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Robin Baker

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"Cadillac" Health Plans a Smooth Ride or a Bumpy Road?

Posted: 10/12/09 01:45 PM ET

The excise tax on so-called Cadillac plans is a central feature of the Senate Finance Committee's health bill. Most often, Cadillac plans are described as the "overly generous" or "gold-plated" plans offered to Goldman Sachs employees and other Wall Street types. The idea is that levying a tax on these gold-plated plans will encourage lower spending and help slow the growth rate of health insurance and health care costs.

In addition, the revenue generated from the tax on insurers would provide a significant source of funding for subsidies to help families with low to moderate incomes afford health insurance. The Congressional Budget Office (CBO) estimates revenues will be about $5 billion in 2013 and increase to $53 billion by 2019.

Most Americans would not be affected by the tax. The Senate Finance Committee's proposal would impose an excise tax on employer-sponsored insurance beginning in 2013 for plans with costs above $8,000 for an individual and $21,000 for a family. In Colorado, the average annual premium cost in 2008 for an individual was $4,900 and $11,952 for a family.

It seems like a reasonable plan, but like so many other pieces of health care, it's complicated.
A brief by Milliman Inc., the world's largest independent actuarial and consulting firm, notes that high-cost plans have as much to do with the beneficiary's geographic location, profession, age, gender and health status as with the richness of benefits.

With regard to geography, Milliman uses the example that a typical employer-sponsored plan for a family of four in Miami in 2009 is $20,282. In comparison, the cost of plan for a similar family in Phoenix is less than $15,000. Given that the medical costs have grown between 7 percent and 10 percent over the last few years, it is possible that benefits in some geographic areas could exceed the tax trigger by 2013.

Those in high-risk professions, such as firefighters and coal miners, have higher utilization costs and would easily be subject to the excise tax. A new provision by Sen. Jay Rockefeller (D-W.Va), however, would increase the allowable benefit amount to $9,850 for an individual and $26,000 for a family.

Age and gender also make a difference in the cost of premiums, and age is the biggest cost driver over time. Millman notes that the national average per-member, per-month cost for a 30-year-old male is $155 per month -- less than $2,000 per year. But the cost for an age-60 female is $717 per month, or $8,604 annually, which exceeds the tax threshold.

Age is a significant factor, especially with the percentage of workers 55 and older increasing and remaining in the labor force longer. It is estimated that 93 percent of the growth in the U.S. labor force from 2006 to 2016 will be among workers ages 55 and older.

As people age, health care premiums increase and as premiums increase, it is possible that those that did not exceed the threshold in 2013 may be taxed in the future. The cost of plans could become a problem for employers with an older workforce.

Beginning in 2014, the taxable amount would increase by inflation as measured by the Consumer Price Index for Urban Consumers (CPI-U). The problem is that heath care inflation has grown at a faster pace than general or consumer inflation for more than a decade. In 2008, CPI-U actually decreased 1.5 percent while health care costs increased 7.4 percent -- and the 7.4 percent is the lowest increase in five years. Because health insurance premiums will outpace the tax threshold, more plans will be subject to the excise tax over time.

The Milliman report argues that the dramatic increase in the CBO's estimates of the tax revenue in a six-year period -- from $5 billion in 2013 to $53 billion in 2019 -- suggests that the excise tax will "dip substantially further into the mainstream of health plans."

This isn't necessarily bad. The existence of a ceiling will likely encourage insurers to create products that are under the cap. On the other hand, insurers may look to create a plan that does not exceed the threshold but instead increases co-pays, co-insurance or deductibles based on minimum benefit levels. How benefits are put together and the ratio of benefit value to the total cost (actuarial value) is something to watch.

In the end, we must ask if we have a societal responsibility to protect the health and well-being of our fellow citizens -- this includes making health care accessible and affordable for all. To do this we need to cover the cost, and an excise tax on insurers offering high-cost plans can provide a significant source of funding for subsidies.