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Cadillac has got a wheel in the ditch

MANAGED CARE June 2013. © MediMedia USA
Managed Care Outlook

Cadillac has got a wheel in the ditch

The so-called Cadillac tax, an Affordable Care Act provision that is to begin in 2018, will very likely make many employer-sponsored health plans, not just the ones tailored for high-earners, too expensive, predicts a report by the Bipartisan Policy Center (http://tinyurl.com/Cadillac-Tax).

Cadillac plans cost above $10,200 per individual and $27,500 per family per year. Insurers offering such benefit packages will pay a 40 percent tax on any amount above that threshold — and that’s the rub.

The study, A Bipartisan Rx for Patient-Centered Care and System-Wide Cost Containment, says that employers and employees may wind up bearing the burden. If premiums increase 5.7 percent annually (the rate that is projected from national health expenditure data and one that is lower then historical growth), “the Cadillac tax would effectively prohibit half of today’s employer-sponsored health plans by 2029.”

But as we pointed out a few years ago, the reasons a plan might exceed the threshold are varied, and may have nothing to do with luxury benefits (http://tinyurl.com/Diamond-Cadillac).

The authors of the Bipartisan Policy Center report propose replacing the Cadillac tax with a plan that limits the income tax exclusion for employer-sponsored insurance (ESI) at the 80th percentile in 2015.*

This would be indexed to GDP per-capita growth through 2023, and GDP per-capita growth plus 0.5 percentage points thereafter. This would slow down bracket creep, but not eliminate it, so as to keep some pressure on.

Cadillac tax could effectively prohibit half of today’s employer health plans by 2029

Annual premium for plan

Projected annual premimums for family coverage

*The study states that “Under current law, employer contributions to employee health benefits, including ESI [employer-sponsored insurance] premiums and various tax-advantaged health care spending accounts, are excluded from an employee’s taxable income. Employee premium contributions are also paid with pre-tax dollars in most cases. The ESI tax exclusion is the single largest tax expenditure, reducing annual federal income tax and payroll tax revenue by about $250 billion — which necessitates higher marginal tax rates on everyone, and it also reduces revenues for state governments.”

Source: Bipartisan Policy Calculations, assuming that ESI premiums grow at the same rate as national health expenditures, as projected by the CMS Office of the Actuary