12/06/2009 05:19 pm ET | Updated May 25, 2011

Political Grandstanding: Excessive Compensation and the Health Care Bill

In the pending health care bill, Senate Democrats have finally addressed the taxpayer subsidy of excessive executive compensation. Unfortunately, their limited proposal is little more than political grandstanding.

The current bill denies corporate income tax deductions for excessive executive salaries paid in the health care industry, but continues to permit such deductions for egregious salaries paid elsewhere in the economy.

Currently, publicly held corporations can effectively deduct unlimited amounts of executive compensation from their federal corporate income tax returns. Although Section 162(m) of the Internal Revenue Code purports to limit such deductions to $1,000,000 annually per executive, Section 162(m)(4) contains a loophole large enough to sail a mega-yacht through: Deductions are still allowed for any "performance based" pay, no matter how high.

The Internal Revenue Service has interpreted 162(m)(4) to allow almost any compensation plan to pass muster, even when executive compensation is tied to comically low performance metrics. Thus, Section 162(m) has become largely a dead letter; unlimited amounts of executive compensation can be structured as performance-based and therefore deducted for federal income tax purposes.

The current Senate health care bill seeks to revive Section162(m) by removing the "performance based" exceptions. However, the bill applies only to corporate salaries paid to health insurance executives, not to compensation for employees in any other industry.

Under the bill, health insurance companies would only be able to deduct compensation below $500,000 (or, under a pending amendment by Senator Blanche Lincoln of Arkansas, $400,000). More importantly, health insurance companies would be denied the Section 162(m)(4) loophole for performance-based pay. These insurance companies could still pay their executives large amounts, but taxpayer money would no longer subsidize such salaries via corporate income tax deductions.

Unfortunately, the Senate Democrats' decision to target only the compensation paid to insurance executives belies an unwillingness to address the broader issue at hand: the taxpayer's subsidy of excessive executive compensation via tax deductions. There is no persuasive rationale for limiting the deductibility of health insurance executives' pay, while allowing every other industry to continue using the 162(m)(4) exception to deduct unlimited compensation characterized as performance-based pay.

Targeting the executive pay of health care insurance executives is like going after AA baseball players for steroid abuse: Everyone knows that's not where the real action is. Today's Gordon Gekkos are not flocking to the health insurance industry.

There is no persuasive argument for disallowing the deductibility of the salaries health insurance executives receive while permitting every other corporation effectively unlimited deductions for executive compensation. At best, supporters of the Senate bill argue that such limits will help "encourage health insurance companies to put premium dollars toward lower rates and more affordable coverage, not in the pocketbooks of their executives." However, the proposed changes will do nothing substantial to address health care costs, since executive compensation is a minuscule fraction of such costs.

Consider Senator Blanche Lincoln's amendment lowering the deduction maximum for insurers from $500,000 to $400,000. Senator Lincoln estimates this would result in a savings of approximately $0.25 per U.S. citizen per year. Unless playing Ms. Pacman counts as health insurance, such savings will not have a material impact on premiums.

The current bill's treatment of executive compensation is political grandstanding at its most troubling: Senators can crow about decreasing taxpayer subsidization of excessive executive compensation in the health insurance industry, while leaving the taxpayer subsidy of excessive compensation firmly intact everywhere else.

That's patently unhealthy.