Ways to Finance Health Reform: New Taxes

As we move closer to reforming America’s healthcare system to include coverage for everyone, it is becoming apparent that the costs to do so stagger the imagination. The meeting in May between the Obama administration and key players in the debate, including groups representing doctors, pharmaceutical companies and insurance companies, all committed to cutting the growth of medical expenditures by some 1.5% (or $2 trillion) over the next 10 years. While commendable and a great first start, this represents just a decrease in the cost of future increases of medical care (which is currently 7% a year). In other words, it does nothing to address the current costs and only states that the rate of increase in future years will not be as great as it has been.

So, the question remains, how will we pay for universal coverage? When the government needs money to pay for programs, usually it means higher taxes for us all. That is the subject of this week’s column. Currently there are at least three new taxes that are being looked at to pay for reform.

The first will undoubtedly meet with resistance from many fronts, as it will tax benefits that have historically always been received tax-free. It will also prove to be a political sticking point for the Obama administration, as they actively campaigned against the exact same tax during the presidential election when Senator McCain proposed it. It is a tax on the value of health benefits received through an employer. Currently, when an employee receives health insurance from their employer, they are not taxed on the value of that benefit. We in the insurance industry (and the employers themselves), know just how much money employers are spending on benefits for their employees. Employees typically don’t realize just how expensive their benefits really are until they leave the company and are offered COBRA. Most people believe COBRA is prohibitively expensive. What they may not realize is that their COBRA premiums represent the true cost of their benefits (with 2% added on for administrative expenses). Now imagine if a current employee had that cost added to their gross income so they would be taxed on it at the end of the year. Looked at another way, an employee making $30,000 a year with a benefit package that is 100% employer-paid, would be taxed on the cost of those benefits. If the employer pays $700 a month for the benefits, that employee would be taxed on $38,400 instead of $30,000. Not a happy prospect (or employee for that matter).

Another tax being proposed operates on the principle that those that cost the system more would contribute more. This is already in place for consumable items like cigarettes. Smoking is one of the leading costs for preventable health problems. By increasing taxes on cigarettes, the tax serves two purposes; it obviously increases revenues that can be used by the government and dissuades people from buying cigarettes in the first place. The government is looking to expand that to other ‘unhealthy’ consumables, most notably soft drinks. While good for the short-term, the problem with this approach is that as more and more people move away from these items due to the higher cost, the taxable revenue from these items will dwindle. Of course, discontinuing smoking, drinking and soft drinks will reduce the health care costs associated with their use, but there is no guarantee that people will take up healthy habits to replace them.

Lastly, there is something called a VAT (or Value-Added Tax) making the rounds in the discussions. Although it has been around since 1954, currently the U.S. does not use a VAT. Value-added taxes are a bit more complicated; in essence it applies to all goods that are purchased, just like a sales tax does. There are various ways to go about this, just as there are some states that don’t tax things like groceries or states that don’t have a sales tax. Instead of taxing a product when a consumer buys it via a sales tax, everyone in the chain of making and selling that product pays a tax on the ‘value-added’ to the product at that stage of production. Put another way, someone that makes brushes, for example, would pay tax on the price they charge a wholesaler to buy the finished brushes. The wholesaler then sells the brushes to a retailer and pays taxes on the difference in price. The retailer then pays taxes on the price difference they charge a consumer to purchase the brushes. In theory, everybody wins. But in reality, a VAT reduces demand and raises prices, which is a tough-sell in any economy.

Tune in next week as we continue to explore this ever-changing reform discussion.

Until next time, stay healthy!