Government

40% tax on health plans. The naive left invades the editorial board. Are you surprised? 

It is unfortunate that the 40% tax on health plans created by Obamacare has been labeled a “Cadillac” tax because the perception of luxury and excess is misleading and inaccurate.

The idea that such plans encourage overuse of health care is ludicrous, especially when you consider the cost of such plans as defined in the Law includes employee contributions to spending accounts and health savings accounts (HSA); programs designed to do exactly the opposite of encouraging spending.

Just think, the idea of lower out-of-pocket expenses encouraging a disregard for costs from the folks who want “free” college.

The Times says: “Employers can avoid the tax by reducing the benefits they offer (the original purpose of the tax) or by shifting more costs to employees.” Or? Here’s  a clue, reducing benefits and shifting costs to employees are one and the same, it’s not a matter of or. The number of employers affected would be relatively small says the Times;  the current estimate is about 48% initially and growing from there since the dollar cap is not geared to health care inflation  

The fact is avoiding this tax as most employers will, means direct cost-shifting to workers. And yes, the Times is right, modest and lower-income workers will be hurt most as they are now.

Will the experts please give us the details of what they describe as a gold-plated benefit plans.

The idea that employers will increase pay when they reduce benefits is a dream of what must be naive left of center economists, especially considering that many of these are Union plans and public employee plans, which by the way means taxpayers are getting a double whammy 😛

Keep the Tax on High-End Health Plans (New York Times Editorial Board, August 12, 2015)

Congress is under pressure to repeal an impending tax on the so-called Cadillac health plans offered by many employers. Scores of legislators from each party have endorsed separate bills to repeal it, and candidates for office, pressed by lobbyists from labor unions, business groups and insurers, may join the call for repeal. The tax should probably be adjusted by Congress to eliminate inequities, but outright repeal would be a mistake that would undermine the viability of the Affordable Care Act.

Cadillac plans, which often offer more generous benefits and lower costs to the employee, are substantially more expensive than the average employer plan. Many experts believe they encourage wasteful spending in the health care system. To eliminate most of these pricey plans, a 40 percent excise tax will be assessed, beginning in 2018, on any annual premiums that exceed $10,200 for individual coverage and $27,500 for family coverage. The tax will be paid by employers or, in some cases, insurers hired by the employers. If the premium for a family plan is $30,000, for example, the tax would be 40 percent of $2,500, or $1,000.

Employers can avoid the tax by reducing the benefits they offer (the original purpose of the tax) or by shifting more costs to employees. The number of employers affected would be relatively small at the start but would grow over time as more employer-sponsored plans exceed the premium threshold that triggers the tax.

There are good reasons to retain the tax. It makes a start, albeit small, toward reducing the cost of health care by discouraging excessive spending. It would generate some $87 billion over the next decade to finance more coverage for the uninsured, a sum that would either have to be replaced with other revenues or added to the deficit.

In addition, a vast majority of policyholders won’t be hurt because the average family plan currently costs about $17,000, well below the tax threshold. The Congressional Budget Office recently lowered its estimate for projected growth in premiums for private health insurance, making it even less likely that premiums will exceed the tax thresholds anytime soon.

Still, the tax could end up unfairly penalizing some employers for factors beyond their control, and lead them to impose harmful cuts on their workers. Even employers that do not provide gold-plated benefits face very high premiums if they are in places where medical costs are high or if their work force is disproportionately old or chronically ill. Those inequities can be addressed by adjusting the tax to take account of obvious disparities in work-force composition or local medical costs.

One unanswered question is whether employers that cut back their health benefits to avoid the tax will pass the savings on to workers in the form of higher wages. Many economists think they will, but so far there is little evidence of that happening with businesses that have reduced benefits or increased employee contributions.

Analysts at the Commonwealth Fund, a research organization, warn that if employers require higher deductibles and co-pays, workers with modest incomes might postpone the health care they need, which could lead to more spending down the road. Congress should not repeal the tax, but it should find smart ways to adjust it.

Advertisements

4 replies »

  1. I’d like to point out another flaw in the ACA cadillac tax: Alaska. As a resident and a broker I can tell you that EVERY PLAN SOLD IN ALASKA IS CONSIDERED A CADILLAC PLAN. Do I need to say that again? Every plan, regardless of deducible, costs so much because of the high costs of obtaining care in our state, that they are all subject to the tax in 2018. Just 750,000 people, families and businesses impacted by a ridiculous regulation.

    Like

  2. Well, a couple of comments:

    First, averages are deceiving. So, when the NYT indicates that the “average” family plan currently costs $17,000, that includes plans with exceptional health coverage, crappy health coverage, families of two people, families of 10 people. So, expect employers to look for ways to dump health plans with high value benefits (and/or to reduce spending in individual accounts such as employer contributions (and potentially employee pre-tax contributions) to Health Savings Accounts). Second, expect them to moderate their “tiers” of coverage so as to limit the non-single tiers that might be affected by the tax. Third, expect them to self-insure their health plans where possible so that they can eliminate some of the most expensive health treatments and benefits – while still offering a health plan that is both “minimum essential coverage” and “minimum value” (now further limited by regulations that require “substantial” hospitalization and Rx benefits, whatever that is ultimately defined to mean).

