Welcome, students, to our special combined 9th grade math and civics class. Today, we’re going to look at the “Cadillac tax” in the Affordable Care Act.
Yes, Mitt, you have a question already? No, no, “Cadillac tax” is just an expression. No one is going to tax your family’s cars, Mitt, I promise.
Paul, you also have a question? I’m sorry, Paul, but if you had done the reading, you would know that the “Affordable Care Act” and “Obamacare” are the same thing. And yes, it is still the law, as I must have told you and your friends 40 times. Now can we get on with the class?
As those of you who did do the reading know, most American workers get their health insurance through their employer. The company, in turn, is allowed to deduct the cost of that insurance from its taxes. If the insurance for workers is very generous, it can encourage people to use too much medical care. This not only drives up costs, but we all pay for it a second time through the tax code. The Affordable Care Act addresses that problem by placing an excise tax on rich benefit plans starting in 2018, which is informally known as the “Cadillac tax.”
Economists of all viewpoints generally agree that an open-ended tax deduction for health insurance encourages overconsumption. What do we call that kind of agreement? Michelle?
No, Michelle, I’m afraid, “liberal conspiracy” is not the answer I was looking for. “Bipartisan consensus” was the correct response.
Rand, you seem quite agitated. Yes? “Government intervention in markets is never the right answer.” OK. Well, Rand, let’s talk about that another time and move on from civics to the mathematics part of today’s lesson. We’ll start with a word problem from the New York Times.
The Times quoted a study from a health policy journal as saying that 75 percent of health plans could be affected by the Cadillac tax over the next decade. That’s a big number, isn’t it? And the tax itself is 40 percent – another big number. No wonder the story was on the first page of the Business section.
But here are a few other numbers from the same study: just 16 percent of plans are likely be affected by the tax when it starts in 2018 – a much smaller number. And the “next decade” the study is talking about starts in 2018. What the study actually says is that by 2029 the tax could reduce benefits for affected plans by 3.1 percent. That’s an even smaller number and even further away.
Class, why would the New York Times emphasize the biggest numbers they could find?
No, Michelle, I’m afraid “liberal conspiracy” is not the right answer here, either. Chuck? “That was the only news fit to print” is also not correct. The answer I was looking for is, “Some people did not pay close enough attention in math class.”
Now that all of you are paying close attention, let’s move on. This problem is a little tougher. A big consulting firm called Towers Watson released a survey showing that “more than 60 percent of employers believe that they will trigger the excise tax in 2018 if they don’t make adjustments.” But the study we just talked said the real number was 16 percent. Who can tell me what “16 over 60” is without a calculator? Anyone?
I’m sorry, class, I couldn’t understand you because Harry and Mitch were talking very loudly again. The correct answer is that sixteen is a little over one-fourth of sixty.
Why do you think Towers Watson got a number four times larger than the authors of the study in a health policy journal? Nancy? “Because businesspeople are stupid.” No, I’m afraid that is not a good answer, Nancy. Michelle? Michelle, I cannot keep calling on you if all you’re going to say is, “It’s a liberal conspiracy.” Rand? No, the government was not involved in either number.
The answer, class, is to remember what you learned when you first studied fractions back in elementary school: look at the denominator. The study in the health policy journal analyzed the actual benefits offered by 4,000 employers responding to a randomized national survey over two years. The consulting firm results are based on the opinions of 420 customers turning in a questionnaire in July.
Chuck? “Was the Towers Watson number in the New York Times?” I don’t know, Chuck.
Harry and Mitch! I told you to stop talking, and I meant it!
One last question. This one isn’t about the Cadillac tax, but it has something in common with both of the other questions. Here goes:
A study done on behalf of America’s Health Insurance Plans concluded that the average family’s health insurance premiums could go up $5,080 over ten years because of a tax on certain health insurers in the Affordable Care Act. What do we need to know about that number?
Paul? “A ten-year estimate is enough; you don’t need any more detail.” No, Paul, I’m afraid that’s not right. Mitt? No, Mitt I don’t know if 47 percent of the people won’t pay the tax, anyway.
Here’s a hint: what’s missing? That’s right: a numerical denominator to go with the $5,080.
If you look at the average family premium in 2013, it was almost $16,400, and it went up 4 percent from the year before even without the Affordable Care Act. When you know that information, adding $508 to, say, a $17,000 premium in 2014 doesn’t look quite as awful, does it?
Now remember our first problem, where we discussed making numbers look bigger or smaller? $5,080 over ten years becomes $508 over one year and less than $10 every week. Why do you think the insurance industry didn’t say the new tax would cost the average family less than $1.50 a day while providing billions of dollars to help other Americans with no insurance at all?
Nancy? “Because businesspeople are stupid.” No, Nancy, that’s not the right answer at all.
Chuck? “Because they wanted to fool reporters from the New York Times.” Closer. Here’s a hint: let’s go back to civics, not math.
“Because the insurance companies want Congress to repeal the premium tax in the name of helping consumers, even though their real reason is making sure the companies make a lot more money.” Thank you, Joe. I didn’t see you sitting behind Barack over there in the back of the room.
OK, class, we’re just about out of time, and – Mitch and Harry, how many times do I have to tell you to stop talking?! What’s that? “You don’t have the votes to make us shut up?” I’m afraid you young men are very confused. Why don’t you try telling that to the principal when you get to his office.
Michael L. Millenson is president of Health Quality Advisors LLC in Highland Park, IL; the Mervin Shalowitz, MD Visiting Scholar at the Kellogg School of Management; and a board member of the Society for Participatory Medicine.