The Fate of the Cadillac Health Plan Tax

Posted by Emma

David Leonhardt lays out the tax on “Cadillac plans” in yesterday’s New York Times and is a good read for those following the health care reform debate.  Currently, health insurance benefits are not taxed but the Senate Finance committee has a proposal to tax benefit plans valued over $21,000 starting in 2013. As they begin working on the financing portion of the health care reform bill over the next several days, the fate of this controversial tax remains unclear. While the tax could have a positive impact on our economy and bending the cost curve, the impacts could only be felt if many of the contentious issues in the health care reform debate remain intact.  

This tax break causes us to buy more health insurance than we would if the playing field for taxes were level, much as the tax breaks for housing helped inflate the real estate bubble. In effect, the tax-free treatment is a subsidy for health insurers, doctors and hospitals. It encourages wasteful spending — the extra M.R.I., the brand-name drug that’s no better than a generic, the cardiac-stent procedure that has no evidence of extending life (but does have some risk).

His argument boils down to three main points: employees will avoid purchasing the most expensive plans, insurance plans will become less generous, and taxing benefits will lead to higher wages.   

His first argument says that the tax will create a disincentive or “stick” for employees to choose less generous plans.  One worry with this logic is that the monetary driver will not only push people out of the highest benefit plans (that often have more benefits than individuals need) into the lowest coverage plans.  This could add to the ranks of the underinsured.  Coupling the tax with a robust exchange and public option would ensure a wide variety of options are  available to consumers.

Insurance companies will respond by becoming less generous.  Without the insurance market reforms and minimum benefit packages insurance companies lack of generosity could become a problem.  The House and Senate health care reform bills call for minimum benefits to ensure standards are met and insurance companies are providing quality coverage.  

Analysis from the Sonia Sekhar at Center for American Progress shows that by 2029 health care costs will be 48% of real family income. Taxing higher plans will encourage companies to spend less money on high cost plans which theoretically frees up money for more take home income.  However, as Peter Orszag continues to testify, the fate of our economy depends on what we do with health care.  As health care costs rise well above the rate of inflation, if we cannot control this increase, there will be no additional employer revenues to fund higher wages.  Leonhardt argues the tax will be the main cost controller, however reducing inefficiencies in the system, modernizing the delivery design, and realigning doctor incentives through payment schemes will also be essential to bringing down costs and ensure the right care is given to the right patient.


1 Comment

Filed under Health Policy

One response to “The Fate of the Cadillac Health Plan Tax

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