    Second, it will be the lower wage and middle class wage workers who will suffer. Managers, directors, executives, will all ensure that action is taken that does not reduce their total rewards package. However, it is the lower wage and middle class wage workers who disproportionately benefit from employer-sponsored health coverage today – BECAUSE EMPLOYER SPENDING ON HEALTH COVERAGE IS A DISPROPORTIONATELY HIGHER PERCENTAGE OF THOSE EMPLOYEES TOTAL REWARDS PACKAGES.

    Third, expect employers to restructure their health coverage spend and the point of purchase cost sharing so that those who anticipate significant out of pocket medical spend waive the employer-sponsored coverage, and migrate to the public exchange coverage.

    Fourth, expect a disproporationate number of workers who need family coverage to migrate to the public exchange.

    So, while the Cadillac Tax is assumed to be a revenue raiser, the fact is that the employer-sponsored health coverage marketplace is much more dynamic than Congress and the President anticipate… so, expect to see taxpayer-subsidized coverage costs for those enrolled in public exchange options escalate dramatically, and the revenue from the Cadillac Tax be substantially less than predicted, PARTICULARLY AS THE DIFFERENCE IN PREMIUM BETWEEN A CADILLAC PLAN COST (WITH TAX ADDED) INCREASES COMPARED TO THE COST OF THE EMPLOYER SHARED RESPONSIBILITY PENALTY TAX (CURRENTLY JUST OVER $3,000).

    The policy wonks think that employers won’t have the wherewithal to make such changes, but, once employers are able to document/communicate/market how taxpayer subsidized coverage is substantially better than what the employer-sponsored plan can provide (while avoiding the Cadillac Tax), workers will take any increase in direct compensation (the increment still far below the current employer spend on medical), trigger the $3,000 penalty tax under the employer shared responsibility rules, and still end up paying less than they would have under the employer-sponsored plan (contributions and out of pocket costs, particularly those who anticipate dramatically larger amounts of medical coverage usage).

    Some always believed that PPACA was designed to ultimately result in the erosion and end of employer-sponsored health coverage. I think Professor Ezekiel Emanuel (one of PPACA’s architects) really has it right – his recent book (and book reviews of his effort) predicts:

    “… (a) fundamental shift in where most working Americans get their health insurance — specifically, a sharp drop in the number of employers who offer coverage to their workers. … But now Mr. Emanuel thinks that a number of well-known national companies will break the mold and begin a trend. By his estimation, the proportion of private-sector workers who receive health care from employers will fall below 20 percent by 2025. Currently, just under 60 percent of private-sector workers get health care from employers. … But Mr. Obama included a feature sure to make some employers less happy: To help finance his plan and constrain health costs, he reversed course and supported a new tax, beginning in 2018, on the most generous health care plans that some large companies provide. Mr. Emanuel argues that this “Cadillac tax,” along with taxpayer subsidies now available for Americans with modest incomes, will expand and accelerate the trend away from employer-provided health care. …
    Even though the health law’s “employer mandate” requires that companies with 50 or more workers pay a penalty of $2,000 per employee if they do not provide health care, many large companies now spend far more than that to offer coverage. As a result, Mr. Emanuel says they will be able to pay the penalty, give workers a raise and shed the burden of providing coverage by sending workers to the public exchanges. … “By 2025, few private-sector employers will still be providing health insurance,” Mr. Emanuel writes in his book….”

    He’s off in terms of one prediction – certainly, 20% or more of employed Americans will obtain coverage through their employer, but, it won’t be 20% of employers who offer coverage, but 95+% of employers with 100 or more employees will offer coverage – where all but the highest paid employees will waive the employer-sponsored plan in favor of taxpayer-subsidized public exchange coverage. Taxpayer assistance ends only for those who have “household incomes” > 400% of the federal poverty level, so, expect to see even one more phenomenon – people asking for cuts in hours or cuts in pay (in favor of other benefit plans perhaps) so as to remain under the 400% threshold.

    The 400% threshold in 2015 for the lower 48 states is based on household size:

    1 household member – $11,770 (100%), $47,080 (400%)
    2 – $15,930 – $63,720
    3 – $20,090 – $80,360
    4 – $24,250 – $97,000

    My understanding that more than 2/3rds of all US Households have incomes between 100% and 400% of the federal poverty level.

    Like

    • Regarding your comment about self-insuring plans, I agree that is logical, but then you have the move to insured private exchanges which seems counterproductive (except for the DC of course).

      Like

What's your opinion on this post? Readers would like your point of view.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s