Most of the talk in the news about the state and local role in implementing the Affordable Care Act is about whether states chose to expand Medicaid and whether they chose to run their own health insurance exchange or let the feds do it for them. But there’s something else that could directly affect state and local employers: It’s been dubbed the “Cadillac tax”—a special tax on high-priced insurance plans.
When Congress passed the Affordable Care Act, it set a tax on so-called Cadillac coverage—high-cost insurance plans that were presumably richer in benefits than most health coverage. Under the tax, plans that cost above a certain threshold in 2018—$10,200 annually for individual plans and $27,500 for family plans, with slightly higher cutoffs for retirees and those in high-risk professions like law enforcement—will be taxed at 40 percent of their costs that exceed the limit.
State and local governments tend to offer more expensive health plans than private businesses, and their workers often accept smaller wage increases to retain those benefits. Because of this, state and local government employees are expected to be disproportionately represented among those subject to the tax. As a result, “cities and towns across the country are pushing municipal unions to accept cheaper health benefits in anticipation of the Affordable Care Act that will tax expensive plans starting in 2018,” reports the New York Times.
For more on this issue, I turned to Elise Gould, the director of health policy research at the Economic Policy Institute, a nonprofit, nonpartisan think tank, and author of a recent paper on insurance policies and health-care costs. Here are the edited highlights of our conversation.
What was Congress’ intention in including a “Cadillac Tax”?
It was two-fold: They were looking at ways to raise money for health reform, and they thought it would have this effect of making people better consumers of health care.
What defines a Cadillac plan?
Just the premium–that’s one of the problems. The tax is set up on a high-priced plan; It’s not tied to the actuarial value or anything specific about the plans features.
Who has the high premium plans that might be subject to the tax?
We know that insurance plans are more expensive for smaller firms or firms with older or more expensive workers. Small businesses pay more for the same plans than large corporations do so it’s more likely to hit them. At the same time, they may also have thinner plans. They’re called Cadillac plans not because they're comprehensive. The premiums are higher because there’s a less healthy workforce.
Generally, most employers will look for ways to avoid that tax. At 40 percent, it’s very high. Most employers will offer plans that avoid that tax. So all else being equal, lower-cost insurance plans mean thinner plans (higher deductibles and higher co-pays), which will be more expensive for people who are sick.
What about state and local governments?
Public employers, workers and their unions are trying to find ways to keep insurance affordable. This is just another incentive to keep health insurance premiums from increasing. Together, employers and unions can sit down and look at the tax and think about how to handle it. I don’t have any great advice. It depends on what jointly they want to do. If they're thinking about bargaining over a full compensation package, one thing that will have to be considered is where that tax falls if they stick with more comprehensive coverage. It could lead to less comprehensive coverage. For many, that may not make much of a difference, but health costs are extremely skewed. Some don’t spend much in any year, and some spend a lot. For those that spend a lot of money, it’s because they’re sick and they'll absorb a lot of the increased costs. It will fall unevenly on union memberships.
How is the private sector positioning itself?
Generally, we've seen a trend toward less comprehensive coverage as health-care costs increase and as workers have lost bargaining power. The state of the economy is not irrelevant. We’re slowly coming out of recession but there’s a slack in the labor market so workers don’t have bargaining power for better wages and benefits. In that environment, workers can’t dictate conditions of their contract and employers can decide to move to thinner health plans. The Cadillac tax will be one more pressure.
There’s also the better-consumer argument. The argument for Health Savings Accounts, for instance, is that when consumers have more invested, they'll question expensive tests and compare costs between facilities and providers. Is the Cadillac plan argument similar to that?
Yes, people shy away from more comprehensive plans and look for higher deductibles, co-pays or coinsurance rates. Premiums are lower but they're spending more of their own money every time they go to a doctor or need care. The idea is they’ll be a more careful consumer and a wiser one. The “success” of increased cost-sharing hinges on the ability of patients to make educated decisions about their health-care purchases much like they do when buying other goods and services such as milk, cars or cell phone plans. But in an emergency when people are experiencing chest pains or their child is suffering from an asthma attack, people aren't equipped to or don’t have the wherewithal to shop around. Even in a non-emergency, people don’t have the right information to shop around. Price is not a measure of quality when you don’t know which procedure to choose, which doctor is best.