Posted on 10 Aug 2009
A proposal to tax certain health plans – often termed “Cadillac” plans due to their premiums and generous range of benefits -- could affect more employers and workers whose benefits aren't necessarily so luxurious.
The idea, first pitched by Sen. John Kerry late last month, is being given serious consideration by members of the Senate Finance Committee. Senior House leaders and the Obama administration have said they are willing to entertain the idea to help finance a health-care overhaul.
Besides potentially generating tens of billions of dollars, proponents argue the move could slow the steep rise in health spending. They say generous insurance plans can encourage people to spend more freely on medical care.
The White House cited the health benefits enjoyed by top executives of Goldman Sachs Group Inc. as an example of a Cadillac health plan. The Wall Street firm pays roughly $40,000 in annual premiums for each executive's family.
But the proposal being weighed by the Senate Finance Committee would tax health plans that cost much less, setting the bar perhaps as low as $25,000 a year for a family plan. That is about twice the cost of the average family plan and would affect only a tiny fraction of U.S. workers, according to the Kaiser Family Foundation.
But if lawmakers don't allow the threshold to be adjusted annually to reflect annual price increases, the proposed tax would eventually hit a much larger number of people.
Health-care costs are likely to climb at several times the rate of inflation between now and 2013, when much of the proposed legislation would go into effect.
Employer benefits consulting firm Towers Perrin calculated that the tax would today affect about 6% of Fortune 1000 companies, based on an analysis of 560 employers whose annual health-care costs the firm tracks. By 2011, though, 18% of those employers would cross the $25,000 threshold, Towers Perrin estimated.
"It's startling to see how rapidly that number would go up," said Michael Langan, a principal at Towers Perrin.
The proposed tax would apply to the amount of a health plan that exceeds a certain threshold, which would increase over time based on a cost index or other formula. If the threshold is set at $25,000, for example, and the annual premium of a family plan costs $26,000, $1,000 would be taxed. Though lawmakers haven't released any draft legislation, a tax rate in the range of 20% to 35% is being considered.
Self-insured employers would be taxed directly and would likely reduce their employees' benefits or curb wage increases to absorb the levy, policy experts say.
"This won't be paid for by insurers anymore than Macy's pays the sales tax when you buy a shirt," says Steven Kreisberg, director of collective bargaining and health-care policy for the American Federation of State, County and Municipal Employees.
He estimated that more than one-third of the association's members could be affected by the proposal. Many are already in plans that cost about $20,000 in family premiums or approach it, though he said that's often because they are in areas where health-care costs are higher.
One such area is Nebraska, which employs 14,000 state workers. The state's average family plan will cost more than $22,300 this year, 30% more than in 2006. Employees on average pay nearly $400 in monthly premiums for a family plan, in addition to $20 co-pays for doctor's visits and a share of other medical bills.
Roger Wilson, the state's administrator for employee wellness and benefits, says the fairly generous coverage helps drive up medical spending. But Julie Dake Abel, executive director of the Nebraska Association of Public Employees union that negotiates employee benefits with the state, argued the culprits are the high cost of care in the state's more rural areas and the older age of its work force.
"Our health-care costs go up too, and more than eat up employees' pay raises," she said. "It's certainly not a Cadillac plan."