Who Pays for Health Care? 

Skirmishes are breaking out in what’s sure to be a lengthy battle over the future of Vermont’s health care. Specifically, will our state be home to the nation’s first single-payer, universal-coverage plan?

Decisions on crucial aspects of Vermont’s proposed system — such as who would pay for it, and how much — won’t be made for another two years. But business interests are already lobbying hard against the financing formula recommended in the blueprint to be used by the system’s architects.

The opponents’ first target is now in range. They’re fighting to influence the makeup of the five-member Green Mountain Care Board that Gov. Peter Shumlin will appoint in the next couple of months. This panel will make all the key decisions about the single-payer plan, including its tax mechanisms — although the legislature will have the final say.

At the center of the developing debate is the 12.5 percent payroll tax that Harvard health-policy economist William Hsiao has suggested as the funding source for Vermont’s pioneering initiative. Hsiao’s February report, commissioned by the legislature as a plan for the future of health insurance in Vermont, calls for employers to pay a 9.4 percent tax on the wages they pay their employees; their workers would contribute 3.1 percent of their paychecks to the proposed health care system.

Hsiao acknowledges that an increase in income taxation would serve as the fairest financing basis for the single-payer plan. “The most equitable, or progressive, form of health care financing is household income tax,” his team writes in their final report. “Income taxes are formed in such a way that richer individuals pay a larger share of their income than poorer individuals, and therefore by using the overall income tax base to finance health care the same dynamics remain.”

But the report goes on to note that “if Vermont were to finance this system on income tax, the federal tax treatment of health benefits would be lost for the populations who can least afford it.

“Under the tax code in the United State[sic],” the report points out, “employers’ spending on health premiums is considered a legitimate business expense and exempted from taxation. Meanwhile, employees do not have to include the premium paid by employers as income ... subject to income tax.”

It is for these reasons that Hsiao favors reliance on a payroll contribution.

To enhance the equity of such a levy, the report urges that the lowest-income workers and their employees be exempted from the payroll tax.

What about objections that a payroll tax harms business? Hsiao implies that such complaints from the business community should not be given much credence. “Empirical studies on U.S. companies find that payroll taxes imposed on employers were passed back to employees over time in the form of lower wages or lower pensions and other fringe benefits,” Hsiao’s report says. “In other words, the burden of payroll tax on employers was actually borne by employees.”

Acknowledged losers under Hsiao’s plan include high-earning couples who are now jointly covered under the better of two employer-paid policies available to them. With single payer, each partner will have to pay a new tax on earnings, while his or her benefits will probably not improve.

Overall, Hsiao declares, “most employers and employees will pay less” under his public-private single-payer model than they will if the current system remains in place.

Vermont business leaders dispute that assertion. Tom Torti, president of the Lake Champlain Regional Chamber of Commerce, says “more than 60 percent of our members will come out worse” under Hsiao’s plan. “Many of their employees will come out worse, as well.”

Vermont Businesses for Social Responsibility has similarly declined to endorse Hsiao’s payroll-tax proposal. Dan Barlow, its public policy manager, says many members of the organization want the income tax to provide some portion of single payer’s financing.

But all predictions about the effects of a payroll tax remain tentative, given the possibility that neither Hsiao’s nor Torti’s numbers are accurate, observes State Rep. Mark Larson (D-Burlington), chair of the House Committee on Health Care. One bedeviling problem awaiting the Green Mountain Care board is the lack of reliable statistics on many facets of health insurance coverage in Vermont, Larson says.

All sides in the debate do agree, however, that Hsiao’s proposed tax formula will place heavy financial burdens on many small businesses, especially those that currently offer no health insurance to their workers. That’s why, Torti says, the chamber wants a small-business owner included on the Green Mountain Care board. “Otherwise,” Torti warns, “it will lack credibility.”

Larson, a leading advocate of the single-payer legislation that authorized creation of the board, argues that “it’s essential all members be independent” of special interests. “If you give a seat to small business, every group is going to want to get a member onto the board.”

Vermont’s business sector is split over Hsiao’s claim that single payer will prove an economic boon to the state. The report estimates that the new system’s efficiencies will produce a $580 million savings in 2015, its projected first year of implementation. Employers can use their share of the savings to raise wages and expand their operations, while the state can invest in primary-care services, Hsiao suggests.

For those reasons, “we see this as an economic development bill,” says Barlow, of Vermont Businesses for Social Responsibility.

