A 'Cadillac' health tax could affect companies that self-insure

Kaiser Health NewsJuly 30, 2009 

WASHINGTON — As Congress considers taxing insurance companies' most generous health benefits to help pay for overhauling the nation's health care system, it also might ensnare employers that pay their workers' health care bills themselves.

The Senate Finance Committee is considering a proposal by Sen. John Kerry, D-Mass., that would impose an excise tax on insurance companies' so-called "Cadillac plans." Some critics argue that such plans, with their liberal benefits, encourage the overuse of medical care.

So far, lawmakers have talked mostly about using the tax to compel insurers to contribute more to paying for revisions to the health care system. However, it's also likely to affect the more than half of covered workers who're insured directly by their employers rather than by private insurers. In those cases, businesses that "self-insure" assume the risk of providing insurance to employees and pay for health services directly.

Such employers use insurance companies to administer the plans, and workers seldom know that it's their employers, not the insurers, that are paying the bills. Under Kerry's proposal, employers that self-insure would be taxed just like insurers. In any case, workers wouldn't be taxed directly, which would provide political cover to those who've opposed taxing employees on their health benefits.

Employers already are calling their lobbying groups in Washington with questions. Gretchen Young, the vice president of health policy at the ERISA Industry Committee, which represents more than 1,500 companies, said that the issue ranked among the group's top concerns.

"It's funny to me to be treated like a cash cow," she said. "We're providing generous and thoughtful benefits, and yet we're treated like the enemy in all this. . . . We're an overlooked and stepped-on category of individuals in most of these bills."

The tax wouldn't affect every plan sold, only those that exceed a value threshold. The tax probably would be levied only on the amount above the threshold. Lawmakers haven't yet set a number, but many have discussed plans with premiums of about $25,000 a year.

However, that's unlikely to raise much money for a health care overhaul. Less than 1 percent of workers have health plans that are worth that amount, according to the Kaiser Family Foundation, a bipartisan, nonprofit foundation that focuses on health care. (Kaiser Health News is a program of the foundation.) The result: Lawmakers might end up lowering the threshold to raise more money.

Blaine Bos, a principal at Mercer, an employer-benefits consulting firm, said the proposal could be difficult to enforce. Self-insured employers aren't required to report the values of their benefits packages, so lawmakers would "have to come up with a reporting venue and some way to enforce it."

It's also unclear whether the tax would change the kinds of benefits that employers offer. Paul Fronstin of the Employee Benefit Research Institute said the tax could discourage employers from offering insurance in the first place. The U.S. Chamber of Commerce, however, said the tax would end up being passed on to workers in the form of higher premiums or lower wages.

James Gelfand, the senior manager of health policy at the chamber, said the tax was "not going to be taken out of executive pay or insurance company profits. It's going to be passed on to the people who have insurance."

"This is the same thing we've been talking about since the beginning of this debate: It's taxing benefits," he added. "It's the same exact policy, and will have the same effect on workers, but Congress doesn't have to be the bad guy."

Richard Curtis, the president of the Institute for Health Policy Solutions, said the tax would be an obvious substitute for a tax on employee benefits, and "could be a good thing in general, because it could increase cost discipline and it's an extra incentive for insurers to be more efficient."

While the advantages and disadvantages are similar to limiting the tax exclusion on workers' health benefits, he said that the insurer tax seemed fairer because it "puts the onus on the people who administer the plan."

Nevertheless, the term "Cadillac plan" could be a misnomer, because high costs don't necessarily indicate better or more generous benefits. The cost of a health plan also depends on the average age and characteristics of the individuals in a group, as well as the region where the plan is administered. Individuals in high-cost regions such as South Florida often end up paying significantly more than people in other regions do for the same benefits package.

If it's included in the final legislation, the tax is also likely to apply to the 42 states that offer self-insured plans to state employees. If the threshold were set at $20,000, the governments of Nebraska and New Hampshire, for example, would have to pay the tax, according to the National Council of State Legislatures.

(Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy-research organization that isn't affiliated with Kaiser Permanente.)

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