By Janet Trautwein
Cadillacs have never been less popular.
President Obama recently signed legislation that will delay implementation of the Affordable Care Act’s “Cadillac” tax, which will sock generous employer-sponsored health plans with a new 40 percent levy in 2020, rather than 2018 as originally planned.
But policymakers shouldn’t be satisfied with a delay. They should nix the tax altogether, as it’s poised to increase the healthcare bills of not just Cadillac-driving executives but the Chevy-driving middle class, too.
The Cadillac tax was intended to discourage companies from offering overly expensive coverage. The idea was that rich plans disproportionately benefit higher-wage earners and don’t encourage covered individuals to use cost-effective healthcare services.
The ACA assesses a 40 percent tax on the value of any employer-sponsored plan in excess of $10,200 for individual coverage and $27,500 for a family plan.
But the tax’s poor design makes it a clunker.
First, the tax targets all high-cost plans equally and doesn’t account for geography or employee demographics. So expensive health plans with modest benefits could be subject to the tax if a company has an older workforce or is located in a high-cost state.
Second, the formula for calculating the tax includes contributions from employers, employees, and even tax-advantaged Health Savings Accounts. So plans could hit the Cadillac tax thresholds quickly.
Further, since the tax is indexed to general inflation — not healthcare costs — more people will be subject to it as health costs rise. Healthcare spending is increasing at an annual rate of almost 6 percent — three times the general inflation rate.
Had the Cadillac tax taken effect in 2018 as originally planned, it would have hit about half of all health plans right off the bat.
The tax will fall on not only bankers and CEOs but teachers, firefighters, and union laborers, too. It will also affect mom-and-pop businesses, which already pay 18 percent more for employee health insurance.
In response, firms have already started redesigning their health plans to avoid triggering the tax — in ways workers are sure to dislike.
To start, more workers are finding themselves paying for doctors and hospitals long before their policy even kicks in, thanks to larger deductibles, bigger co-pays, and higher out-of-pocket maximums.
One recent survey of over 3,000 employers found that 42 percent were planning to increase deductibles for workers from their current average of $3,000 for family plans and $1,200 for individuals.
Employers are already making drastic changes to avoid the Cadillac tax, even though it’s still years away. So employees are getting less for their share of health plan costs — in the form of narrower provider networks and pared-back benefits. Xerox and UPS have already reduced eligibility for spouses. The University of Virginia has separated dental benefits from its health plans. Still other employers may limit contributions to Health Savings Accounts.
Delaying the Cadillac tax is not enough. It shouldn’t be allowed to even cross the start line. The tax will only drive healthcare costs higher and hurt middle-class workers. Republicans and Democrats alike need to take this Caddy to the junkyard.
(Janet Trautwein is CEO of the National Association of Health Underwriters.)