One of the major points of contention in the soon-to-be-started House-Senate Conference Committee will be the Senate-passed 40% excise tax on high-premium insurance plans. The Congressional Budget Office (CBO) projects that the tax, which begins in Fiscal Year 2013, would raise $149 billion in through Fiscal Year 2019. The excise tax would be levied on the amount that the health insurance premiums exceed a specified threshold – $8,500 for single coverage and $23,000 for family policies. After 2013, the thresholds would be indexed to inflation plus 1 percent. This tax proposal has created a firestorm of protest, particularly from unions, and has created a major political problem for Democrats. One of the defining issues in 2008 elections was taxation of employer-provided health benefits – Democrats, led by Presidential Candidate Obama, campaigned against the levy. (Interestingly, this morning’s Washington Post reported that President Obama accepts the tax.) Besides the political issue of how the campaign promise could impact Democratic turnout in the 2010 Congressional elections, the proposal has a direct bearing on future FEHBP benefits. First, the premium threshold includes the total FEHBP premium (not just the enrollee contribution), vision and dental plan premiums, and contributions to a Flexible Spending Account. This sum of these amounts adds up quickly. Second, the premium threshold is indexed to general inflation, not medical inflation. Additionally, medical inflation, as reflected in FEHBP premium growth, increases much faster than general inflation. Consequently, FEHBP plans will be hit the threshold within a very few years. The result of hitting the mark will force FEHBP plans to reduce benefits, including increasing copayments and deductibles. It is likely that OPM will direct the plans on how to reduce benefits, probably in the form of “Call Letters” to FEHBP carriers, similar to actions taken by the Reagan Administration in the 1980s.
The problem with the excise tax is much more fundamental than its impact upon the active and retired federal workforce. The tax strategy was originally sold as a way to penalize Cadillac health plans (luxury plans), encouraging generous employers to ratchet down excessive benefits. The tax was also a method to raise funds to offset the cost of providing health benefits to the uninsured. However, the tax is not being imposed on the plan’s benefit-value; rather it is levied against the plan’s premium-value. Rule one of insurance: Benefits do not equal premiums – claims reflect premiums. Two plans with identical benefit packages can and will have dramatically different premiums. Plan A has a sick population, it has more claims; the premium will be high. Plan B has a healthy population, it has less claims; the premium will be low. This phenomenon is known as risk-selection. Unlike other plans, FEHBP provides non-discriminatory coverage to all members of the Federal population; it does not cast off retirees. Moreover, there are a significant number of Federal retirees who are not yet Medicare-eligible, and they represent the most expensive population to insure. The net effect of the excise tax is to penalize those health plans that insure an older and sicker population, not those plans that actually provide Cadillac benefits. (If this were the case, the USPS would get nailed for providing such benefits to its PCES employees.)
NAPUS plans to aggressively ensure that the integrity of the FEHBP is protected and to continue to oppose a regressive health care excise tax, which penalizes comprehensive – not excessive – health plans that provide health protection to NAPUS members.
