David Dranove was one of the 32.1 million Americans to watch President Obama’s address on healthcare. Like many others, he was waiting to hear about the public option, or lack thereof. But Dranove also had his ears pricked for a policy point likely to be wrapped in more subtle language—the taxation of so-called “gold-plated” insurance plans.
Two-thirds of the way through (some time after Joe Wilson’s gauche exclamation—at 34:43 in the video linked above), President Obama mentioned that his proposed reform “will charge insurance companies a fee for their most expensive policies.”
I heard this statement myself, sighed with relief at the prospect of shopping malls bereft of full body scanning services, and moved on. I should have pondered the point further. Such a fee could finally encourage true competition in the insurance industry, according to Dranove.
The fee is “just another way of eliminating the tax subsidy for people who buy expensive health insurance plans,” he said. “It has been a centerpiece of virtually every economists proposal.”
“If you tax expensive plans, the expensive plans will have to raise their premiums, so the people who buy them end up paying more.” Dranove said. “It’s just as if they’d lost their subsidy.”
The President has “come around to what a lot of health economists, including myself in my last blog, had been suggesting he needed to do, which is get rid of the public options, focus on covering the uninsured, and do something about the tax break for expensive plans,” he said, adding the subsidies for gold-plated plans were “crazy tax policy.”
The tax-exempt status of health insurance in the United States dates back to World War II (pdf). During the war, wages were frozen to combat inflation. Employers, looking to compensate employees without violating the wartime mandate, started tacking on various benefit packages like health insurance. A 1943 regulatory ruling declared employer contributions to health plans tax-exempt, and a 1954 revision of the tax code cemented the policy.