Thursday, November 12, 2009

Reid's Funding Mechanism for Senate Bill Rewards Cats

According to today's Washington Post, Senate Majority Leader Harry Reid will shortly be announcing a plan to pay for healthcare expansion by increasing the federal Medicare payroll tax on high-earning individuals. This would be a big win for those firms that coordinate consumer-driven healthcare mechanisms with employers to exclude income from the federal Medicare payroll tax. Current law sets the tax at 1.45 percent of income, an amount matched by employers. An increase to the tax would increase the substantial incentives already existing to coordinate health care around a site of employment (see earlier post on cats versus dogs for more on these incentives).

The increased tax would likely be restricted to individuals earning $250,000 or more. These individuals already have an incentive to contribute the maximum allowable amount to a family health savings account (HSA), $5950. While the employer's share of the Medicare tax avoided through those contributions is only $86, it pays for a lot of account administration fees. If the tax doubles, the incentives of employers to put HSA utilization programs in place roughly doubles as well. Using an ASP software service costing a few dollars per employee per month, the employer would net a substantial savings across a broad employee base.

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