How Obamacare is taking a bite out of CEO pay

Obamacare is known for overhauling how millions of how Americans buy health insurance, but it is also quietly having an effect on another key aspect of health care costs: executive pay.

That's because the law includes a little-known rule that puts a $500,000 cap on how much health insurers can deduct from their taxes for top executives' compensation. The outcome? At least $72 million was returned to taxpayers last year, based on the pay of top executives at America's top 10 largest publicly traded health insurance companies, according to a report from the left-leaning Institute for Policy Studies (IPS).

The $500,000 deduction limit was sparked by concern that health insurers, which were expected to be flooded with new customers under Obamacare, would lavish their CEOs with higher pay, notes Sarah Anderson, Global Economy Project director at IPS. The cap was meant to deter such corporations essentially profiteering from Obamacare, she notes.

"It's a common sense thing to do," Anderson said. "They can still pay them as much as they like, but they can't deduct it."

So far, there's little evidence that limiting the loophole has tamped down health insurance executives' pay, given that compensation levels didn't decline last year, the report found. On the other hand, the share of executive pay that health insurers could claim as tax-deductible shrank from 27 percent from 96 percent in 2012, the report found.

The performance-pay loophole has been cited by some critics as one reason for bloated CEO compensation. Back in 1983, the average CEO made 46 times the average worker; by 2013, that ratio had swelled to 331-to-one.

The loophole stems back to 1993, when a tweak to the U.S. tax code aimed to reform executive pay by capping corporate tax deductions for executive pay for $1 million. At the same time, it allowed tax deductions for "performance-based pay." Since CEO pay has surged since then, it seems that the incentive to dampen excessive pay didn't work as planned.

Not only health insurers benefit from tax payer subsidies, of course. Low-wage employees at Walmart (WMT) have been estimated to take $6.2 billion in public assistance, such as food stamps and Medicaid.

"It would be hard to find a major company that isn't benefiting in some way from public largesse," Anderson said. "It's outrageous that executives are making these incredible amounts of money and it's subsidized by taxpayers."