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Congress' Test on the 'Cadillac Tax'

Timothy S. Jost and Joseph White, Special to Roll Call

The Senate's draft health care legislation includes a punitive excise tax on "Cadillac" health insurance benefits. The idea is to limit the tax deductibility of health care benefits by penalizing insurers (or self-insured employers) for providing benefits that cost too much ("too much" means total benefits of $23,000 for families or $8,500 for individuals in 2013, amounts that are set to increase more slowly than likely health care costs in subsequent years). Many unions and business interests, and most House Democrats, think the excise tax is a terrible idea. Many eminent economists, the White House and much of the press seem to think it is a wonderful idea. If the tax (and bill) make it to conference, conferees will face a test. So here's the first question:1. Which of the following statements is true?

  • (a) Governments should and can set limits on the health care benefits that they fund or subsidize.
  • (b) Particularly expensive plans provide particularly generous benefits.
  • (c) If insurance companies could not sell more expensive plans, they would do a better job of controlling health care costs.
  • (d) All of the above.
If you answered (d), you might be a Senate drafter or an eminent economist. You're also wrong. The right answer is (a).Option (b) is false because, as a Dec. 3 report in Health Affairs based on a survey of more than 3,000 health plans in 2007 summarizes: "It's often assumed that high-cost health insurance plans - sometimes called 'Cadillac' plans - provide rich benefits to plan subscribers. Health reform provisions that treat these plans like luxuries may be misguided. Only 3.7 percent of variation in the cost of family coverage can be explained by benefit design (actuarial value)." As Allan Sloan explained in the Washington Post on Dec. 18, "as any insurance maven can tell you, costs depend more on the people being covered (old, sick, or both?) and location (high-cost New York or low-cost Montana?) than on the level of benefits."Choice (c) is false because there is no evidence that insurance companies can control costs better just by trying harder. The excise tax would not give insurers more bargaining power in dealing with hospitals, doctors and drug companies. It would not create new innovations in delivery systems. It would not generate credible evidence to "manage" care. It would not do anything but force insurers to offer cheaper plans to whoever had unhealthy enough employees to qualify for the tax. Which leads to:2. Which of the following statements about the excise tax is true?
  • (a) The tax would raise revenue for the federal government.
  • (b) It would cause employers to offer reduced health care benefits.
  • (c) Those reduced benefits would especially hurt people with chronic conditions, so one effect of reform would be to worsen insurance for some people who need it most.
  • (d) All of the above.

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