The anatomy of the 'Cadillac Tax'

There has been a lot of grumbling inside the progressive inner-divide on the health care debate about the so-called 'Cadillac tax.' The Senate-passed bill raises $150 billion over 10 years by this method. The idea is to recede the tax exemption on high-end employer-provided health insurance plans.  A lot of labor unions are understandably angry because their members have given up wages to keep and earn these benefits.  On the other hand, there seems to be somewhat of a meeting of the minds among the policy wonks that this is an effective cost control measure.  So what's going on?

I decided to actually look into the policy.  Who it applies to, whom it is going to affect and to what degree, and what the cost controls, if any, are.  I wanted to look into whether the claims of this being a cost control measure are true.  I also wanted to look into whether the claims of this being a policy that balances the health care woes on the backs of working people is true.  I must admit that I consider myself more of a policy wonk.  Perhaps I best self describe as a  empathy-driven policy wonk, however.

Whom does the tax apply to, and whom doesn't it apply to?

It is very important to remember that this excise tax applies generally only to employer-provided plans, not to plans in the individual market.  If your employer does not provide coverage and you are attempting to purchase it in the individual market, this tax does not apply to you.  The Senate Democratic Policy Committee explains:

The Patient Protection and Affordable Care Act levies a new excise tax of 40 percent on insurance companies and plan administrators for any health coverage plan with an annual premium that is above the threshold of $8,500 for single coverage and $23,000 for family coverage.  The tax applies to self-insured plans and plans sold in the group market, and not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals).  The tax applies to the amount of the premium in excess of the threshold. A transition rule increases the threshold for the 17 highest cost states for the first three years.  An additional threshold amount of $1,350 for singles and $3,000 for families is available for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. [emphases mine]

So not only is it only applicable to employers (including self-employers), if you are retired and over 55 (i.e. union members who have great retirement benefits) or if you are employed in a high risk profession (police, firefighter, workers at a nuclear facility), your individual limit is $9,850 and your family limit is $26,000.  To clarify, the 40% tax is also only on the amount above and beyond the above thresholds.

Who has this type of coverage in the current system?

The Kaiser Family Foundation, in its Employer Health Benefit Survey found that in 2009, the average cost of employer-sponsored coverage for individuals was $4,824 per year, and for families, $13,375 per year.  Note that both amounts are little more than half of the prices of health insurance plans where a so-called Cadillac tax would kick in.  The survey further finds that that 2% of workers with individual coverage have a plan that costs $8,000 or more in premiums and only 4% of workers with family coverage have plans with premiums greater than $20,000.  Given the floor for the Cadillac tax is even higher, $8,500 and $23,000 respectively, a very very very small percentage of workers have plans that are that expensive.  In other words, 98% of workers with individual policies from their employers and over 96% of workers with family coverage do not currently fall under this penalty.

Adjustment for cost increases: I have heard complains that the excise tax is not indexed for inflation.  This is not true.  According to the Congressional Budget Office, the "Cadillac" tax threshold is indexed.

Beginning in 2013, insurance policies with relatively high total premiums would be subject to a 40 percent excise tax on the amount by which the premiums exceeded a specified threshold. That threshold would be set initially at $8,500 for single policies and $23,000 for family policies (with certain exceptions); after 2013, those amounts would be indexed to overall inflation plus 1 percentage point. [emphasis mine]

It is true that under the status quo, health insurance premiums have been growing faster than inflation.  However, it is wholly inaccurate to say that the "Cadillac tax" is not indexed.

Who'll the tax hit by 2016?

It is true that a CBO report states that under current law, 19% of employer-covered workers would reach these thresholds by 2016.  However, the same report also speculates that

CBO and JCT estimate that most people would avoid the cost of the excise tax by enrolling in plans that had lower premiums; those reductions would result from choosing plans that either pay a smaller share of covered health care costs (which would reduce premiums directly as well as indirectly by leading to less use of covered medical services), manage benefits more tightly, or cover fewer services. Those calculations also reflect an expectation that a large share of enrollees in employment-based plans would be in grandfathered plans throughout the 2010–2019 period.

So according to the CBO, most people would opt for a lower-premium plan to avoid the tax.  Those plans would be ones that manage benefits more closely or offer fewer benefits than the previous plan.  However, let's also note that the health insurance reform bill from the Senate puts in strong insurance regulations not only for plans in the exchanges but plans offered through employers as well.  There is a minimal set of benefits that insurance companies must cover, including no-copay preventive care; there is also an out-of-pocket maximum.  In addition, the status quo forces untold numbers of workers to either decline employer-provided coverage or choose cheaper, more high-deductible plans every year.

