The Cadillac Tax on health insurance – Obama bites the union hands that feed him
One of the great mysteries of the health care reform effort is the White House’s continuing support for the so-called “Cadillac” tax on higher priced health insurance policies – despite the strong objection of the nation’s unions who stand at the core of the Democratic Party.
As currently included in the Senate reform bill, health insurance companies will be required to pay a 40 percent excise tax on insurance plans they sell which exceed $8,500 for individuals and $23,000 for families. It is widely assumed that the insurance companies will pass the cost of the new tax on to employers, thereby either dramatically raising the cost of maintaining the level of existing employer health benefits provided to certain employees or forcing employers to cut back on the level and quality of health benefits offered.
The origin of the Cadillac tax can be traced to an interview Obama did with PBS’s Jim Leher.
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.”
Via Politics Daily
Not such a bad idea.
However, by the time the notion made it through the Senate Finance Committee, it had morphed into something that had lowered the threshold to the current proposed levels of $8500/$23,000. This is an entirely different kettle of fish as many middle class, hardworking union members receive negotiated health care benefits that would now qualify as Cadillac plans.
Note that these union members do not earn at anywhere near the levels of the Goldman Sachs employees the president had in mind at the outset. Further, union health benefit plans are often the result of collective bargaining trade-offs where improved health benefits are negotiated for in lieu of higher wages. With employers expected to lower benefits rather than pay the dramatically higher costs, this turns into a pretty raw deal for the unions.
The House seems to get this. Pelosi and her fellow House Democrats much prefer an alternate approach that would tax individuals earning over $500,000 a year and families earning over $1 million annually.
The large unions have been vocal in their opposition, understanding all too well that the Cadillac tax will put their members in a difficult position as employers are forced to adopt new benefit plans that promise higher co-pays, larger deductibles and more out of pocket costs for the employees.
Why does the president continue to support this approach? After all, it’s no secret that without the union support he received during the campaign, Obama likely would not be president today. It’s also no secret that the president has pledged not to raise taxes on the middle class. Surely, he would much prefer taxing rich people earning a million a year rather than placing the burden on the struggling, mid-level earners.
There is an argument that the tax will actually result in creating more jobs. The logic of this suggests that as employers are forced to cut back on health insurance benefits it will free up more cash to hire more employees.
But I think the real answer begins with the government economists who estimate that the tax on the higher priced insurance policies will bring in $149 billion over the next ten years while serving to depress the rate of health care inflation by discouraging companies from offering more generous health plans. In fact, the Congressional Budget Office and the Joint Committee on Taxation stated in a letter to Majority Leader Reid that the tax is the single, largest factor contained in the Senate bill resulting in the “bending the cost curve” and cutting the federal deficit.
In many ways, the Cadillac tax represents a perfect blend of raising money to pay for the subsidies included in the reform bills in the short term while creating policy that will encourage companies to offer less generous benefits and, by so doing, bring down the costs of health care in the long term.
It should, therefore, not be surprising that the plan would be attractive to a president who has promised that health care reform would accomplish precisely what the Cadillac tax appears to accomplish. The bad news is, the accomplishment will come on the backs of middle class workers.
Enter the political element.
While there is, no doubt, some room for Pelosi to negotiate a higher level of plan benefit that will be subject to the tax, an idea that is rumored to be acceptable to the unions, killing the idea off completely would likely cost some Democratic votes in the Senate…and we all know what that means. There simply isn’t one vote to spare.
It is also a reality that if the threshold for applying the tax is raised, less money will be generated, thus changing all the numbers applied by the CBO in determining the cost of health care reform. This means it will be on Pelosi to come up with the money from somewhere else or try to convince the Senate to accept a modified plan that does less to raise money and bend the cost curve. Such a move would unquestionably be a very dangerous political game to play at this stage of the process as there are far too many Senators looking for an excuse to withdraw their support as we get closer to the mid-term elections.
There is one other element to this that I find of great interest.
Some of you may recall my post wherein I argued that single-payer health insurance in America is, like it or not, inevitable. The Cadillac tax is just one more piece of the puzzle that proves the point.
The basis of my argument is that health insurance companies have an inherent problem that will ultimately lead to their demise in the mass market. While they bring in lots of money due to volume, the health insurers actually operate on a very small profit margin of 3% to 5%. Some of the profits have been tied to their efforts to deny coverage when needed to those who are entitled to the same. Hopefully, such behavior will be a crime of the past once the new regulations take hold.
When you apply the impact of the Cadillac tax, a tax guaranteed to squeeze health insurance company profits even further, maintaining annual increases in company share prices will become that much harder. This, inevitably, will lead to Wall Street putting pressure on the health insurance companies to improve their profitability. The only way this will happen is for the health insurers to offer policies that lower benefits which means higher deductibles, increased co-pays, etc. So, just as companies who provide health care benefits to their employees will be forced to devalue the benefits they provide as a result of the Cadillac tax, further devaluation is inevitable in the face of health insurance companies struggling to maintain shareholder value.
All of this means that the middle class will have an increasingly difficult time affording health care. Eventually, they won’t be able to handle the burden. And when that happens, there will only be one answer – government provided, single-payer health care where health care is extended to all. Health insurance companies will migrate to a business model similar to what takes place in the UK where those who can afford it will purchase private health insurance to get around some of the more negative aspects of government provided health care.
While the answer to burdens placed on the middle-class as a result of this tax might, at first glance, appear as simple as just getting rid of the whole plan, it really isn’t that simple at all.
The fact is, we cannot afford to extend health care coverage to millions of people without having money to pay for it. Yet, we cannot, in my opinion, afford not to extend this coverage to the millions who do not have access to health care as to do so is simply immoral.
Would it fairer and more realistic to simply skip to the last act and go with a single-payer system now?
I think so. But we all know that this is not going to happen. So, at the end of the day, the Cadillac tax will be a step along the way to the unavoidable reality of an augmentable, single-payer system.
Hopefully, the negotiations between Pelosi, Harry Reid and Obama will result in taking some of the pressure of middle class workers and the chronically ill who will end up bearing a large part of the brunt of this tax.
However, the tax will remain because it is the only way to get reform going.