Why Taxing "Cadillac Plans" Will Hurt Small Businesses

One of the key revenue-raising elements of the Senate Finance Committee's health insurance reform plan is a tax on so-called "Cadillac" health plans. A proposed 40% excise tax on plans costing more than $8000 per year for individuals (that's $666 per month) or $21,000 per year for families (that's $1750 per month...and thanks for pointing out the earlier typo, Greg)), irrespective of whether they are group or non-group health plans, is anticipated to raise a big chunk of the bill's forecast $880 billion price tag.

There are a number of big issues with this proposal which have already been widely discussed in the media. Foremost among those concerns is that, while the issue has been positioned as a way to tax high-rolling white-collar types and their big compensation and benefit plans, the primary negative effect will be on union members, and especially government employees, whose unions have fought hard to protect the generous health plans their members receive. That issue alone may force the Congress to re-think the excise tax idea.

But here's another one: such an excise tax is liable to be another slam on small businesses' health plans, and the big guys may be able to duck the tax altogether.

Big companies tend to be self-insured; they pay directly for their employees' health care expenses, and rely on insurance companies primarily to pay claims, to make use of the insurers' provider discounts, and to help-out with stop-loss coverage. So large employers generally don't pay monthly per-employee premiums.

On the other hand, almost all small businesses, and almost all self-employed individuals, who pay for health coverage do so by purchasing fully-insured "products" from insurance companies. And we know that companies with fewer than 10 employees pay, on average, 18-20% more for their health insurance products than do their larger counterparts for the same coverage. And non-group insurance purchasers pay even more, for less coverage.

I recently wrote about my quest last year for non-group insurance coverage for my family. Because of my age, and because of a couple chronic but not serious health conditions, the best deal I could find was $1880 per month for a plan with a $3000 family deductible. It sure didn't feel like a "Cadillac plan" to me.

But at $22,560 per year, that plan would have been subject to a 40% excise tax, which would have raised the cost to $31,584 per year.

Do policymakers really expect that my insurance company will eat the extra $9000 per year? I sure don't; I expect that the lion's share of that tax will be passed along to me, and will raise my premiums another 40% in addition to whatever annual rate increase I might expect from my insurer. So within a couple years, my family's health insurance costs would exceed $40,000 per year...perilously close to our country's median annual household income.

The only relief might come from purchasing a plan with a $10,000 family deductible...but that won't reduce my premiums by more than 25%...and would greatly increase my family's exposure to out-of-pocket health expenses.

Seems to me as though that's the opposite of the intended effect of health insurance reform legislation.

The bottom line here is that maybe assessing a tax based on the price of a health insurance policy is not the smartest way to levy such a tax. It has the advantage of being simple, but it's terribly imprecise, may not reach its intended targets, and may actually end up hurting small businesses...and /or dramatically increase the federal tax subsidies required to enable folks to purchase coverage.

The alternative will be a much-more-complicated, but more precise, focus on the "actuarial value" of health plans, to put the emphasis not on higher prices, but on more generous benefit levels. it may be a fairer way to levy such a tax, but it won't be any easier to enact.