The Myth of the Cadillac Plan


Last week’s White House meeting on health care reform re-floated the idea of taxing employer-provided health benefits to help pay for insuring the uninsured. Sen. Max Baucus (D-MT), chairman of the powerhouse Senate Finance Committee, told reporters after the meeting that the president “might consider” taxing some employer-provided benefits, even though President Obama “‘made it very clear’ that he preferred his own revenue proposals,” according to the  New York Times.

The idea of taxing health benefits has drawn strong support from many progressives. Eyeing the potential to raise $680 billion in revenue over five years (the health benefits tax exclusion now dwarfs the home mortgage deduction, whose repeal would only raise $444 billion over the same period), the liberal Center for Budget and Policy Priorities issued a new report calling for limiting the health care exclusion because “universal coverage may be out of reach otherwise.” Jon Cohn, writing in his debut Kaiser Health News, column, endorsed the idea earlier this week with a slap at unionized workers “whose employers give them blue-chip coverage.”

But are there really a lot of Cadillac plans out there? That gratuitous slap ignores the reality of today’s insurance marketplace. Employer-based plans pool risk for members of that plan only. Whom do you think has the high-cost “blue-chip” health insurance coverage — a newly opened, foreign-owned auto assembly whose average employee is 35 years old and has been hired because of his perfect health, or a General Motors plant whose average worker is 55 and has suffered through the stress of multiple layoffs and multiple plant closing threats over the past two decades? The only thing “Cadillac” in the health insurance costs of that GM worker is the nameplate of the car rolling off the assembly line. His higher premiums are a direct function of he and his co-workers’ higher claims, not more generous benefits.

In pushing for removing the tax deduction, the CBPP report at least pointed to the necessary adjustments that would have to occur to make the new tax truly progressive. High-cost groups would have to be protected by not allowing insurance companies to set higher prices based on either an employer’s size (thus protecting small business, which usually has higher rates because of higher administrative costs) or the health status of a firm’s employees. This is called community rating, which can only be enforced by a strong regulator.

The exclusion’s removal would also have to take geographical variation into account. Making the insured pay higher taxes because they live in areas with high health care costs punishes the victim, not the beneficiaries of those higher health care expenses, which are hospitals, physicians and medical suppliers who collect the fees for the often useless procedures offered in high-cost areas.

The idea of removing the income tax deduction as a way of raising revenue for insuring the uninsured has just one compelling argument behind it. It’s a form of progressive taxation. Because tax rates are higher on higher income, the tax exclusion for health benefits is much more valuable to high-income employees than low-income employees. Removing the exclusion only for those with high incomes would amount to a progressive redistribution of income from the upper class to the working class, good economics because of the unequal distribution of income in our society, but very bad politics. Taxing the rich to pay for a new entitlement — universal health care — may appeal to liberals and the left, but can be easily attacked by opponents of reform.

Indeed, couple its redistribution effects with the likelihood that Congress will be reluctant to impose tight regulation of the insurance industry and cost-control measures to offset geographic variation, repealing the health benefits tax exclusion could engender an angry backlash from already insured workers. I can already see the next round of Harry and Louise commercials, funded by opponents of reform. The 85 percent of working Americans who are privately insured will be told ad nauseum that the only benefit they’re going to get from health care reform is a higher tax bill on top of their already skyrocketing co-pays and deductibles.

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14 replies »

  1. We were told repetitively by the President and the Democrats that if one liked his health plan he could keep it. This seems to be one of the promises now disregarded.
    The tax on “Cadillac” plans is one mode of preventing one keeping his health insurance. Our Standard Plan in Wisconsin at the Univ.of Wisconsin falls into the category to be taxed 40%. But one gets a WPS (or Blue Cross) policy which is relatively ordinary but permits things such as keeping ones own physician.
    Thus, the promise of keeping one’s health insurance if one likes it, no longer is remembered.

  2. Punishing companies for doing the right thing and providing good coverage to their employees is the stupidest idea I’ve heard from the healthcare “reform” folks. We’re not talking about a stealing a few pennies from the super-rich billionaires. This provision targets the middle class and will get worse over time, just like AMT.

