NCPA - National Center for Policy Analysis


January 6, 2010

Democrats are starting to mash together the Senate and House health care bills, all of the negotiations taking place in secret.  One reason to keep quiet is so voters don't discover items like the Senate's destructive change in the way retiree health benefits are taxed, says the Wall Street Journal.

For instance, when the Medicare prescription drug benefit was created in 2003, one concern was that businesses that provided private drug coverage for seniors would dump them into the new taxpayer-funded plan.  So Congress created a modest tax subsidy -- equal to 28 percent of the total cost of a drug plan -- to encourage employers to maintain coverage for retirees who would otherwise enroll in Medicare:

  • On average, this subsidy will cost the government about $665 per person in 2011, according to the Employee Benefit Research Institute, while the same Medicare coverage would run about $1,209.
  • Currently, the $665 a business gains by providing benefits -- and keeping one senior off Medicare -- is not taxed.
  • By instead treating the subsidy as income taxed at the 35 percent corporate rate, Democrats expect to raise about $5.4 billion for ObamaCare.

The cost of offering drug benefits will rise by about $233 per retiree, making Medicare a far more attractive option for businesses.  Private drug coverage is already on the decline, but Verizon, Xerox, Boeing, Metlife, Caterpillar and other companies are already warning that they may be forced to cut benefits, says the Journal.

  • As more employers drop drug coverage, Congress won't be dispensing as many subsidies with the one hand that it can tax with the other, so revenue will fall.
  • The retirees who lose private benefits will simply move onto Medicare, so public drug spending will also rise.
  • The American Benefits Council, which represents the largest employers, estimates the tax will be a net loser for the government if just one out of four retirees is crowded out of private coverage.

Source: Editorial, "ObamaCare on Drugs," Wall Street Journal, January 2, 2010.

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