Richard Cauchi, health program director for the Council, said the tax isn't likely to be a deal breaker for states, but "it's all in the details. The dollar amounts make a great deal of practical difference."