economics

January 16, 2010

Cadillac Plans

Filed under: Uncategorized — ktetaichinh @ 10:51 pm
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The agreement between the White House, Congressional leaders and labor unions over taxing high-priced health insurance policies is a reasonable solution to an issue that was threatening to derail health care reform. The agreement treats unionized workers far more favorably than nonunion workers, the price for the support of important Democratic constituencies. But it would preserve the tax’s crucial role in slowing the rise in health care costs for decades to come.

When the Senate voted for the tax on high-priced employer-sponsored health insurance policies — “Cadillac plans” — labor leaders and many House Democrats complained that the tax would penalize middle-class people who had plans that were hardly lavish. They much preferred the House approach: a so-called millionaire’s tax, a surcharge on earnings above $1 million a year for couples.

A millionaire’s tax may not survive the negotiations on a final bill, but Congress has to find money to pay for health insurance for millions of Americans. The agreement makes that more difficult because it is expected to reduce the money generated by the excise tax substantially from the original Senate bill. Rich Americans and the industries involved in health care should pick up much of the added burden.

The proposed excise tax on high-cost plans is the most significant measure in either bill to slow the relentless rise in health care spending.

HOW IT WORKS Many employers pay most of the premium for health coverage. Workers pick up the rest but pay no taxes on the employer’s often-substantial contribution. That’s why many unions have bargained hard for generous health coverage over the years, even if that meant forgoing a bigger pay raise.

The new agreement would take away the tax advantage for a small portion of the health benefit by imposing a 40 percent tax on the amount by which the premiums for employer-sponsored health coverage exceed specified thresholds. That would be $24,000 a year for a family, starting in 2013. The tax on a $26,000 plan would be $800, or 40 percent of $2,000. The insurance company would pay the tax but would almost certainly pass it along to the employer and its employees.

That $24,000 threshold, which was raised by $1,000 from the original Senate proposal, is well above the current average of $13,400 for a family plan. By 2013, more than 90 percent of all family plans are projected to still fall below the threshold. In the following years, the tax threshold would rise more slowly than the likely rate of inflation in medical costs, which could mean the plans of millions of workers — a small minority of the work force — would be subject to the tax in theory.

Most likely, insurers will drop their premiums just below the threshold. They could do that by setting higher deductibles and co-payments, managing access to care more tightly, or reducing benefits.

WHY IT’S GOOD A vast majority of economists agree that the tax would be a valuable cost-control feature. In our largely fee-for-service system, doctors have an economic incentive to provide more services. With insurance covering most of the bill, neither patients nor doctors worry much about costs. Requiring workers to pay more out of pocket would force them and their doctors to think a lot more carefully about whether an expensive test or treatment is really necessary.

Because the excise tax would be imposed on insurance companies within the health care system, the revenues it generates would grow at the rate of medical inflation; revenues from an income tax on the wealthy would probably grow more slowly.

POTENTIAL HARM There is some risk — nobody knows how large — that higher deductibles and co-payments would discourage some people, especially the chronically ill, from seeking medical care that they need. Congress can avoid this tragic outcome by setting up a monitoring system to detect any emergence of harm and making a midcourse correction to protect the health of any groups that suffer adverse consequences.WILL EMPLOYEES RECOUP? Eminent economists — and the official scorers at the Joint Committee on Taxation — believe that as employers spend less on health benefits they will increase wages to continue to attract high-quality workers. Indeed, most of the money the tax is projected to generate would come from an anticipated increase in wages, rather than the tax itself. The theory is that employers don’t care much whether they provide compensation in the form of health benefits or wages.

There is reason to worry that in a troubled economy, with unemployment high and employers scrambling to reduce costs, employers will simply pocket the savings. The new agreement protects unionized workers and state and local government employees by exempting their health plans from the tax for five years, until 2018. That gives the unions plenty of time — probably more time than justified — to negotiate new contracts and demand a rise in wages commensurate with any decline in health benefits.

The much larger number of nonunion workers would get no comparable protection. In fashioning a final bill, Congress should seek some way to pressure companies to convert their savings on health benefits into higher wages and monitor whether they do so.

MORE SENSIBLE TARGETING Many of the policies described as Cadillac plans are not costly because they provide lavish benefits but rather because they cover workers who are older and sicker than most, or who work in high-cost areas or in high-risk industries.

The agreement would raise the thresholds for plans covering workers who are disproportionately old or female or employed in a wide range of high-risk jobs. There would be a transition period for states where medical costs are high. These look like reasonable exceptions to ensure that the tax falls on truly generous plans.

A vast majority of workers would not be affected by the proposed excise tax. Those that are hit should remember that the bulk of their health benefits would remain exempt from taxes — an enormous subsidy from the taxpayer. For the sake of reining in costs and helping to pay for covering the uninsured, taxing high-priced plans is the right thing to do.

This editorial is a part of a comprehensive examination of the debate over health care reform. You can read all of these articles at: nytimes.com/healthcare2009.

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