Time to Trade-In the Cadillac Health Plan

By Richard A. McGrath, CIC, LIA

In a few years, millions of Americans will likely be trading in their Cadillacs for Corollas.

We’re not talking about cars.  The government invested billions into General Motors, so driving a Cadillac would be protecting your investment.

But if you have a “Cadillac” health plan – one that costs significantly more than the average plan – the government plans to impose a 40% tax on premiums that exceed a price threshold, beginning in 2018.  The new tax was included in the Patient Protection and Affordable Care Act, widely known as Obamacare.

A Cadillac plan is any plan that costs more than $10,200 a year for single coverage and $27,500 for family coverage, including both employee and employer contributions to flexible spending and health savings accounts, but not including vision and dental benefits.  If a plan exceeds the threshold numbers by $1,000, for example, the insurer or employer would pay a $400 tax.

Towers Watson found the average cost of a family plan in 2010 was $14,988.  But, given the high rate of inflation for healthcare, the price of an average plan will be far closer to the threshold by 2018.  Towers Watson predicts that more than 60% of large employers’ active health plans will be subject to the tax, unless the plans are changed.

By defining Cadillac plans based on price, not on the level of benefits provided, the tax could also affect seniors, those who work in risky professions and small businesses.

Insurers base premiums not only on the features plans offer, but on risk.  Insurance costs more for people who are older, who have a history of health problems or who work in high-risk industries, because they are at a higher risk to have costly health problems.  At a large company, risk is spread over many employees, so insurers can accurately predict their costs.  Someone who is self-employed or who works for a small business pays more, because the risk to the insurer is higher.

Congress partially addressed this issue by increasing the threshold to $11,850 for individuals and $30,950 for families who are employed in high-risk professions. In addition, employers with higher costs because of the age or gender of their employees may value their coverage based on a comparison to a national risk pool.

Unions Exempt

The purpose of the tax is twofold – to raise some of the money needed to pay for healthcare reform and to ensure that all Americans have access to roughly the same level of healthcare.

It’s unlikely to accomplish either goal, though, and may instead lower the overall quality of healthcare coverage.

Congress initially projected that the tax would generate $238 billion in revenue over a decade.  The Congressional Budget Office, though, estimates that the tax would raise about $12 billion in 2018, the first year of implementation, and $20 billion in 2019.

While insurance companies and companies that self-insure would pay the tax, insurers would need to pass on much of the cost in the form of higher premiums to remain profitable.  As Cadillac plans are already significantly more expensive than other health plans, passing on the tax would make the plans unaffordable for most, so insurers would likely just stop selling the plans.

Insurers and companies that self-insure will also be forced to spend a great deal of time on compliance, monitoring their costs and trying to stay below the threshold.  The Cadillac tax is one of more than a dozen new taxes created by the healthcare reform, which also includes hundreds of other regulatory changes.

The net result is that the $238 billion included in revenues projected to offset the cost of the Patient Protection and Affordable Care Act, will not be collected.  Instead, assuming the law is not changed, another tax will be needed or healthcare reform will add even more to the federal deficit.

In addition, Congress has already exempted plans covering union employees from the tax.  That creates a big boost for unions, since their employers will be able to continue offering Cadillac plans, but they will become unaffordable for nonunion companies.  So rather than creating equality of coverage, it allows exclusivity for union members.

While the tax would not take effect for six more years, and there is a possibility that it will be overturned by Congress, many employers and insurance companies are already taking action to avoid the tax.

Boeing, for example, announced more than a year ago that it would reduce its coverage and increase deductibles for non-union employees to avoid the tax.

One positive from the Cadillac tax could be that some consumers who no longer have Cadillac coverage may use their health insurance more efficiently, which would help control costs.

Cadillac plans typically offer comprehensive coverage with low deductibles.  The patient shares almost none of the costs.

When patients don’t share the costs, they tend to make expensive decisions.  They may, for example, go to the emergency room for treatment of anything from a headache to a hangnail.  Such non-emergency visits greatly increase the cost of healthcare.

When patients instead have plans with high deductibles and they share the costs, they are unlikely to use their insurance unless they truly need it.

The Cadillac tax could help control healthcare costs for employers that choose to reduce their benefits is some consolation.  Overall, it will simply meet fewer healthcare options, a lower quality of care and the likelihood of an increase in the federal debt.

Keep in mind that the Cadillac tax is just one provision of the Patient Protection and Affordable Care Act.  We can only guess at the cumulative effect of the healthcare reform law.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at rmcgrath@mcgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.