As the House of Representatives prepares to vote Thursday to repeal the Affordable Care Act, there’s a new estimate of the cost of one of its hidden provisions, a rollback of rules designed to restrain executive pay at health insurance companies.
Here’s the bottom line: Rolling back the provision will result in an even bigger ripoff of the American taxpayer than previously calculated.
The rule in the GOP crosshairs placed a stringent limit on corporate tax deductions for executive pay among health insurance companies. Most public companies can’t deduct more than $1 million in pay for their top executives, but there’s a huge loophole: “performance-based” compensation, such as stock options or restricted stock grants, are exempt from the limit. The Affordable Care Act, however, cut the limit on the deductibility for health insurers to $500,000 in pay per executive and eliminated the performance-pay loophole for them entirely.
I don’t think the American people voted in November for more incentives for higher CEO pay.
The limitation was imposed partially to balance the bounty health insurers would receive from Obamacare’s expansion of health coverage, both through the individual exchanges and Medicaid expansion. “Consumers across America,” then-Sen. Tom Harkin (D-Iowa) said when the ACA was passed, “should know that when they pay their hard-earned dollars to cover the soaring cost of premiums, they are not just chipping in to pay for the CEOs’ next new yacht.”
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The GOP repeal bill to be voted on Thursday eliminates those restrictions, effectively equalizing the tax treatment of health insurance executives with that of other public companies. According to calculations by the progressive Institute for Policy Studies based on the pay of top executives at the five biggest publicly traded insurers in 2015, the deduction constraint saved taxpayers about $92 million that year. The calculation is an update of the Institute’s original calculation of the value of the limit, which was about $70 million a year. That figure was based on executive pay 2013 at 10 top insurers.
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Repealing the limit amounts to a “perverse incentive for companies to overpay their CEOs,” says Sarah Anderson of IPS, who prepared both studies. She thinks that as more taxpayers learn about the ramifications of the repeal, Republican lawmakers could pay a political price. “I don’t think the American people voted in November for more incentives for higher CEO pay,” she told me.
The drafters of the GOP repeal bill were crafty about this provision. It’s shrouded within six bland lines on Page 67 of the 123-page repeal bill, headed, “Remuneration from certain insurers.” One has to chase down “paragraph (6) of section 162(m) of the Internal Revenue Code of 1986,” the only concrete reference to the tax deduction limit, to discover what’s being repealed and what it means.
Indeed, even Health and Human Services Secretary Tom Price was hopelessly at sea when asked by CNN’s Dana Bash about the provision during a broadcast town hall last week.
He seemed to think the provision raised taxes on the executives directly, rather than merely limiting the deductibility of their compensation by their companies. At best, that creates an indirect effect pushing up executive pay. (To be fair, he was abetted in this error by Bash, who had the same misconception that it was about a “tax break for healthcare company executives who make over half million dollars a year.”)
“I think the previous administration singled out healthcare executives,” Price said. “And what they said is healthcare executives ought to be punished….Think about what this is, Dana. This is the federal government before saying to a certain sector of society, a certain individual, ‘You can’t make what that company is willing to pay you for your services.’ That doesn’t sound like America to me.”
He added, “What we’re saying is we ought not single out certain individuals in this nation and have the federal government have the power to be able to say, ‘You’re going to be treated differently from that individual even though you make the same amount of money.’ … What the previous administration did was … identified individuals in a certain sector of our society and said you’ve got to pay more than the guy or the gal down the street who’s making exactly the same amount of money as you.”
Obviously, the ACA provision has nothing to do with “punishing” healthcare executives but is about getting their companies to help cover the cost of their own expanded business opportunities — and despite their whining about losses on the Obamacare exchanges, those companies have reaped huge profits by serving Medicaid expansion under the ACA.
It’s proper to observe that the ACA limitation on tax deductibility had a precedent. Under the $700-billion Troubled Asset Relief Program, or TARP, which bailed out American banks after the financial crash of 2008, banks that received TARP funds faced the same deduction limits until they paid off their government loans.
More to the point, the provision did little to rein in health insurance executive pay. The average compensation for the top five or six executives in the five companies in Anderson’s current sample earned an average of $14.6 million in 2015, up from an average $10.9 million collected by the executives of the 10 top companies in her original survey.
Anderson says the weak effect was predictable, since imposing the restrictions on executives in a single industry wouldn’t keep their boards from using compensation in other industries as a benchmark. Until the limits are applied to all publicly traded companies, Anderson says, “we won’t see much of an effect.”
The GOP repeal bill, obviously, would make that goal more remote. “This was a small step forward,” Anderson says, “and it would be a shame to go in the opposite direction.”