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Cost Containment and Cadillacs

Posted Jan 11 2010 5:55pm

Let’s talk about the so-called Cadillac tax. Without question, it is counter-intuitive and nearly impossible to sell, much less understand. This post is my best effort to present the pros and cons as objectively as I’m able.  I’ll present the arguments for and against that are strongest and let you all figure it out.

What is a “Cadillac Plan”, anyway?

The goal of taxing employers’ large group plans where premiums exceed a certain threshold is to discourage plan design that is overly generous on what is covered, encouraging higher utilization without corresponding better outcomes. For example, if an insurer covers MRIs in all situations, it will cost more for that policy and there will be higher utilization of MRIs. However, there isn’t medical evidence that MRIs are indicated to produce a higher rate of diagnosis than cheaper and more conventional methods.

Another example: in vitro fertilization. In the past, some higher cost and executive health plans have covered the full cost of IVF, which has an average per cycle cost of $12,400. In most states, IVF is an elective procedure with no state requirement for coverage. By including it as a benefit, the insurer can hike the premium cost accordingly.

The Center on Budget and Policy Priorities cites two different examples of these plans: the Goldman-Sachs executive medical and dental program:

The executive medical and dental program at Goldman Sachs, one of the nation’s largest banks, has become the poster child for lavish health insurance plans. Goldman’s top executives participate in a medical and dental plan that costs $40,543 a year for each participant’s family — three times the national average, according to the New York Times. Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute, suggests that such extremely expensive plans are likely to have no co-payments or deductibles, no limits of virtually any sort on doctors or procedures, and no requirements for referrals. [6]

A plan reported in the Boston Globe.

As another example, the Boston Globe recently described a plan that costs $20,400 a year in 2009 for family coverage — far less than the Goldman Sachs plan, but still 50 percent more than the national average. The plan provides $450 annually towards gym memberships, or $200 for home exercise equipment, and $150 for yoga classes or nutritional counseling. It also requires no cost sharing for many procedures and services and only modest cost sharing for others.[7]

How does an excise tax bend the cost curve?

There are two basic ways to bend the costs of health care downward: a tax on excessive benefits or adjustments to Medicare payments. The first forces premiums downward; the second forces provider and supply costs downward. (More on that later in this post).

Employers who offer plans like these also receive a tax deduction for their premium payments. As far as they’re concerned, each dollar contributed toward health insurance is a bargain, because the premiums are fully deductible. A dollar in payroll costs employers $1.0745 plus increased pension obligations. A dollar in premiums costs employers $1.00. This is where unions come into play.

There was incentive for unions to trade current wage increases (or a portion of them) for better health plans in recent negotiations. Health care is an obvious concern for employees and employers, and management had an easier time swallowing the deductible premium dollar than wage increases with corresponding payroll taxes and pension benefits. This tradeoff had the effect of keeping payroll costs down while giving employees a tangible “right now” benefit.

As a consequence, there are union plans in existence that hover at or just below the threshhold set for the excise tax. Despite the fact that the tax is on insurers, it is also true that insurers will pass through the higher costs to employers who will pass through the costs to employees, either by slashing benefits or other means. This is the reason unions object. There’s nothing particularly progressive about cutting negotiated benefit levels in order to contain costs.

Bottom line: The excise tax is likely to bend the premium cost curve downward, but it does not address the underlying issue of ballooning costs for doctors, clinical services, lab tests, pharmaceuticals, surgeries and other costs of actually providing health care.

It is, at best, one prong in a multi-prong approach to health care cost containment.

The flawed theory: Wages will rise as premium costs drop

According to CBPP:

JCT projects that only 20 percent of the revenues from the proposal in 2014 will come from the excise tax itself, with the remaining 80 percent coming from additional income and payroll taxes on the increased cash compensation that workers will receive. By 2019, fully 83 percent of the additional revenues will come from taxes on higher wages and salaries, not the excise tax.[11]

Well, yes and no. My prediction based upon employer behavior — particularly large public employer behavior — is that any lower premium costs will pass through to shareholders in the form of higher profits, not employees in the form of higher wages. To me, it’s idealistic to assume there would be a passthru to workers, particularly since there is absolutely nothing that requires employers to hand over savings to employees in the form of higher wages.

History reinforces this. We have minimum wage laws to address the fact that employers do not raise wages unless they are forced to. There is no reason to expect a pass-thru of health premium savings to workers, especially in industries which are already stressed by a difficult economy.

What other options are there?

Not many. The idea here is to make the tax so unpalatable that health plans are structured to avoid it, not trigger it. But it’s also true that for it to work effectively, costs have to drop. The strongest argument against this approach is that plans will be restructured to cut essentials like pharmacy benefits or hospital coverage in order to avoid the excise tax. Because the current versions of health care reform don’t place any structure around what benefits constitute minimum benefits on a dollar basis, concerned workers argue that insurers will simply keep premium costs down by unfairly slashing basic benefits.

The House bill has no Cadillac tax, but adds a flat 5.7% tax on any earnings over $500,000. While this looks like a great and fair way to pay for health care for the uninsured, reality dictates that this tax will be repealed the instant control of Congress shifts back to the Republicans, and with such a repeal will come other limits on reforms. Since the entire reform package is intended to be designed for improvement, not repeal, Congress is looking for solutions less likely to become targets for repeal in future administrations.

It’s all a crystal ball call…

No matter how you look at this, it’s wonky, complex, dependent on many other moving parts, and on its face appears to capture many middle class workers in the net. As unpopular as it’s likely to be, reality may prove it to be effective and non-punitive to all but the highest-paid tier of workers, or it will cause an untenable disparity in workers’ health benefits which will require a renewed look at its efficiency. No one really knows, because it’s untested.

However, it is fact that the costs to provide health care in this country are more than twice the costs in other countries with universal coverage. For us to get to a point where everyone has basic coverage, there has to be some way to keep an upper limit on growth.

Tell me what you think in the comments. Be brutal. Let’s figure this out, because honestly, I have no opinion pro or con. I can’t quite get my head around whether it will work or not, so it might be good to have a Plan B.

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