Obamacare's "Cadillac Tax" Working as Planned

May 29, 2013

According to a story published Monday in the New York Times, Obamacare’s famous “Cadillac Tax” is already starting to have an effect on employer health insurance coverage.

Even though the tax goes into force in 2018, companies already are starting to reduce the value and quality of their high-end health plans in order to avoid the coming tax.

Starting in 2018, this tax will be a 40 percent levy on the value of a health insurance plan that exceeds a statutory limit. According to the Times article, that value is $10,200 for individuals and $27,500 for families. So for every dollar over $10,200 for singles and $27,500 for families, the plan will be taxed 40 cents.

Example Calculation of "Cadillac" Health Insurance Tax

.4 x ( Cost of Plan - $10,200 or $27,500 ) = Tax Owed

Plan Type

Total Premium

Tax Owed

Total Cost of Coverage

Single

$11,000

$320

$11,320

Family

$29,000

$600

$29,600

 

Like an income tax with a progressive rate structure, which discourages earning that additional dollar of income over a specific amount, this tax discourages employers from purchasing plans that are over the statutory limit by making the next dollar 40 percent more expensive. It works almost like a cap on the exclusion for employer-sponsored health insurance.

Apparently it is doing just that. 17 percent of employers this year have revised their health plans, up from 11 percent in 2011 in anticipation of the tax. Employers are either reducing the benefits of plans, increasing deductibles, or attempting to encourage their employees to be healthier all in attempt of avoiding this tax in 2018.

And union members are not happy about this tax. Union members are famous for their generous health benefits and have benefitted from the tax subsidy on health insurance. This explains why unions are put in a rare position of opposing a tax increase.

The point of this tax—and much of Obamacare—was to lower the utilization of health care by making people face the true costs of their care. The excise tax attempts to do this by making generous plans more expensive for employers. In turn, this pushes employers to offer higher-deductible plans that make individuals share more of the cost of their own care. This theoretically will contain healthcare costs-a laudable goal.

However, the excise tax is an odd way of accomplishing this. A better way would have been to just cap the tax exclusion for employer-sponsored health insurance. However, that was not politically feasible, especially with strong union opposition. So instead, lawmakers imposed the tax on insurance companies to drive up the price of insurance instead.

It will be interesting to see if this trend towards lower-cost insurance plan continues, or if employees value high-end insurance plans so much that they are willing to take an even larger hit in their wages to get them.

 

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