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Jan. 9 2010 - 6:00 pm | 1,166 views | 2 recommendations | 19 comments

The Cadillac Tax on health insurance – Obama bites the union hands that feed him

s-TEAMSTERS-ENDORSE-OBAMA-largeOne 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.

Maybe.

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.


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  1. collapse expand

    Everyone has to pay their fair share, why wouldn’t union members want to pay their fair share….

  2. collapse expand

    On the one hand we have a gut level emotional issue – make the filthy greedheads pay for their “Cadillac” plans = on the other hand, we have the reality that actually becomes law, and that reality is too complex to explain in a slogan. The entire HC debate has richoted from one slogan to another because the American voter just isn’t capable of understanding issues with so many variables. And the voter isn’t stupid; it’s very debatable whether the experts actually understand what they themselves have put together.
    How can an economy and a society capable of this kind of complexity be governed effectively? It’s definitely not by shouting slogans. I no longer believe that effective government can come from two political parties. Individual voters need more choices, and they need to invest more time into making the right choices, not following party lines.

  3. collapse expand

    Rick, government health care will take over one-sixth of the american economy….and not keep costs down…and leave millions un-insured

    http://news.yahoo.com/s/ap/20100110/ap_on_bi_ge/us_obama_health_care

    “The study found that health spending, which accounts for about one-sixth of the economy, would increase by less than 1 percent than it otherwise would over the coming decade even with so many more people receiving coverage.”

    We are getting 6 years of government health care for ten years worth of taxes….what a deal!

    • collapse expand

      Uh..Andy…I think you might want to re -read the article you posted and relied upon. It’s point is precisely opposite of your opinion. It says that the costs will ONLY go up less than 1% while insuring over 30 million additional people.

      “Americans would see only a modest rise in health care costs under the Senate’s plan to extend coverage to 34 million people who currently go without health insurance, government economic experts say in a new report.
      The study found that health spending, which accounts for about one-sixth of the economy, would increase by less than 1 percent than it otherwise would over the coming decade even with so many more people receiving coverage.”

      In response to another comment. See in context »
  4. collapse expand

    Thanks for posting about this Rick. A relative let me in on the inclusion of union members in this tax in a little debate/discussion we had over health care and other issues over Christmas. I was wondering how accurate his remarks were, and intended on looking them up now that I’m back at home.

    If Pelosi want to beef up her leadership cred, she’ll stand up for the less fortunate. Sadly, I think it’s wishing too much to think Reid would lead such a charge; please please prove me wrong Senator.

    • collapse expand

      There’s really not much Pelosi can do here. She knows that it doesn’t matter what the House does if the Senate doesn’t go along. She is going be forced to go with the Cadillac tax – but may be successful in raising the policy values that will be subject to the tax and, thereby, help get some of the union benefits programs out of the line of fire.

      In response to another comment. See in context »
      • collapse expand

        After some more reading, it doesn’t look so good in the short run. If a single payer health plan emerges in 10, 20, 50 years, maybe that’s something to look forward to, but lower benefits with higher deductibles and co-pays are gonna be a problem. Maybe that’ll piss people off enough to offer single payer sooner, but I shan’t hold my breath.

        One more thing I’m curious about: military health plans. These seemed to have changed, but I just compared 2 TriCare plans, and TriCare Prime is a zero-deductible plan unless you choose medical care other than military health care, and even then it’s pretty reasonable. Any word on how that will be handled?

        My relative also said something about McCain and tax deductions for health insurance, but I can’t find anything to support that assertion – at least not what we were (or I thought we were) discussing: self-employed citizens would be able to take a tax deduction on their health insurance payments. Have I missed something here?

