Friday, September 18, 2009

Why tax the insurers who provide generous health insurance plans?

The bill introduced by Senator Baucus earlier this week suggests placing a tax on the most expensive health insurance plans. The approach is to place a tax on only he most expensive plans. Below a given value per enrollee there is no tax. Above a certain value per enrollee the plans would be taxed. The claim by insurers (and by those with the most generous plans like unions) is that this would be passed on to the enrollees. Does this make sense?

In fact, it does. If all insurers who offer generous plans have to charge the tax, then there is no distinction between insurers offering generous plans. Typically “more insurance” costs more to provide. In this case there would be a distinct break in the supply curve. The demand for some groups would suggest that they would still buy a generous plan that is taxed, but a slightly less generous plan. They’d end up paying more overall and get a less generous plan. There are others, however, whose demand would not be consistent with paying a higher premium for a less generous plan. This group would actually save money compared with their original plan but would have a much less generous plan.

So, would the tax hit enrollees? Yes. Over time, it would not necessarily be the full tax on the original premium. But it would either cost them more for a slightly less generous plan or cost them less but for a substantially less generous plan. It would mostly depend on how response demand is to the premiums that people pay. If it is more responsive, the actual tax from the more generous plans would be small but a lot of people would end up with substantially less generous plans. If it is less responsive, the tax collected would be substantial.

Will the insurers pay for this?  Only to the degree that they lose profits on the most generous plans.  So taxing insurers may really just be a way to make it less obvious to the population who is bearing the tax.

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