Politico is reporting the Nancy Pelosi’s “fix” to the excise tax is to just raise the limit.

Pelosi has repeatedly expressed her frustrations about the inclusion of the Cadillac tax in the Senate bill and has sparred with Obama about the issue during face-to-face meetings. Her hope now, House aides say, is to get the administration to accept a tax that starts on family plans worth $28,000 — $7,000 more than the threshold favored by Obama and Senate Majority Leader Harry Reid (D-Nev.).

This is the wrong way to fix the excise tax. The problem is not that the current level of $23,000 is too low (very few plans are currently above this limit), the issue is that the tax is unfocused, poorly designed, and badly indexed.

The first issue is that the tax is designed like a blunt instrument, it hits all plans over a set limit, regardless of how generous or stingy the benefits are. Some companies, with much older work forces and unusually high levels of medical problems, could have very expensive premiums even for fairly bare bones plans. These are not the people you want hit by the tax. This problem can be solved with some form of community adjustment calculation. The excise tax should be based on how much the premiums would be, given the level of benefits if sold to a risk pool with a regional average for health and age.

Another issue is that the level of the tax is set at a flat 40% for all benefits over $23,000. The tax should be set to any employee’s current average tax rate, not 40%. This 40% level is over many American’s current average tax rate. This means even if an employer or employee are willing to pay more for better health insurance, and are willing to pay taxes on these additional benefits as if they are income, it would still not make financial sense to do so. I see no logical reason to put in place obstacles preventing people from getting super-high-end health insurance if they want and are willing to treat the additional benefits as taxable income and/or pay for them with post-tax dollars.

The biggest issue is that the tax is badly indexed. It is fixed to the consumer price index plus 1%. The problem is not how many plans the excise tax will hit at first, but how many plans it will eventually hit moving forward. Health insurance premiums are rising much faster than general inflation, and nothing in this health care bill leads me to expect that will change. Even in other countries with sensible health care systems, costs are still increasing at a rate faster than inflation. At first, the excise tax will hit only a small number of plans, but, moving forward, it will start to affect more and more middle class Americans, forcing their health insurance plans to get worse. Simply raising the limit does not solve the problem, it only delays for a few years when the tax will start hitting middle class families.

The solution is to make sure this “Cadillac” tax remains forever only a tax on truly “Cadillac” plans. That can be done by indexing the tax to health care prices. My prefered solution is to index the tax to the average premiums in the federal employee health benefit (FEHB) program plus some large percentage. The government is the largest provider of employer health care in the country. If it can bring down premiums and slow the growth rate of its health care costs, the rest of the private sector should be able to follow suit. Conversely, if the FEHB as the largest single purchaser of insurance can’t slow the growth rate of its health care premiums, much smaller private companies should not be expected to either.

If Pelosi really wants to fix the excise tax, simply raising the limit should not be the solution. Her goal should be to make sure the tax is better designed and properly indexed.