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Finance reform bill would tax higher-premium health plans

Despite some economists' wishes, one of the quirks of the U.S. health system might remain largely intact even if health system reform is enacted this year. The Senate Finance Committee approved a version of reform that would institute a tax on costly health plans to discourage overspending on health care and to pay for health coverage expansions. But the bill would not go as far as earlier committee discussions indicated it might. Senate Finance Committee Chair Max Baucus (D, Mont.) had considered raising revenue and curbing spending on health insurance by limiting the tax exclusion for employer-sponsored health insurance. Workers with group coverage can use an unlimited amount of pre-tax dollars to pay for health premiums; employer spending is also exempt. But individual health plan subscribers can deduct only the amount they spend that is higher than 7.5% of their adjusted gross income, according to Dallas Salisbury, president and CEO of the nonpartisan Employee Benefit Research Institute. Baucus had discussed narrowing the tax exclusion from an unlimited amount to the average amount deducted -- about $5,000 for individuals and $13,000 for families. This would have raised hundreds of billions over the next decade, according to a Lewin Group estimate. Bills adopted by House committees do not address the tax exclusion. Instead, the Senate Finance bill includes a 40% tax on premiums exceeding $8,000 for individuals and $21,000 for family coverage, with some exceptions. The premium tax would raise about $200 billion over a decade, or about a quarter of the bill's $829 billion cost, according to a preliminary Congressional Budget Office estimate released Oct. 7. Economists, including Jonathan Gruber, PhD, professor of economics at the Massachusetts Institute of Technology, have called for limiting the tax exclusion. The subsidy is regressive because it provides higher-paid workers with a larger tax deduction, Gruber said. Three-quarters of the dollars go to the top half of American workers, which encourages overspending on benefits and health care in general. Stephen Zuckerman, PhD, an economist at the Urban Institute, said the excise tax definitely would encourage workers to limit their health spending. But he said instituting the tax is a much more indirect way of doing so than is limiting the tax exclusion. American Medical Association policy supports eventual replacement of the employer tax exclusion with health insurance tax credits for individuals and families. As an incremental step toward that goal, the AMA supports capping the tax exclusion. The full and original article can be found here: http://www.ama-assn.org/amednews/2009/10/19/gvsd1020.htm
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