I would be remiss if I didn't point out that the Kaiser study finds that in 2009, a mere 59% of workers were covered by employer plans.  The Economic Policy Institute released a report in 2009 showing a 6.4% decline in people covered by employer-sponsored health insurance between 2000 and 2008.  If health insurance costs continue to rise (which will need to happen if the 19% number above is to come true), we can expect even more decline.  With the same types of increase in premiums that is assumed to calculate the 19% number, I am going to eyeball another 6% decline between 2009 and 2016.  That brings the estimated percentage of workers covered with employer-sponsored health insurance plans to 53% in 2016.  That means that 19% of that 53%, or a total of about 10% of total workers would be affected by the tax (affected being either having their employer pay the tax or choose a lower premium plan).

Conclusion: The above analysis made for my leanings that the "Cadillac tax" might not be such a bad idea.  A near-consensus of health-economists back up that idea.  We might all bristle at the idea that employers might consider giving part of the reduced benefits to the employees as cash pay instead, but I am inclined to believe 23 health-economists, including two Nobel winners on this:

The excise tax will help curtail the growth of private health insurance premiums by creating incentives to limit the costs of plans to a tax-free amount. In addition, as employers and health plans redesign their benefits to reduce health care premiums, cash wages will increase. Analysis of the Senate Finance Committee’s proposal suggests that the excise tax on high-cost insurance plans would increase workers’ take-home pay by more than $300 billion over the next decade. [emphases mine]

I am open to hearing the analysis of anyone who has more credentials on policy than these luminaries.  One of these economists, Jonathan Gruber, a Professor of Economics at MIT, further explains in his own column at the Washington Post.  His analysis is more recent (12/28 as opposed to the 11/17 date for the joint letter to the President quoted above) and estimates a $223 billion increase in wages in a decade.  The primary difference, I believe, is that the Finance Committee bill had lower thresholds ($8,000 for single and $21,000 for family policies) for the tax to hit.  Health economists and policy experts seem to be near-universal in their opinion, as Prof. Gruber points out, that this is one of the effective cost control methods in the bill.

Ezra Klein, Economic and Domestic Policy writer for the Washington Post, has written extensively about this as well, and his columns were instrumental for me to find the expert resources above. 

Let's knock something out of the way right now.  Bob Herbert of the Times complains that it is a pipe dream for the Senate bill to try to raise $150 billion in funding in this way because the bill contemplates raising only 18% of it directly from the tax and the other 82% via income tax when employers cut the costs of the benefits and convert them into wages for employees instead.  Employee wages are tax deductible for the employer.  Herbert laughs at the idea that employers are going to cut your benefits and give you the money in cash instead.  But he blissfully ignores the fact that the savings have to be accounted for somehow.  If it is added to the corporate bottom line, or - err - profits, it is subject to the corporate tax, currently for corporations that can afford that kind of expense in benefits, is 35-38%.  That is a higher tax bracket than the vast majority of workers.  In other words, if they choose to go this route, it would make more money for the government than is estimated, not less.  If they pay the money in wages to employees, however, they won't have to pay any taxes on it whatsoever.  So it is actually not at all nonsensical to say that they will use at least part of the savings to increase pay.

A note: Please understand that this piece is intended to be an analysis of the excise tax in the Senate bill imposed on high-end employer-sponsored plans.  It is not intended to be a comparative analysis with the House bill's method of paying for health care reform - i.e. the "Millionaire's tax."  That is a simple 5.4% tax on individuals making over $500,000 and couples making over $1 million.  My thought at the moment is that perhaps the two can be combined and simultaneous, and because of the additional revenue, the premium subsidies can start earlier than 2013 (House bill) or 2014 (Senate bill).

A special note of thanks: I could not have completed my research and my work on this without several suggestions to articles in the comments section in my Daily Kos diary yesterday.  I want to express my gratitude to glynis, Cedwyn, samantha in oregon, raatz, itskevin and anyone else I'm missing who pointed out articles for me to read and research.  I have not been able to include all the articles in this piece in terms of references, but I have read them all and each expanded my knowledge base on the subject, and some directed me to further resources.  I really can't thank everyone enough.

Tags: cadillac tax, excise tax, health insurance reform, premiums, Health care (all tags)

Comments

3 Comments

it's a great idea

if you want to kill two Obama campaign promises with one stone.

1. If you like the health insurance you have, you can keep it. But obviously, many employers will downgrade the insurance they provide to employees in order to avoid this tax.

2. No one earning less than $250,000 a year will see a tax increase.

I consider myself more of a wonk than a hack in most cases, but the wonks are just wrong about this. Politically this tax is probably more damaging than the mandate to buy private health insurance.

by desmoinesdem 2010-01-05 09:35PM | 2 recs
RE: it's a great idea

Umm... many employers will downgrade, or even cancel coverage in the upcoming years under the status quo.  So you're kind of setting up a double edged sword.

And he's not breaking his campaign promise that no individual earning less than $250K will see a tax increase, since this is a tax increase on the benefits administrator (i.e. the employer) and not the employee.

by deaniac83 2010-01-05 09:41PM | 0 recs
RE: it's a great idea

The wonk part is based on Reaganomics, which as we all know has worked out well for us in the past.

by bruh3 2010-01-06 09:16AM | 0 recs

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