The 15% Solution

Richard Eskow

A blogger contact has told me of a new argument in favor of the health excise tax: Since the tax will be imposed on insurers, the Senate’s limit of 15% for insurance company profit and overhead will prevent the cost from being passed on to consumers. There are a number of reasons why that argument won’t work:

First, I’m in a minority among policy analysts when it comes to the Senate’s requirement that insurers maintain an 85% loss ratio (meaning that 85 cents of every premium dollar collected be spent on medical care.) I just don’t think that limit will be very effective – unless the government imposes very sophisticated monitoring and oversight of insurance companies. And I don’t see that happening without serious lobbying to strengthen oversight mechanisms under the bill.

Why am I a skeptic? Maybe because I worked in the industry. When I was asked about the 85% rule by David Dayen of Firedoglake, I was able to come up with five ways to get around the rule pretty quickly. For example, they could adjust their reporting by allocating more of their corporate administrative costs to regions that are performing well. Or they could reclassify some of their administrative cost as “medical” in nature, which I’ve seen happen in workers’ compensation. And adjustments could be made to what is called “IBNR” – incurred but not reported medical claims – to alter the apparent loss ratio.

At the most cynical extreme, insurers could simply pay their doctors or hospitals more. So I’m not a big believer in the 85% rule, unless its accompanied by aggressive oversight.

But even if the rule takes effect, it won’t really change the impact of the health excise tax, for two reasons. First, the tax will affect roughly one in five workers in its first few years. Even if those workers’ coverage is costlier than average, an across-the-board decrease in their costs wouldn’t affect the 85% figure by more than a couple of points.

But even that doesn’t really matter. As its supporters keep reminding us, the tax isn’t designed to be paid. It’s designed to cut benefits so that health plans fall below the tax’s trigger levels ($23,000 family/$8,500 individual). So what will happen if the tax passes? A number of workers who fall into higher-cost plans (mostly for demographic reasons they and their employers can’t control) will have their benefits cut. They’ll pay more out of pocket for their medical care, or they’ll forego receiving medical treatment. Either way the tax will not be levied.

And if the tax isn’t levied, the 85% rule doesn’t matter. The harm has already been done, either to the family budget or the family’s health.

Besides, do we really think that a tax that cuts into insurance company profits would have passed this easily?

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