Monday, October 26, 2009

Problems with the excise tax

The excise tax discriminates against women. Picture 2 companies of 200 employees with identical health plans - same benefit levels and network. One company has 100% male employees and the other has 100% female employees. It is entirely possible that the first company will not hit the excise tax and the second company will. What should the second company do to lower its costs per employee - is that really the kind of cost control we want to incentivize?

This is one reason I don't like the excise tax as a funding mechanism - it is a compromise I am reluctantly willing to make to pass reform but as written it will not in general hit the plans with the richest benefits or the highest payments to providers. This article makes some good points on the characteristics which cause variation in premiums. Some of the issues have been addressed by modifications to the tax but there are numerous factors that have little to do with the generosity of the benefit that cause variations in cost of health benefits. Much has been made of the gold plated plan of executives at Goldman Sachs but an example closer to home shows how benefit generosity alone is tenuously related to the cost of the plan. The default Microsoft health plan would fit almost anyone's definition of "gold-plated" insurance with an expansive PPO Network, no deductible, copays or cost sharing In-Network, no copay for most prescriptions, infertility and other special coverages - 100% coverage of employee and dependent premiums. The 2009 COBRA Rates for the Microsoft plan work out to $5,748 annual for an individual, and $16,680 annual for a family.

This includes Medical and Vision - does not include dental but overall still comes in well under the limits for the "Cadillac" excise tax.

Why is this? A couple of reasons:

- Location - WA where a large percentage of MSFTs workforce lives is a relatively lower cost area
- Demographics - younger male workforce is less expensive
- Bargaining power/economies of scale - Microsoft as a large employer can negotiate for a low administrative cost per employee
- Self insured status - since Microsoft self insures they are not charged a risk premium

What does this suggest about the types of plans that are likely to hit the excise tax irrespective of benefit generosity:
- High cost areas
- Unfavorable demographics - adult women of working age are much more expensive than men, older people are more expensive
- Fully insured plans for medium size employers - these types of businesses have less bargaining power and economies of scale
and are charged a risk premium.

Other potential consequences:

Since there is only one threshold for family it will encourage covering fewer family members - penalizes single earner families and companies with large family size.
Ancillary benefits like dental, vision and FSAs are included in the threshold - employers may decide to drop these rather than making their medical plans less generous. This could particularly affect dental benefits.
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