  3. Last week the Detroit Free Press reported that the new Government health care bill had $ 10 BILLION in it for union retiree health care mostly for the UAW. The UAW sent its lawyers and lobbyist to Washington to get taxpayer money because they had to accept some Auto Company common stock in place of cash to fund its VEBA program. If the UAW could not get the cash from GM, Chrysler, and Ford, because of bankruptcy filings they decided that American taxpayers should pay. The new Government health care plan to cover all Americans is not good enough for the UAW. They want icing on their cake at taxpayer’s expense. This implies that workers, both union and non-union, who have a lot less health care insurance than the UAW, will be subsidizing their premium health care coverage. If this bill is passed with this outrage, a national boycott of anything made by the UAW would be appropriate.

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  5. Funny to see the Liberals come full circle on this. Ted Kennedy’s HMO Act required HMOs to offer cadillac plans, those plans became prominate due to subsidies and favorable regualtion and now the same Congressman want to tax them as excessivly generous. Yet another perfect example of how politicians have screwed up healthcare.
    Congress gives tax dollars to HMOs to form and offer Cadillac benefits, Cadillac plans drive cost through the roof, so Congress decides to Tax the plans that only exist becuase of Congress and the tax dollars it spent. In hindsight we would have been further ahead if Congress never spent tax payor dollars on creating HMOs and giving them an unfair advantage. How do those of you on the left not see this?

  6. Many of the Cadillac health benefit plans cited here belong to employees who are part of labor unions and whose benefits have been negotiated as part of broader collective bargaining agreements. Taxing “excess” health benefits on any basis other than income level smacks of an anti-labor union bias. That’s hardly a position I’d expect the Democratic Party to take.
    The observation that premium costs for most employer groups of 100 or more eligible employeees are driven largely by their historical and projected claims expenses adjusted for benefit differences is spot on. It’s not so much the benefit plan differences here as it is the health issues of the employees and dependents, coupled with the often divergent patterns of health care observed by Wennberg, Fisher, et al, that drive premium cost differences.

  7. Merrill, you could not be more factually wrong on your points, and these are facts easily found out.
    “His higher premiums are a direct function of he and his co-workers’ higher claims, not more generous benefits.”
    Absolute BS. His higher premiums are a direct result of his rich UAW contract. I know because I actually administer the benefit plan for some employers. We had clients in Ohio that were lower tiered auto suppliers subject to UAW benefits, they purchased companies down south, Carolinas not Mexico, that were non union and sifted manufacturing to those plants. The benefits offered non union employees down south, while still good, were no where as rich as those required by the UAW. This problem is not exclusive to only UAW, it was a problem with most Union negotiated benefit plans, to claim otherwise is just a lie, I have the Plan Documents and years of claims to prove it.
    “High-cost groups would have to be protected by not allowing insurance companies to set higher prices based on either an employer’s size (thus protecting small business, which usually has higher rates because of higher administrative costs)”
    This is also incorrect. While small group administrative cost is higher only 1-2% is due to the size of the group, 99% of the additional cost is directly related to healthcare reform. Almost every state has passed small group reform which includes guarantee issue. They also require carriers to rate in bands, CA carriers can only rate a group between .9 and 1.1 no matter how healthy or unhealthy. In order to write super sick groups at 1.1 carriers have to charge every group considerably higher rates. Groups over 50 can be charged any amount the carrier needs or even denied coverage outright. This is by far the main reason small group is more expensive. Large groups can self fund which is far more efficient then being fully insured, this is another cause.
    “The exclusion’s removal would also have to take geographical variation into account.”
    AN exclusion based on benefits would be the logical way to go if this was done. No deductible or out of pocket plans are not insurance to start with, only allow tax deductions for plans which are truly insurance plans. Employers would be allowed to deduct the cost of any insurance plan with a minimum deductible matching that years HSA minimum deductible set by the IRS. Come up with imputed income tables, like those used on life insurance, for any employer offering richer benefits. That solves all your geographic and health status concerns.

