What a Tax on "Cadillac" Health Insurance Plans Would Really Mean to Mainstream Americans

Milliman consulting actuary, Robert Dobson, is out with a must read paper for those that think the "Cadillac" health plan tax makes sense.

The bottom line:

"The idea of taxing so-called Cadillac plans may not sound unreasonable upon first glance. But an actuarial view quickly reveals that the high cost of these plans has as much to do with the characteristics of the covered population as it does with benefit richness. It also reveals that the method of determining the taxable benefit threshold may create unintended consequences — especially when coupled with other benefit-level requirements under various reform proposals, leaving little room between benefit floors and the ceiling in certain slices of the insurance market."

A few more comments from Dobson's paper:

"The most common interpretation of this proposal is that the tax would apply to Wall Street bankers with the richest group benefit plans, and it may well be that taxing particular plans whose premiums are otherwise tax-deductible makes sense. But the actuarial reality of a tax indexed to a specific dollar-amount ceiling is that it would likely affect others with less rich benefits. Whether someone hits the ceiling is not so much driven by benefit richness as it is by age, gender, profession, health status, and the geography of the covered population.

"Consider this example from the Milliman Medical Index (MMI): in 2009, the cost of healthcare for a typical family of four in Miami covered by an employer-sponsored PPO is $20,282.2 The cost of care for a similar family in Phoenix is less than $15,000.

"While these numbers include employee cost-sharing (copays, deductibles, and other coinsurance are reflected in the MMI totals but are not subject to the excise tax), they still show how much more susceptible certain areas of the country are to hitting a fixed-dollar excise tax threshold such as $21,000. Given that medical costs have trended upward at a rate of between 7% and 10% over the last five years, one is left to wonder if the average Miami family will find its benefits exceeding the tax-triggering ceiling by the time the tax provision is imposed in 2013.

"The question of age and gender is also relevant. Assuming a similar employer-sponsored PPO plan, the national average per-member per-month (PMPM) cost this year for an age-30 male is $155 per month — less than $2,000 per year. For an age-60 female, however, the PMPM is $717 — or $8,604 annually, which exceeds the excise tax threshold or ceiling. So groups that include retirees and older workers (e.g., public employers such as school districts) can be expected to hit the threshold more readily than groups with only younger active employees, even if the groups have identical benefits.

"Those who do not exceed the threshold in 2013 might still see their benefits taxed in the future. Aging is the most obvious contributor to higher cost over time. But there is also the question of how the threshold is scheduled to escalate. As currently proposed, the threshold amounts are indexed to the Consumer Price Index for Urban Consumers (CPI-U) as determined by the Department of Labor beginning in 2014 [Amended to CPI+1%]. In the last year, CPI-U actually decreased, compared to a 7.4% increase in healthcare costs reported by the MMI between 2008 and 2009. Furthermore, that 7.4% is the lowest increase in at least five years. Assuming healthcare cost increases will continue to outpace the CPI, the tax threshold will catch more people each year.

"The comparison has been made elsewhere, and deserves mentioning here, that the Cadillac excise tax could behave similarly to the alternative minimum tax, dipping further into the middle class than intended. As currently drafted (and discussed above), the tax is indexed to a number that does not reflect the reality of healthcare cost increases. In fact, the Congressional Budget Office (CBO) estimates that the revenue from the tax will be $5 billion in 2013 but increase to $53 billion by 2019 (emphasis added). This dramatic increase in the CBO’s revenue estimates over a six-year period is consistent with the point made above: The fixed-dollar indexing of the tax threshold will cause the application of the excise tax to quickly dip substantially further into the mainstream of health plans."

This is just a very valuable contribution to the discussion and I suggest you take a look at it all here.

It is pretty clear to me that millions of middle class Americans would get caught in this AMT-like tax trap.

If we want to discourage excessive and inflationary health care benefits, a laudable goal, let's be direct about that. But let's not pretend to be going after some rich guy on Wall Street all the while knowing we have set a tax trap for a retired teacher in Miami.