Scrambling for additional money to pay for a health care overhaul, Senate Democrats are eyeing the insurance industry for as much as $100 billion over 10 years. But the ideas they’re exploring, including taxing companies that sell costly policies and imposing a “windfall” tax on profits, all have drawbacks and could have unintended consequences.

“The biggest problem is at the end of the day, these taxes will be passed on to consumers in form of higher premiums,” said Dan Mendelson, president of consulting firm Avalere Health in Washington.

The goal is to raise money to expand coverage to the 47 million uninsured while discouraging the sale of high-end plans that may fuel health cost increases.

The debate over taxing insurers comes amid increasingly harsh rhetoric from Democratic lawmakers and the White House about insurance premiums and industry profits. They question whether the insurance industry, which is likely to gain millions of new customers from a health overhaul, has contributed enough to help pay for it.

The idea of taxing gold-plated insurance plans “is certainly a possibility” so long as it meets President Obama’s requirement that it doesn’t burden the middle class, senior White House advisor David Axelrod said on CBS’s “Face the Nation” on Sunday.”If it meets that test, then he will certainly give it consideration.”

Insurers say they are doing their share by promising to stop rejecting applicants with medical conditions if health reform legislation also includes a requirement that almost every American carry insurance.

Here are some of the ideas under consideration:

TAXING INSURERS FOR POLICIES WITH HIGH PREMIUMS

In theory, proponents say, taxing high-dollar policies should dissuade sales of plans with overly generous benefits, which some economists say encourages overuse of medical services.

But taxing insurers raises some of the same questions as taxing workers directly on their benefits, said Paul Fronstin of the Employee Benefit Research Institute. Not all premiums are high because the plans offer overly rich benefits, he said. Sometimes they reflect that employers have disproportionately more older or sicker workers, or are in a more expensive part of the country.

In addition, lawmakers haven’t yet decided on the definition of a “Cadillac” plan. One idea calls for taxing insurers that sell policies costing 30 percent to 60 percent more than a popular policy offered to federal workers. Such premiums would be nearly $19,000 and $23,000, respectively. Another possibility is using $25,000 as the threshold.

Last year, the average family policy offered by employers cost nearly $13,000, according to the nonpartisan Kaiser Family Foundation. (KHN is a program of the foundation.) About nine percent of workers have family coverage with premiums of $17,000 or more, the Kaiser survey found, while less than one percent have coverage with premiums of $25,000 or more.

To avoid taxation, employers or insurers might tinker with the benefits to drive the premium down just low enough to miss the threshold. That would achieve one goal- reducing premium costs-but would reduce the tax take, Fronstin said.

Unions oppose the idea. “A tax on insurers is going to be passed on to workers, either by increased premiums or some other way,” John Sweeney, president of the AFL-CIO, said Friday.

But others say that some insurers won’t pass the increased cost along to consumers, but will instead tout their lower premiums as a way to pick up new customers.

Another complication involves companies that don’t buy insurance coverage for their employees but instead pay the medical bills directly. Just over half of workers with insurance are covered by policies that are partially or fully self-funded by employers. If such employers are taxed on their coverage, or can’t fully deduct the cost of providing benefits as a business expense, “they are done” providing the benefit, Fronstin predicted.

TAXING INSURERS’ PROFITS

Sen. Charles Schumer, D.-N.Y., last week decried growth in health insurance industry profits over the past decade and suggested a tax on profits that could garner as much as $100 billion over 10 years. Profits for the 10 largest companies grew fivefold since 2000, said Schumer, who said the industry need to pay its “fair share” toward reform.

Robert Zirkelbach, spokesman for industry trade group America’s Health Insurance Plans, said the focus on industry profits is misplaced, and that for every dollar spent on health care nationally, about a penny goes to insurers’
profits.

Insurers’ profit margins – or the amount left over after companies pay for medical services, taxes, salaries and other expenses – averaged 7.1 percent in 2005; 5.8 percent in 2006 and 6.2 percent in 2007, according to Fortune magazine. Last year, profits fell to an average of 2.2 percent, the magazine reported. Between 2002-2007, health insurers and managed care ranked ninth on the magazine’s list of industries with the fastest-growing profits, behind computers, aerospace, oil production and others.

TAXING EACH NEW POLICY SOLD BECAUSE OF HEALTH REFORM

Dubbed ‘pay-for-volume,’ the idea is to “ensure that those who are actually benefitting from reform would also be funding it,” said Mendelson of Avalere Health.
In theory, if everyone in the U.S. were required to have insurance, the industry might pick up more than 47 million new customers But imposing such a fee could prove be tricky. Mendelson said it would be hard to know which new customers signed up as a result of the health overhaul legislation, thus triggering a fee on the insurer.

ENDING SOME TAX-FREE COVERAGE

This idea would set a threshold for premium increases, said Robert Laszewski, an industry consultant who has promoted such an approach. Insurers whose premiums rise faster than a specific rate would no longer be able to sell products that are tax-free for workers. For example, if the economy grows by 3 percent a year, the premiums could grow no more than 6 percent to retain the policies’ tax-exempt status.

That could prompt workers and employers to switch to other insurers that offered policies that weren’t subject to the tax, Laszewski said. That would encourage doctors and hospitals to work with insurers to keep costs down, he said.

But others doubt that such a tax change would give insurers sufficient leverage over providers to restrain costs. They note that the costs of labor and new technology are behind much of the cost increases.

ENDING OR CAPPING THE TAX EXCLUSION FOR WORKERS

While everyone from Obama to leading congressional Democrats have said they don’t like this idea, it’s still in the mix, according to some lawmakers.

Currently, workers with such job based insurance don’t pay taxes on the value of those benefits, a loophole that costs the U.S. Treasury about $226 billion a year. Sen. Kent Conrad, D-ND, said this week that one of the options still being debated is taxing workers on the value of any policy worth more than $25,000 a year.

Such a tax is strongly opposed by unions, who often have negotiated policies with generous coverage and higher premiums, and employers, who say ending the tax break workers now receive will cause unhappiness in the workplace. President Barack Obama has also said he prefers other ways to raise money to pay for health reform, saying it’s not the time to burden the middle class with a new tax.

The public is split, with a slight majority opposed to taxing health benefits, according to the latest poll by the Kaiser Family Foundation.