Monday, September 14, 2009

The Proposed Health Insurance Company Taxes To Pay for Health Care––You Really Need to Know What “Loadings Available” Means

The Congress has investigated about every conceivable way to tax people to pay for the health care proposals—a millionaire’s tax, bigger taxes on home mortgages and charitable contributions, and a couple of dozen more ideas.

Now Congress looks to be the most interested in taxing insurance companies to pay for a big chunk of their health care proposals. The new taxes would come in two parts––a 35% excise tax on any health benefit cost above an $8,000 single and $21,000 family annual premium as well as a flat $6 billion annual tax on the industry to be allocated among the companies proportionate to their premium.

There is certain logic to this. Taxing high priced benefits could help deflate the health care economy. Taxing all of the health insurance companies that stand to get more than a $1 trillion in new business—most of it in the from new private insurance and Medicaid subsidies and the rest from the consumer’s share of those new private plan premiums—seems fair at one level.

Calling for a tax on that big rich insurance company also sounds a lot better to the politicians than looking voters straight in the eye and raising their taxes directly.

But what is really going on here is that proponents of these insurance company taxes would just turn the health insurance industry into a new division of the Internal Revenue Service.

To paraphrase Leona Helmsley, insurance companies don’t pay taxes—at least taxes that are directly related to their health insurance policies, as these would be.

I have run a health insurance business. The insurance companies already pay taxes much like the ones being proposed. They are called state premium taxes. They tend to run about 2% of premium on fully insured business.

Do you know what the insurance companies do with these taxes? Since they are tied to premiums they pass them through directly to the policyholder who pays these premiums.

And, speaking of Ms. Hemsley's famous statement that, "the rich do not pay taxes," I doubt this tax would ever be collected on the high-end benefits at places like the Wall Street firms the proponents talk about. If it became law, I can see the big Wall Street firms, and the like, going to their partners and telling them that because of the new tax partner benefits would be terminated and converted to cash, and the partners should then go to the market to buy their "gold plated policies." They would get away with that because, as it is now drafted, this tax would not apply to individual coverage and any existing individual policy would be grandfathered.

Will the 35% premium tax on high priced benefits apply only to very expensive policies? It will today but the caps would grow with inflation while health care premiums have been growing at about three times that. There is a reason this scheme develops far more revenue in the out-years—because more consumers will be trapped in the new tax not unlike what has happened to the Alternative Minimum Tax (AMT) over the years.

At any rate, whatever the tax, it will be passed through to those who pay the premiums. This is not a theoretical exercise. Taxes like this are what we call a premium load. You can load these costs as long as there are premiums available to load—loadings available.

What’s an “available loading?”

You.

You are available, as the customer, to have these costs passed right straight through as a load on the premiums you already pay. And, that is what the insurance industry has been doing with premium taxes for decades.

And, that is what insurers would do with these taxes. Not like insurance premiums are affordable in the first place.

If this scheme survives, the insurance industry would be a very valuable division of the IRS!
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