Joe Paduda has written an excellent article – as usual – about the proposed tax on “Cadillac” health insurance plans. The tax, which is part of the senate bill, would be levied on the portion of health insurance premiums that exceed a set annual amount ($8500 for individuals, and $23000 for families). It would be levied against the health insurance carriers, but would likely be passed along to employers in the form of higher premiums, much the way increasing health care costs result in higher premiums. The tax does not take into consideration the actual specifics of the benefits provided or the regional cost of health care. Joe makes an excellent point about the arbitrary nature of the taxation start points, and how a better option would be to impose taxes on plans that don’t keep costs under control, while keeping in mind the dramatic variation in costs from one area of the country to another.
Another issue in this debate is how much health insurance premiums can vary from one employee to the next, working at the same company, and with the exact same coverage. To get an idea of the discrepancies, I calculated a quote for a small group policy with Anthem Blue Cross Blue Shield (which has very competitive premiums in the Colorado market) for a hypothetical company based in Denver with six employees. I looked at premiums for single employees as well as employees with families, and used a wide range of ages for the employees. While Anthem has a wide range of plan designs available, I specifically looked at premiums for a policy with a $500 deductible and 30% coinsurance, with an out of pocket maximum of $3500 in addition to the deductible ($4000 in out of pocket exposure each year). The policy I looked at only covered generic prescriptions, and did not include any dental, vision, life insurance, or disability coverage. In other words, it had no bells and whistles and wasn’t even close to what most people would consider a “Cadillac” plan.
For a single, 21 year old employee, this policy would cost $3144/year, well below the threshold for the Cadillac tax. But a 60 year old single employee with the same policy would be paying $15528/year (the employer would likely be paying a good portion of each employee’s premium, but the tax is calculated based on the total premium, not the portion that is paid by the employee). This would mean that $7028 of the 60 year old’s premium would be taxed – at 40%.
For families, the disparity in premiums is similar. Family coverage for a 24 year old at our hypothetical company would cost $13860/year – quite a bit under the threshold for the tax. But family coverage for a 62 year old would be $34,056/year, and $11056 of that would be taxed (the portion that is over the $23,000 premium limit).
Taxing expensive health insurance policies is an idea with its heart in the right place. Making individuals and employers more aware of the cost and value of their health insurance policies is a good start towards real comparison shopping. But setting a flat dollar amount above which a plan will be taxed seems ill-advised. It doesn’t really do a good job of weeding out health insurance plans that truly have too many bells and whistles, and it wrongly penalizes people who live in areas where health care costs are higher than average, or companies with a disproportionate number of older workers.
Joe Paduda’s article was included in the Health Wonk Review, hosted this week by Jaan Sidorov of the Disease Management Care Blog.