Advocates for Evidence-Based Health Policy Speakers
Tho’ you may not drive a great big Cadillac
Currently, employer-sponsored health insurance is treated as a tax free benefit. While this encourages employers and employees to obtain coverage, it is a limitless subsidy. The Cadillac Tax would cap this subsidy in coming years.
Beginning January 1st, 2018, the Patient Protection and Affordable Care Act will impose what is commonly known as the “Cadillac tax”. As with other excise taxes, the primary objective of the Cadillac tax, aside from simply raising revenue, is to change consumer behavior in a way that decreases health coverage, specifically decreasing utilization of low-value medical care, by removing the insulating effect between patients and the true costs of health care. The excise tax rate is forty percent; it applies to the difference between the value of the benefits and threshold levels on insurance benefits. The Cadillac tax thresholds will apply to employer sponsored health plans whose value exceeds $10,200 for single coverage and $27,500 for family coverage. Health plan value will be determined through premiums as well as payments made to health savings accounts (HSAs), health reimbursement accounts (HRAs), and flexible spending accounts (FSAs).
To examine the likelihood of plans crossing the Cadillac tax threshold, data was analyzed from the Kaiser Family Foundation and Health Research and Educational Trust’s (KFF-HRET) Employer Health Benefits Survey for years 2008 and 2009. The KFF-HRET survey collects data from a nationally representative random sample of about 2,000 employers per year. This article modeled outcomes for the years 2018-2029 describing the number of plans that will cross the threshold and the characteristics that make a health plan more likely to cross the threshold.
Predictions for the distribution of single and family-of-four premiums from the KFF-HRET data assume a six percent annual growth rate in benefits. The model suggests that almost one-half of private health insurance plans will likely be affected by 2025 and about three-quarters of these plans will meet the Cadillac tax threshold by 2029. These numbers will vary based on a number of factors, but the authors concluded that as long as the annual growth rate of health insurance premiums outpaces general inflation, more and more plans will be affected by the excise tax as time progresses.
The estimated end result if the Cadillac tax is implemented as written will be a reduction in health care benefits by seven percent in 2018 and 3.1 percent in 2029. The Cadillac tax will likely raise about $931 billion in revenue over the ensuing 10-year budget window from 2020 to 2029.
General characteristics of plans that will be hypothetically vulnerable to exceeding Cadillac tax thresholds are those with higher pre-tax contributions. Such plans are common for unionized employees (who have been able to gain increases in fringe benefits through contract negotiations) and executive health plans alike.
PPOs generally have higher premiums than HMOs, but neither are stronger predictors of threshold breach than high deductible health plans due to the high level of tax exempt contributions under these plans. Furthermore, unionized employers and those with higher risk populations will be vulnerable to the excise tax. The effects of the tax vary considerably from industry to industry and appear to disproportionately impact smaller employers (presumably due to the higher administrative overhead embedded in their premiums), and those in the northeast census region (presumably due to higher health care costs).
The Cadillac tax is one policy approach aimed at preventing the potential over-utilization of low value health care by penalizing the provision of high cost health insurance coverage.
Commentary
The Cadillac tax operates on the principle that greater cost necessarily equals unnecessary coverage. However, employers with smaller or higher risk populations may have higher costs without richer benefits. Those who operate regions of the country where the cost of healthcare is relatively high face the same dilemma and may be adversely impacted. Thus, the tax could have the unintended consequence of limiting benefits of populations with real needs and increasing the number of Americans under-insured.
The excise tax adds a layer of confusion and uncertainty to a healthcare system already undergoing a substantial overhaul. Once more, it seems largely based on revenue predictions from modeling that cannot account for unforeseen variables (political will, insurance industry reactions, and effects of various overhaul efforts already in place).
At what point does healthcare become a luxury? At what point can the government arbitrarily cap healthcare benefits to pay for the benefits of the uninsured? At what point do consumers decide that too many choices have been taken away in the name of increasing federal revenue?
by
Patrick Fitzgerald, MPH
EDITOR’S NOTE: The federal government determined during World War II that certain employee benefits, such as health insurance, should be treated as tax free income. In recent years, economists have recognized that such an unlimited amount of fringe benefits distorts the market for health coverage, causes individuals to purchase more than they otherwise might, and disproportionately benefits individuals with higher incomes. Thus, the federal government seems within its power to modify the terms of this subsidy.
The Cadillac Tax is nothing more than a policy option to set limits to a currently limitless federal subsidy on employer-sponsored health insurance. At some point, the health care coverage provided to some people goes beyond the purpose of insurance and becomes mere prepayment for health care services. As an analogy, consider if car insurance included visits to the gas station to fill up or routine maintenance and not just coverage for catastrophic collisions or liability. That is what health insurance looks like today.
This research shows that some groups (small employers with sicker patients, unionized employers, and those is high cost regions) may suffer by the imposition of an arbitrary cap or tax. Simultaneously, the Cadillac tax will limit the currently limitless ability of the wealthy to shield income from taxation by placing compensation into health insurance coverage or health savings accounts.
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