New SBAM study finds that tax raises costs but doesn’t increase access to health coverage

Noted economist Gary Wolfram, Ph. D, of Hillsdale College, today released a landmark study showing a 1980 law that taxes Michigan businesses to subsidize Medigap actually raises production costs, doesn’t expand healthcare access and benefits only a few people who don’t need the product in the first place.

“While this legislation may have been well intended, it has unintended consequences that result in increased costs on other sectors of the insurance market, in particular small businesses, with a resulting drag on Michigan’s economy,” Wolfram said. “This results in higher labor costs, lower employment, less health care coverage for non-seniors, and less total output in Michigan.  The subsidy is ill-targeted as wealthy seniors, and up until the most recent rate setting, non-resident seniors receive the subsidy.”

Wolfram’s study was commissioned by the Small Business Association of Michigan. Under a 1980 law that governs only Blue Cross Blue Shield of Michigan and no other health insurer, small businesses covered by Blue Cross Blue Shield of Michigan are charged a 1-percent “tax” on their premiums to subsidize Medigap premiums for seniors.

The Medigap “tax” costs around $200 million every year for businesses and individuals. With annual premium costs today averaging around $9,000, eliminating this subsidy could provide health insurance for 22,250 employees at small businesses.

“Health insurance reforms and relief from the burdensome Medigap tax will help small businesses by containing costs and providing more certainty in the health insurance market,” says SBAM President and CEO Rob Fowler. “For more than 30 years, Michigan’s outdated and unfair system has punished small business owners. This study shows that not only does our system not work, it deprives thousands of employees of health coverage and hurts the small businesses that are trying to do the right thing by offering health insurance.”

According to Wolfram’s analysis, the average cost of premiums for small businesses covered by Blue Cross Blue Shield of Michigan per employee has increased from $7,820 in 2007 to $9,068 in 2011 – a 16-percent increase in just four years.

“Does it make sense to require BCBSM to reduce premiums for a retired couple, each of whom receives $45,000 per year in pension income, while a single mother of three children earning $30,000 per year pays an unsubsidized rate?“ Wolfram said. “Every dollar of revenue that is used to fund Medigap subsidies cannot be used to reduce premiums for small business owners.  As a consequence employer-based health insurance premiums are higher than they would otherwise be.”