Who Will Be Paying the "Cadillac Tax"?

The excise tax on high cost health care plans has dubbed them "Cadillac" plans, a choice that was always a little puzzling.  The primary demographic for Cadillacs is on Medicare, not Goldman's payroll.  And one of the main targets of the tax is the union members who form a core part of the Democratic base.  The notion that these people are grotesquely overpaid freeloaders is usually a Republican talking point.

Politics daily columnist Patricia Murphy elaborates:

The levy has been dubbed the "Cadillac tax," but research shows it would likely affect a broad swath of Americans regardless of their income, which could indeed amount to the tax on the middle-class that President Obama promised would not happen under his administration. The tax is a growing source of anxiety for Huber and his co-workers, but also for Democrats in the House, who vow to strip the measure out of the bill in conference or consider bringing the bill down altogether.

The confusion surrounding the tax comes from its complexity and the luxury car it is named for. When President Obama first raised the idea of taxing insurance companies this summer, he framed it as one way to get Wall Street executives to pay their fair share. Obama told PBS' Jim Lehrer he wanted to target "super, gold-plated Cadillac plans." Days later, Obama's senior adviser David Axelrod told The New York Times the administration wanted to tax benefits, "like the ones that the executives at Goldman Sachs have, the $40,000 policies."

At the time, Obama said he did not want the tax to hit middle-class families, but when the proposal emerged from the Senate Finance Committee in September, it proposed charging insurance companies and a 40 percent excise tax for high-dollar, but not exactly gold-plated plans. The bill now calls for the tax to apply to plans exceeding $8,500 for individuals and $23,000 for families, for the cost of combining health savings accounts, medical, prescription drugs, dental, vision, etc.. The tax is charged to insurance companies, but it is widely assumed they would passed it on to employers.

Despite the politically powerful unions that oppose it, the tax is enormously attractive to government economists because it both raises revenue -- $149 billion over ten years -- and should depress the rate of health care inflation by discouraging companies from offering more generous health plans. The Joint Committee on Taxation and the CBO credit the tax as the largest factor in "bending the cost curve" and cutting the federal deficit, as the Senate bill is expected to do.

Christina Romer, a senior economic adviser to the president, predicted in October that the tax would encourage, "both employers and employees to be more watchful health care consumers." But research released last week by Mercer, an employee benefits consulting firm, showed that in addition to considering lower cost plans, two-thirds of companies polled said they would also raise health care costs for workers through higher co-pays and deductibles, regardless of whether the employee is a CEO or a line worker at a factory.

Beth Umland, the research director for Mercer, explained that although the "Cadillac tax" is targeted at high-dollar plans, the cost of insurance plans is primarily driven by the age, gender, health and location of a company's workers, not the lifestyle they enjoy.

"Plans that trigger the excise tax are not necessarily generous plans," she said. "Small employers offer significantly less generous plans than large employers, but just as many small employers are going to trigger the tax." Plans for workers in dangerous professions, like steelworkers, also have higher cost plans because they experience more work-related health problems.

Umland also said that the tax would apply to about 20 percent of companies when it is implemented in 2013, and would apply to businesses large and small, union and non-union, from Goldman Sachs to the bagel shop down the street. It is also likely to have the greatest impact on those who use the most health care, like new moms and people with chronic illnesses, as well as those who can least afford it. "The lowest paid workers tend to choose the most generous plans because they can't afford the out-of-pocket expense of a higher deductible," she explained.

I am sure that the folks at Goldman Sachs have very generous benefit plans.  But taxing their health care plans is not going to cause the executives to consume less health care; traders earning millions of dollars a year are unlikely to forgo an MRI because it might cost nearly as much as they dropped on wine last Saturday night.  You might be able to get their back office folks and the secretaries to cut back a little, but those folks are pretty well paid.

No, if you want to actually "bend the curve" with an excise tax, you have to hit people who aren't that well paid, and cannot afford to make up the spending through a combination of deductibles, co-pays, and straight out-of-pocket expenditures.  People like steelworkers pulling in $42,000 a year.  The unions have been hitting the House of Representatives hard to get them to strip this out of the final bill; it will be interesting to see how many of them will support it if it comes out of conference with an excise tax instead of the "Millionaire's tax" preferred by Pelosi and co.