Don Mayer, “top dog” at Small Dog Electronics, agrees, saying, “it makes me angry to be spending on health insurance money I could use to pay raises.” Mayer figures the share of Small Dog’s 50-person payroll devoted to health insurance would be cut by more than half — from 22 percent to 9.4 percent — if the single-payer payroll tax became effective.

But the savings foreseen by Hsiao may prove a mirage, warns Betsy Bishop, head of the Vermont Chamber of Commerce. No one knows whether the system will include effective measures to discourage Vermonters from making unnecessary use of expensive health services, she and other business leaders caution. The single-payer legislation “puts us on a path toward unknown costs,” Bishop says.

For many Vermonters today, there’s “a strong connection between health care choices and the consumption of health care,” says Bill Driscoll, spokesman for of Associated Industries of Vermont. Single payer will break that connection, he predicts, by eliminating the option of lower-cost, high-deductible plans such as the health savings accounts that many businesses now provide as a form of coverage for employees. Because a consumer will presumably pay nothing extra for additional services, the proposed single-payer system will lead to “expensive overutilization,” Driscoll says.

In addition, the payroll tax will actually have the effect of destroying jobs, argues Edward Sawyer, president and CEO of SBE. In a letter to Larson, the head of the Barre-based capacitor-manufacturing firm calculates that an unpartnered engineer earning $75,000 currently costs SBE $3690 for health care, or about 5 percent of his or her wages. That health care amount and percentage would both increase sharply under Hsiao’s payroll-tax formula, Sawyer adds.

With such a scenario, he tells Larson, “not only will hiring new employees be difficult, but maintaining our current employees will also be a challenge.” A fast-growing company like SBE, which operates in many locations, may elect to focus job growth outside Vermont if the proposed version of single payer becomes a reality, Sawyer continues.

“We do not feel it is appropriate to label this legislation as an economic development tool,” Sawyer declares. “From our company’s viewpoint, it is a job-loss program.”

Some businesses are already making plans for future growth on the assumption that something close to the Hsiao plan will be adopted, Bishop says. Heads of other companies, she adds, complain that they can’t make clear plans because of uncertainties over what health insurance in Vermont will cost them in the coming years. “The unknown is not something that sits well with business,” Bishop says.

She and many Vermont CEOs preface their opposition to the Hsiao plan with acknowledgments that Vermont’s existing health care system is “broken.” Costs are skyrocketing at rates that cannot be sustained, business leaders affirm. Relentless inflation of health insurance premiums has made it impossible for even companies that see themselves as progressive to maintain the scope of their employees’ benefits.

“You pay more, you get less,” observes Russ Bennett, owner of NorthLand Visual Design & Construction. “That’s just the nature of how insurance companies make their businesses successful.”

Betsy Allen-Pennebaker, co-owner of Vermont Design Works, chooses stronger words in describing the private insurance companies: “howling wolves,” she calls them. The truly troubling source of uncertainty for businesses, Allen-Pennebaker adds, is their inability under the current system to calculate whether they’ll be paying “5, 10 or 15 percent more for health insurance a year or two from now.”

Small Dog’s Mayer likewise criticizes the current system in more colorful terms than Bishop’s. “You could put the dumbest people in the world in a room, and they couldn’t come up with a system as dumb as ours,” Mayer says.

Any American business executive who has lived and worked in Europe knows there’s nothing to fear from a single-payer plan, Allen-Pennebaker adds. She says she used both the British and Austrian systems during a combined eight years of residence in those countries and found them superior in most respects to the American way of providing health care. “Give me single payer any day,” the co-owner of the Winooski-based firm declares.

This being Vermont, even business opponents of the Hsiao plan emphasize that they are fighting on economic rather than ideological grounds. Torti notes, for example, that “the whole thing about single-payer being socialized medicine is a red herring. We’re not into that.”

A large proportion of Vermonters already get health insurance through government programs such as Medicaid, Medicare, Dr. Dynasaur, Catamount Health and military veterans’ coverage, Torti points out. While flatly rejecting a 12.5 percent payroll tax as “not based in reality,” he suggests that a tax in the neighborhood of 7 percent might be acceptable.

Such potential concessions suggest that Vermont’s predilection for progressive yet pragmatic politics may ultimately make it possible to broker a compromise on single-payer financing.

First, Vermonters just have to trust the Green Mountain Care board’s fact-gathering and planning process. Design-builder Bennett suggests that, while “we all have uncertainty over something that’s government-run,” single payer “does give voters the chance to weigh in. They don’t get that with a system that’s privately run.”

Bennett says he tries to reassure skeptics by pointing out “this is a government that did take us to the moon.”