What Makes a Health Plan a 'Cadillac'?
Thursday, October 1, 2009
NEW YORK -- In the scramble to find money to overhaul the health-care system, Senate Democrats have been eyeing the most generous insurance packages -- what some call the "Cadillac" plans -- as a lucrative target to tax.
But as the competing proposals are debated on Capitol Hill, a fundamental challenge has emerged: Few people agree on exactly what constitutes a Cadillac plan.
Many proponents of taxing high-end employer-based coverage have singled out the titans of Wall Street finance and industry, whose insurance might pay for regular EKGs, CAT scans and weekend health retreats at tony spas. The California Health and Longevity Institute, for example, offers "comprehensive physicals" over several days that include personalized counseling on wellness, fitness and nutrition.
But insurance plans that cover those types of things are rare. More common are the generous health benefits that many union workers receive -- plans with high employer-paid premiums, low deductibles, prescription drug coverage, vision and dental care, and low or no co-payments.
Over the past decade or so, unions in contract negotiations typically chose to forgo large wage increases in exchange for more generous medical benefits, mainly because costs were rising faster than inflation. Now, as the Senate Finance Committee works on health-care legislation, union members say they feel unfairly targeted.
"It's the old Washington, D.C., law of unintended consequences," said Robert Laszewski, president of Health Policy and Strategy Associates, a consulting firm. "They went after the Goldman Sachs partner and they ended up with the fireman in Brooklyn."
Laszewski and other health policy experts said union plans are likely to be the hardest hit by any new tax because their premiums tend to be higher for several reasons: Union workers are often older and concentrated in urban manufacturing areas, where medical costs are higher.
"State workforces and nursing home workforces -- they are older and their plans are more expensive," said Celia Wcislo, an executive board officer of District 1199 of the Service Employees International Union. "They were talking about lawyers with their Cadillac plans, but in fact, the way it's written applies to everyone."
With the Finance Committee marking up a bill that would then be melded with another Senate plan, details of a tax on high-end policies are still uncertain -- including whether it would survive. Such a tax probably would be met with fierce resistance by the full Senate and in the House, where more members favor funding reform with a tax on wealthier Americans.
Unions are adamantly against the tax on medical benefits, even though in its current form insurance companies would be taxed. "They will pass it on back to the individual in terms of higher premiums," Wcislo said. "There are a lot fairer ways."
Currently, employer-paid premiums are not taxed.
The idea of eliminating that tax exclusion was raised during last year's presidential campaign by Sen. John McCain (Ariz.), the Republican nominee, who urged targeting "those people who have the gold-plated Cadillac insurance policies that have to do with cosmetic surgery and transplants and all those kinds of things." In fact, experts said very few plans cover plastic surgery, laser eye operations or even chiropractors.
President Obama, during the campaign, sharply criticized his opponent's proposal. "John McCain calls these Cadillac plans," he said in October. "In some cases, it may be that a corporate CEO is getting too good a deal. But what if you're an American line worker . . . who's given up wage increases in exchange for better health care? Well, Senator McCain believes you should pay higher taxes, too."
Some analysts of health-care policy and taxation have long argued that the current tax exclusion for employer-paid premiums unfairly benefits those with higher incomes, while not helping those whose jobs do not provide coverage.
Also, critics of the exclusion say it adds to health-care inflation -- meaning that people with expensive plans and employer-paid premiums have no incentive to shop around for better deals. "If you could deduct the cost of your car, you might buy a Cadillac instead of a Chevy," said Len Burman, a professor of tax policy at Syracuse University.
Burman has long been a critic of the current system, including the tax break for expensive medical plans and companies giving union workers better health benefits instead of increasing wages.
"I think providing a large share of compensation in the form of health benefits is pretty inefficient," he said. "My preference would be to get rid of the tax exclusion altogether."
Finance Committee Chairman Max Baucus (D-Mont.) initially proposed an excise tax of 35 percent on insurance companies for plans that amounted to $8,000 for an individual and $21,000 for a family. Those amounts were initially set to increase with inflation.
But several of Baucus's fellow Democrats immediately objected. "I want people to know -- particularly the coal miners in my state -- that I will work to protect plans for high-risk workers from an excise tax," Sen. John D. Rockefeller IV (W.Va.) said at the Sept. 22 opening of the committee's markup session. "Taxing these higher-priced insurance plans is simply unacceptable."
To lessen the impact of the tax and mollify Democratic critics, Baucus revised his bill to exempt people with high-risk professions, such as firefighters and coal miners, who may have more costly plans because they need more frequent doctor's visits. In addition, he agreed to a request from Rockefeller and five other senators to increase the threshold defining a "high cost" plan by $750 for such individuals and $2,000 for families.
Baucus also agreed that those amounts should be indexed to inflation plus 1 percent, because of objections that health-care costs have been rising at three times the level of inflation. To cover the added cost, he proposed increasing the tax to 40 percent.
Fred J. Myers, an 81-year-old retired coal miner in Morgantown, W.Va., knows he has a Cadillac plan, with a low co-pay and no deductible.
"A lot of my people died, in explosions or whatever, in order to get what we got," he said. "I think, seriously, if they try to tax the miners' health plan, Congress is going to hear from us. We might need to go up there and enlighten 'em."