        In response to another comment. See in context »
  5. collapse expand

    This is not complicated. The rich don’t want to pay more taxes (House bill) to help pay for this Medicaid expansion bill, so Obama rules an excise tax is better that goes on the backs of union members and older workers with higher cost policies.
    New Democrats could care less about the middle class, because they are now part of the elite in this country. They just wear different color robes than the Repugs. – fwdpost.com

    • collapse expand

      Gotta disagree with your analysis. The reason the House Dems. are favoring the tax on the rich is twofold – a) they prefer taxing the rich than the middle class and (b) the way the tax is written in the Senate bill, it brings middle class workers – particularly union workers – into the mix. It is not particularly smart for the House Dems. to piss off the unions and they know it.
      So, to say that “New Democrats” don’t care about the middle class is just wrong, even if for political reasons only.
      The Senate is another story. Also not so good for them to piss off union workers but less of a problem than in the House. I think what happened here is that got kind of deep into the Cadillac tax notion before they realized that it would be a problem for unions. Now, GOP senators who have never had to worry about union voters are holding their feet to the fire as will Democratic senators who don’t have strong union presence in their states.
      So, to say that Dems. don’t care about the middle class reveals a lack of understanding of the political process. I’m not saying you have to like Democrats. I’m not saying Democrats will do anything for the middle class out of the goodness of their heart. I’m saying that without the middle-class, democrats don’t get elected.

      In response to another comment. See in context »
  6. collapse expand

    The arguments I’ve seen from the establishment voices on healthcare — Ezra Klein and Paul Krugman — essentially say, yes it will be painful, but this is the only way we have to contain costs left.

    Which is pretty sad. It’s like saying we have to cut off the arms of the patient to save him or her. It’s sad all the better options appear to have been thrown overboard.

  7. collapse expand

    It will be interesting to see this play out in my local union. Our health plan is funded per hour, so members (single, married or with kids) working more pay more for the same coverage but all equally by the hour and completely invisibly from a pay stub perspective.

    A single guy therefore will be way over the $8500 mark and supposedly his benefit will need to be taxed, but the family man will not. So who will pay the tax? Presently the companies send the money monthly to the plan based on each employee’s hours. Will they send in the tax with their regular payroll filing? This will make a single guy a much less attractive employee.

    $8500 a year is about $4.12/hr. Our plan collects $7.60/hr, so that’s like a new tax of about $1.40/hr (40% of $7.60-$4.12) on single employees? The single guys had better start sucking up to their companies now!

    • collapse expand

      unknown – you’re misunderstanding the tax. It is not based on your income- its based on the value of your insurance plan. So, let’s say you’re a single guy who has a health insurance benefits program provided by the company. If they company is paying more than $710.00 a month in premiums for your policy, then it would be classified a Cadillac program. Still, you would not be taxed. The health insurance company would have to pay the government a 40% tax, equivalent to roughly $280 a month on your policy. It is expected that the health insurer will now pass that cost on to your employer. Now, your employer is paying closer to a$1000 a month for your insurance. YOu can begin to see where this becomes a problem. Companies are not going to be able to afford this boost when it comes to all their employees.So, they will likely begin providing you with a different insurance benefit that costs less than the $710 a month plan they originally provided as this will be the only way to avoid the higher costs. That less expensive plan will probably leave you paying a higher deductible out of pocket, higher co-pays, etc. So, at the end of the day, this will cost you more.

      In response to another comment. See in context »
  8. collapse expand

    “So, at the end of the day, this will cost you more.” = nice (read that as sarcasm) Why those guys are basing any tax or fee or whatever you want to call it on the cost of the coverage eludes me. Maybe I don’t get it because I’m not on an employer’s plan, but instead on an individual one. (I think that’s what it’s called when you pay 28% of your gross income for health care insurance.) Whatever. Just take me to the guillotine already and get this over with!

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    About Me

    I am an attorney in Southern California, and a frequent writer, speaker and consultant on health care policy and politics. To that end, I am active member of the Association of Health Care Journalists. Based in beautiful Santa Monica, California, I'm very pleased to have the opportunity to be a contributing editor to True/Slant. I've recently finished a book designed to make the health care debate understandable to the average reader, and expect it to be out in the next five months or earlier. In my 'spare time', I continue to write for television and, occasionally, for comic books.

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