Don`t Tax Efficiency in Health Care Opinion by Stanford Business School Professor Alain Enthoven

STANFORD, Calif.--(Business Wire)--
Current tax laws are biased in favor of more costly health care. Some of the
Senate Finance Committee`s proposed taxes, currently under consideration, would
make it worse. The Committee`s bill would impose an aggregate tax of $6.7
billion per year on "any U.S. health insurance provider," in proportion to
market share, whether for profit or not for profit, but not on employers who
"self-fund" their employees` coverage.

About 88 million Americans have private health coverage through employer
"self-funded" arrangements. "Self-funded" means the employer is the insurer.
Employers hire "third party administrators" (often an arm of an insurance
company) to process the claims, but they write checks to medical providers on
the employer`s bank account. About 89 million Americans have "fully insured
coverage" meaning the insurance company bears the risk and pays the bills itself
out of premium revenues. Government actions are biased in favor of
self-insurance: employers then avoid taxes on insurance and costly state benefit
mandates. Self-funding is concentrated among large employers who can bear the
risk of health care costs. In 2006, 89% of employers of over 5000 self-insured,
compared to 13% of employers of 200 or less.

This tax would fall disproportionately on small employers and individuals who
need to buy insurance. The tax will surely be passed through to the policy
holders or their employers who, in turn, will pass it through to employees, at a
cost of about $75 per person per year.

The burden will fall on all insured plans, including those affiliated with
non-profit integrated delivery systems like the Marshfield Clinic`s Health
Security Plan in WI, Geisinger Health Plan in PA, Harvard Pilgrim and Fallon
Community Health Plan in MA, Group Health Cooperatives in WA and WI, and Kaiser
Permanente in 8 states and D.C. The President and Congressional leaders have
praised some of these organizations for providing better care at less cost.
These systems offer their own affiliated health plans to market their superior
efficiency with lower premiums. But these organizations also compete in
employment groups with employers` self-funded plans. So this tax will tilt the
balance in favor of self-funded plans.

But this is not all. The Committee`s bill also imposes a tax on health insurance
to pay for subsidies in the individual market and for employers covering early
retirees. These taxes total $25 billion over the three years 2013-2015. They are
levied on the total commercial (employment groups and individuals) premium
revenues of all insurers, averaging roughly $280 per covered person per month
for those who actually purchase insurance, and on the revenues of companies that
administer claims, roughly $25 per person per month, but not on the claims they
process.

Over the 3 years, these revenues will be approximately $976 billion and the
taxes will be about 2.6% of that revenue. That will mean, on average over the 3
year period, a tax of approximately $8.00 per year for people in self-insured
arrangements, and $87 per year for people in fully insured plans, thus imparting
about a $79 extra burden on the fully insured. Add this to the other tax of $75
and one gets an extra burden of $154 per person per year. One way or another,
these will be (hidden) taxes on insured people.

To be sure, the Committee also plans a tax on "Cadillac plans" which is a clever
back-door way of moving to correct the bias in today`s tax law. The exclusion of
employer-paid health benefits from employee taxable income provides an incentive
to choose more costly benefit plans.

This helps, but it doesn`t do enough to overcome the negative effects of these
new taxes. Employer-based self-insurance invariably pays providers
fees-for-service (FFS), the method of payment increasingly found to be
inflationary and a cause of cost increases. For example, a Special Commission on
the Health Care Payment System in Massachusetts recently concluded "FFS rewards
overuse of services…and thus does not align with evidence-based guidelines or
outcomes." Alternative methods of payment in which providers share risk of the
cost of care are needed to provide the necessary incentives to coordinate care
and use resources wisely.

Providers sharing risk does not happen in the context of employer
self-insurance. So these taxes will fall on just the insurance plans America
needs to develop new payment arrangements with incentives to use resources
wisely. In fact, the taxes will fall heavily on the programs based on per capita
prepayment, just the method the Special Commission in Massachusetts concluded
was the best solution to the need for cost containment. And they will fall most
heavily on plans that offer comprehensive benefits including preventive services
and low or no deductibles.

Practically all taxes distort economic incentives to some extent. But these
taxes are particularly perverse. Instead of promoting prepayment and integrated
care with the right incentives, the best long term strategy for keeping coverage
affordable, this policy moves us in the wrong direction, toward fee-for-service.

Revenue is needed to cover the uninsured. The Bill is right in proposing an
excise tax on high-cost insurance (at least if just capping the tax exclusion is
politically impossible). That would motivate people to look for less costly
alternatives, thus encouraging the development of less costly systems of care.
And this tax would apply equitably to both fully-insured and self-funded plans.
If it proves to be absolutely necessary to raise revenue by taxing some part of
health insurance, it would make more sense to lower the thresholds at which the
excise tax on high cost insurance would apply, adjusted for age and other risk
factors, thus strengthening the incentive to choose economical care. That would
help drive the transformation of American health care into high value systems.

Mr. Enthoven is Marriner S. Eccles Professor of Public and Private Management,
Emeritus, at the Stanford Graduate School of Business

Stanford Graduate School of Business
Helen Chang, 650-723-3358 (Media)
chang_helen@gsb.stanford.edu

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