The Red Flags on Taxing "Cadillac" Insurance Plans

by Tim Foley

categories: National Health Exchange, Obama and Congress

Published October 28, 2009 @ 10:42AM PT

There are some relatively popular things I just don't get. The NHL, for example. Jon & Kate Plus 8, for another. But I've been somewhat surprised with the extent to which many wonkish bloggers I enjoy reading have embraced the Senate bill's method of paying for a chunk of reform through an excise tax on so-called "Cadillac" insurance plans -- an idea that I've repeatedly called "lame." Less surprising but still fretful to me is the White House's embrace of the idea, with economic advisor Christina Roemer yesterday calling it, "probably the number one item that health economists across the ideological spectrum believe is likely to stem the explosion of health-care costs."

Will the insurance plan tax raise money for reform? No question. Will it stem costs? Well, I've got some red flags on that which I haven't seen adequately explained.

Now the forebear of this policy idea did made a lot of sense. Currently, employers don't pay taxes on health benefits like they do on salary for their employees -- a historical accident left over from WWII that fosters our dependence on employer-based insurance, with its inefficiencies and drag on our wages. The original idea was to remove some or all of this exemption and use the money to help pay for subsidies for people buying insurance through the Health Exchange -- not a bad trade-off when combined with an employer mandate to get companies to think twice before just dumping their employee benefits because they had to pay taxes on them. When that idea proved politically unpopular, Sen. Max Baucus suggested maybe they'd only remove the exemption for plans whose dollar value is well above the average -- hence, "Cadillac" because they're more expensive.

When that idea, too, proved unpopular, the senators hit upon the idea of taxing insurance companies. It sounds great (yes! Tax those greedy insurers!), but the intent is the same. If your company's benefits plan for an individual costs $9,000 (the national average is $4,500), then the portion above the threshold of $8,000 would be taxed at 40% -- your insurance company would get hit with a $400 tax on your plan. Of course, they're just going to pass that tax on to their customer -- your boss. Your company then has to decide a.) if they make you pay for that out of your employee contribution, b.) they just pay for it themselves, or c.) they go shopping for a cheaper plan that covers less. Those predicting cost control are betting on Option C winning more often than not.  (By the way, the Senate Finance bill ultimately lacked the employer mandate to prevent dumping as well, which created a whole host of other problems, but that's for another day.)

Let me first mention the problem you hear the most: just because you have a "Cadillac" plan doesn't mean you have the money to buy a Cadillac car. For decades, unionized workers have negotiated for better health care benefits, particularly as a concession when their employers were intractable on raising salaries. Similarly, the excise tax does not take into account areas that are already high-cost on insurance plans. Combine those two factors and you have a lot of middle-class people whose insurance plans are about to be taxed. That's a big political problem.

But I'm not loving the policy implications either. Because we haven't done anything to change the fact that the decision-maker on for most benefits plans is still the employer, and the decision-maker on what to do about the extra cost is also the employer, I'm unconvinced that we'll see that many employers do the cost benefits analysis and arrive at Option C. For one thing, we know that employers already don't optimize their health insurance choices. Changing the benefits of their employees, with disruptions like having to adjust to a new network of doctors, is more likely to elicit howls of employee protests than increased costs, even where the new plan is not only cheaper but better. In California particularly, Kaiser Permante's more efficient model for delivery of care yield better health outcomes and lower prices on average -- the only insurer in the Bay Area who can give you a lower premium at comparable health outcomes is (natch) the government-run Healthy San Francisco. But, as Kaiser CEO Jon Kingsdale explained yesterday, they're not mopping up the floor with the competition:

The price differences are not translated to the consumer. They go to the company. What is the typical HR officer's decision hierarchy? They have benefits that make most workers happy. The worst thing they could do is introduce a change that make 2 to 5 percent of the workers unhappy. The worst thing you can do in this market is bring change. But what kind of market is that?

Here's another way to look at it: health insurance is already on the rise an average of 9% per year in the private sector. It's why more and more companies drop their non-Cadillac benefits or increase their employees' contributions. Say you own a company that offer a $10,000 benefits plan which is $2,000 above the Cadillac threshold. The tax that your insurance company will pass on to you is an 8% increase. That's suddenly going to trigger your cost-controlling impulse in a way that it hasn't been triggered already?

For some companies, sure. For most, of course not. In fact, the Congressional Budget Office and the Joint Commission on Taxation were counting on not much changing when they calculated this excise tax would generate $201 billion in revenue. In order to net that much, then employers would have to not be choosing Option C in large numbers. The biggest red flag on the excise tax as cost control is that the CBO estimates the revenue would go up every year (pg. 15), from $10 billion in 2013 to $46 billion in 2019. How do you get that dramatic revenue increase and subsequent deficit-fighting superpower?  Because more and more benefits plans hit that Cadillac threshold each year.

Revenue generation? Sure. Cost-control? Much like a TLC Marathon of the greatest hits of the Gosselin family, I can't get that excited about it.

(Photo credit: http://www.flickr.com/photos/wingsofman/ / CC BY-NC-ND 2.0)