Update: The Cadillac Tax Will Raise Far Less Than Projected and Won't Control Costs

By Maggie Mahar Health Beat

The Senate’s controversial “Cadillac Tax” on expensive health insurance plans was supposed to raise $149 billion to help fund reform. But now, we’re told it’s been “scaled back.” Some use the verb “gutted”—though that is probably a tad strong. Still, a number of changes have been made:

•Union employees will be exempt for the tax on expensive insurance plans until 2018, five years after the legislation takes effect

•Government employees will also be exempt until 2018

•The threshold defining “expensive” plans has been lifted from $8,500 to $9,000 for individual plans and from $23,000 to $24,000 for family plans.

•The threshold will rise further for plans where premiums are higher because the work force is older or includes more women

•Adjustments will also be made to spare plans in 17 states with particularly high health costs.

•The value of dental and vision benefits won’t count toward the thresholds

Reportedly, the changes mean that the tax will raise about $90 billion over 10 years, down from $149 billion. But my guess is that, after you tally up all of the adjustments, the bill will raise far less.

Keep in mind, as I reported in yesterday's post, the original figure was based on the assumption that roughly $120 billion of the $149 billion would come from individuals paying higher income taxes, Medicare taxes and Social Security taxes. Why would their taxes go up? The bill’s architects make two assumptions:

First, they predict that in order to avoid the Cadillac tax, employers will ratchet back to cheaper plans. This is no doubt true.

Secondly, they fantasize that employers will then pass on the savings to employees in the form of higher wages. To say that this is unlikely would be an understatement.

As I explained in the earlier post, the history of wages and benefits over the past 25 years shows that employers hand out raises only if they must, in order to attract employees in a very tight labor market.

Legislators will now have to scramble to find a way to replace the funding that the Cadillac Tax was supposed to provide. Reportedly, negotiators are “considering increasing the financial hit on drug makers, nursing homes and medical-device makers.”

Here, I would note many large drug-makers have expanded into medical devices, and now enjoy 16 percent profit margins. Meanwhile, drug-makers and medical-device manufacturers rake in roughly 16 percent of the $2.6 trillion that we, as a nation, spend on health care. They could afford to make a larger contribution to reform.

But while the tax may raise far less than expected, a few years down the road, it still could have an unhealthy impact on many middle-class Americans. Today, very few employees are covered by a family plan that costs $24,000, but keep in mind that over the past ten years, the amount that private insurers pay out to doctors, hospitals and patients has been rising by an average of eight percent a year.

Each year, health care providers do more, patients undergo more tests and treatments, and manufacturers charge more for every pill and every piece of high tech equipment.

If health care costs continue to spiral, premiums will rise apace. Meanwhile, the threshold defining expensive plans will climb slowly—it will be indexed to the consumer price index plus one percent, far below the average annual rate of health care inflation. As a result, premiums will quickly begin to catch up with the thresholds.

Mercer, the benefits consulting firm based in New York, predicts that by 2016—just three years after reform kicks in—the tax could affect 24 percent of the nation’s employees. (This number may be high; no one can predict how many plans will be exempted after adjustments for older workers, women and high-cost states).

But those employees who are affected will almost certainly face higher out-of-pocket payments. Here’s how the tax trickles down to employees:

Under the proposal, insurers will be required to pay a 40% tax on high-cost plans. They will then pass that tax on to employers who continue to choose these plans in the form of even-higher premiums. To avoid that added expense, most employers will probably switch to less expensive plans. Under reform, all plans will be required to offer a fairly rich package of “essential benefits,” so the only way to find a cheaper plan will be to look for one with higher co-pays and deductibles.

Thus, the burden will shift to employees. The tax’s supporters argue that this will help rein in health-care inflation. Because they will have more “skin in the game”, employees will become more prudent in their use of health care, going to the doctor less frequently, and avoiding unnecessary tests and treatments.

But, as I noted yesterday, research shows that when patients face high co-pays and deductibles, they are just as likely to skip needed care as they are to avoid overtreatment. And, when they put off necessary care, at some point down the road, they become sicker, and many even land in the hospital.

Recent experience confirms the research. As employers who can no longer afford sky-high premiums shift costs to employees, co-pays and deductibles have climbed. Yet health care spending continues to spiral as Americans undergo more procedures, see more specialists and pop more pills.

If “skin in the game” was going to control spending, one would think that it would already have begun to “bend the curve” of healthcare inflation.

I would also point out that in developed countries that have done a much better job of holding down health care costs, their citizens often receiving “first dollar coverage, ” paying nothing when they receive care. Their governments don’t try to force patients to ration themselves; they regulate prices and put caps on volume. And their hospitals and doctors are more likely to follow evidence-based guidelines to lift the quality of care while lowering costs.

Recently, I’ve written about how Norway has all but eliminated hospital infections, while France’s hospitals have adopted checklists that we know greatly reduce costly medical errors.

Finally, I can’t help but recall the House’s alternative to a “Cadillac tax”: raise income taxes on Americans earning more than $500,000. Even with the hike, the richest 1% would be paying no more than they did in the middle of the 1990s. It was such a simple plan. . .