Public support for health care reform is based on a desire to
help the sick or, at the very least, to protect the non-wealthy
from the financial impact of illness, chronic disease, and
accidents. Unfortunately, the reform proposals under active
consideration in Congress do precisely the opposite.
In particular, the Baucus health reform proposal, recently
passed by the Senate Finance Committee, imposes new taxes on those
who need health care the most and on lower-income people with the
least ability to pay--in some cases to fund coverage subsidies that
will primarily go to young, healthy people with moderate
The proposal would impose higher taxes on taxpayers at all
income levels who face high out-of-pocket medical expenses or have
high-cost health plans, including patients living in poverty. It
would impose "annual fees" (i.e., taxes) on the medical device and
pharmaceutical industries, which would have to be passed on in the
form of higher prices to patients who pay out of pocket, and to
insurance plans, which will have to raise their premiums. There is
also an "annual fee" on insurance companies that will be passed on
to patients directly in the form of higher premiums.
Taxing Medical Devices
The Baucus proposal imposes an "annual fee" on medical device
companies, which amounts to an excise tax on medical devices.
Although it would not apply to Class I devices (simple items like
tongue depressors and bedpans) or Class II devices priced under
$100, it would apply to all other medical devices, including items
from powered wheelchairs and breast-milk pumps for working mothers
to pacemakers, hearing aids, prosthetics, and replacement joints.
It would also apply to diagnostic tools like MRI and CT
The tax is structured in an unprecedented way: as an "annual
fee" on the "industry sector," to be "allocated" across companies
according to their U.S. market share. The tax would be passed on to
patients who need these devices both directly (through higher
prices for out-of-pocket purchases and higher co-payments) and
indirectly (through higher health insurance premiums).
The total tax would initially be set at $4 billion per year. Yet
the true impact would be higher because the annual fee would be
treated as profit for corporate income tax purposes. This would
make the effective tax as much as $5.4 billion and could result in
money-losing companies paying tax on profits they do not actually
have--in addition to their allocated share of the industry sector
fee. For example, a company with market share but no after-tax
profit would have to pay its share of the annual fee, the amount of
which would be treated as profit and taxed as such. Thus, a pre-tax
profit would turn into an after-tax loss.
Taxing Prescription Drugs
The Baucus bill would also impose a tax ("annual fee") on
prescription drugs (excluding FDA-designated orphan drugs and
generics). As with the device tax, the prescription drug tax is
structured as an annual fee on the pharmaceutical industry sector.
But the drug tax would be "allocated" to drug companies according
to their share of sales only to federal health care
programs--Medicare, Medicaid, the Veterans Health Administration,
Since the tax will be charged on the basis of sales only to
government programs, the government will pass much of the tax onto
itself and the rest onto Medicare beneficiaries through higher
The total pharmaceutical-sector tax would initially be set at
$2.3 billion. Like the device tax, the pharmaceutical tax would be
treated as profit, making the effective tax as much as $3.1 billion
and possibly forcing some drug companies to pay a "profits" tax on
profits that do not exist.
Taxing Patients with High Health Care
One provision of the bill would raise taxes on people with high
health care needs--but only if they have jobs--by reducing the
limit on employer-sponsored tax-free flexible spending accounts
from $5,000 to $2,000. Most affected workers would see an increase
in income taxes; there would also be a payroll tax increase that
would fall most heavily on lower- and moderate-income workers.
Those with incomes under $106,800 would pay up to $459 more;
workers with higher incomes would see an increase of no more than
Another provision would increase taxes on those with high
out-of-pocket health expenses, as well as those who pay their own
health insurance premiums regardless of their employment status.
Currently, medical expenses (other than those paid pre-tax through
an employer) that exceed 7.5 percent of adjusted gross income are
tax deductible. The Baucus proposal would raise this threshold to
10 percent, increasing taxes on more than 6 million households at
all income levels.
About half of affected households have incomes low enough that
they would qualify for the subsidies for which these taxes are
intended to pay. Despite the President's promise that families with
incomes under $250,000 would not pay higher taxes, 98.8 percent of
those affected by this tax increase have incomes below $213,800.
Affected households have higher health expenses because they
have pre-existing conditions or buy health insurance themselves
because they do not have access to employer-sponsored insurance.
This group includes over 250,000 people who are disabled or in very
poor health. By any reasonable standard, health care
reform should be directed at helping precisely these households.
However, the Baucus plan would make them pay extra--to foot the
bill for subsidies to healthy households with lower health care
Taxing "High-Cost" Health
The Baucus proposal would impose a 40 percent tax on plans with
premiums or actuarial value over $8,000 for individuals or $21,000
for families. This tax rate is higher than the top income
tax rate for even the richest Americans--and it would apply to
everyone with high-valued plans, regardless of income.
Union members are particularly likely to be affected, as their
contracts often call for comprehensive, high-value health plans.
Even more cruelly, those with more health problems are most likely
to select comprehensive plans with higher premiums, bending the
cost curve in the wrong direction.
Taxing the Sick to Subsidize the
Despite President Obama's promise not to raise taxes "one dime"
for those earning below $250,000, this proposal would increase
taxes on households with incomes substantially below that
level--and especially on households facing the worst health
The revenue from these taxes is intended to offset premium
subsidies for households with incomes below four times the federal
poverty level (FPL), but these taxes would be imposed on Americans
who need medical devices or prescription drugs, have high
out-of-pocket costs, or pay their own health insurance
premiums--including many households with incomes below four times
The Baucus proposal would tax the sick to subsidize insurance
for the healthy. And much of the tax burden would fall on the same
people "helped" by the subsidies. In short, the Baucus plan would
harm those it should help and help those who need help the
Robert A. Book, Ph.D., is Senior Research
Fellow in Health Economics, Guinevere L.
Nell is Research Programmer, and Paul L.
Winfree is a Senior Policy Analyst in the Center for Data
Analysis at The Heritage Foundation.