    Howard Dean and the Democrats are correct.
    “a” (Toothy, Robust, Affordable, Immediate, Triggerless, Medicare-Like ) “public health insurance option” (For All Who Want It) “is more important than bipartisanship, and Democrats should pass health-care legislation that includes the option with 51 votes if necessary.”
    “Democrats should have “no intention” of working with Republicans if it’s not the strongest possible legislation that could be passed with a simple majority.” (Howard Dean)
    CONTACT CONGRESS and your representatives Now! And tell them you demand ALL of the minimum requirements above. This is the time for maximal, toothy, sustained pressure on Congress to get this done. Be creative. But be relentless.
    This is what WE THE PEOPLE gave the Democrats all that power to do for ALL of us.
    In medicine and healthcare there is only one acceptable standard. And that standard is the HIGHEST level of EXCELLENCE! you can provide for everyone. Nothing less is acceptable for a precious human life.
    And the White House is right. “Good health care reform is essentially good economic policy.” (Christina Romer)
    BUT HEAR ME WELL! Just as I warned you before 911. Before the wars in Iraq and Afghanistan. And before the US and Global economic crisis.
    I must tell you now that healthcare reform is now a critical matter of NATIONAL SECURITY. A-H1N1 (Swine Flu) was yet another loud WAKE-UP! call. And there is MUCH! worse lurking, and poised to strike at any moment. Working against the clock, many of us have known this for a long time now. And this is why we have been pushing so hard for so long without fully saying why. But Congress and the American people are literally running out of time.
    I’ll tell you more later. But get healthcare reform done NOW!.
    God Bless All Of You
    jacksmith — WORKING CLASS

  9. Comments on Cerner and DeParle are utter rubbish. The NHS’ Connecting for Health was a text book study in how not to manage a huge system installation. Neither NHS trust management nor the clinicians were meaningfully involved either in setting the specifications for the system, nor in contract negotiations. THey were simply told what to do by an arrogant and out of touch senior bureaucrat. Don’t blame the vendors. Some very talented firms, like Accenture, couldn’t function in the absurd, poorly managed implementation process, and incurred huge losses. Do your homework and bark up another tree. . .

  10. Rick,
    The President is being advised by people who are financially, morally, unidimensional in thought, and financially conflicted, eg DeParle, Tullman, and more. Each has a vested interest in the outcome. And Rick, you are herding traffic to your blog site.
    DeParle sat at Cerner’s Board meetings while its products were causing meltdown conditions in Trusts in the UK (Milton Keynes and Newcastle, to name two) and simultaneously contributing to the 12 billion pound loss by the NHS of the UK.
    If there is a blog reader out there affiliated with Cerner, please clarify whether it is your gear that is used at the Clarion Health Partners Hospitals (U Indiana) that recently went down to a “power surge” and if so, why did you not have adequate surge protectors and back-up systems? After all, CCHIT declared whichever system is in there to be “certified”.
    Health care reform will become a reality when the scandalous self-interested are deposed.

  11. The President’s direct engagement on health care reform now is imperative. This president was elected on and,I believe, is still committed to a change agenda.
    US Health Care is terribly broken and unsustainable. Besides its moral failures of not providing some coverage to all US citizens, not reforming it now threatens our entire US economy. Tinkering with this very broken system is not enough and Obama and his team know that.We need the level of bold change in health care as we are applying to energy policy and to the environment. Nothing less will carry the day.
    Join our president over the next several weeks and months as he puts forth more details. Congress alone regrettably will not do the job it should on this issue.
    So this popular President and the people who elected him must.
    Dr. Rick Lippin

  12. Blue chip coverage is a thing of the past with one exception. The only folks with blue chip coverage are the lawmakers, corporate executive leadership, and hospital administration. There is at least one health system with at least ten “employees” earning more than $1 million whose CEO who earns a multiple of that goes to another hospital for surgery, Draw your own conclusions. The rank and file employees of that system, such as doctors and nurses, must stay in network or suffer penalties.
    If you are sick with complex multi-system illness nowadays, forget it, unless you have a gifted doc.