The news is filled with stories about “Obamacare.” Now that the Republicans are in charge in Congress, they want to repeal it. Insurers have had to rewrite their plans. Employers aren’t sure what they will do. Everybody’s getting taxed. No one is quite sure what comes next.
But there’s one thing we should all look at more closely.
The excise tax on high value health insurance plans was one of the least publicized provisions of the Patient Protection and Affordable Care Act (ACA), but from a policy standpoint, it may be one of the most significant. Because it is a tax on a high-end or luxury item, it has been publicly called the “Cadillac tax.”
I don’t know why a health plan is being compared to a car. Doctors and patients sure aren’t in the “driver’s seat.” Insurance companies are behind the wheel and the government is riding up front. And so far there’s been no product recall on Obamacare—although there have been plenty of delayed releases.
Even the Cadillac tax was delayed. Although the ACA was passed in 2010, the Cadillac tax is one of the last provisions to go into effect—in 2018. The delay was partially due to pressure from large groups such as labor unions, which needed time to change long-term insurance contracts. But by then, there may be no turning back.
The Cadillac tax places an excise tax of 40 percent of the cost of an insurance policy in excess of a fixed threshold. Although the tax is nominally charged to the insurance carrier, that amount will almost certainly be passed on to the purchaser/consumer.
As of 2013, the cost threshold for individuals is $10,200 and for families, it’s $27,500. For those in high-risk occupations such as law enforcement, construction, mining, agriculture, and fire fighting, the limits are extended to $11,850 and $30,950 respectively. To some degree the list of high-risk occupations is arbitrary and politically based. Other high-risk occupations—mountain guide, acrobat, or even an urban trauma surgeon with a risk of HIV exposure—may not qualify.
So what happens when that Cadillac hits the road?
The Cadillac tax is based on three premises. The first is that employer-paid healthcare benefits represent untaxed income. By allowing employers to deduct the cost of benefits paid to workers, the federal government is losing more than $200 billion dollars a year in revenue. To put this in perspective, the cost to the federal government of the home mortgage interest deduction is estimated by the Joint Committee on Taxation to be $68 billion. Many in Congress believe that the time has passed for health care as an employee benefit and that an excise tax is one way to gradually alter the tax code.
The second premise is that making insurance too costly above a certain level will force insurance companies to exert downward pressure on costs and consumer choices. Insurance companies will decrease the benefits each policy offers and consumers will be faced with higher deductibles and copays. As a result, patients may have fewer allowed physical therapy visits per year, less coverage for short-term rehab stays, and possible restrictions on newer types of implants or procedures.
The third premise is that by increasing deductibles and copays, patients will be forced to make more careful economic choices. They will forego doctor visits and testing that they would have pursued when their out-of-pocket expenses were lower.
For example, Erskine Bowles, former White House Chief of Staff who cochaired a balanced budget commission and has made healthcare cost reduction a centerpiece of his proposals, has stated that “we ought to provide a darn good Chevrolet, but not a Cadillac plan.” Mr. Bowles, who addressed the AAOS 2013 Annual Meeting with former Senator Alan Simpson, went on to say that “nobody ought to have first-dollar coverage … everybody needs to have some skin in the game.”
How does this affect patient care? Although some patients may save money, others may simply choose not to get the care they need. Patients may forego scoliosis screening or may ignore “knee sprains” that are really ACL tears. We have all seen patients who failed to get a recommended CT scan or MRI and later were found to have a mass lesion.
Our business managers will be under more pressure to negotiate with patients over unpaid deductibles. Our day-to-day practices—as well as ancillaries such as physical therapy and surgery centers—will be affected.
Hit the brakes
Can an excise tax this high be justified? When Congress passed a luxury tax in 1990, the tax rate was only 10 percent over a certain threshold. Hotel taxes typically run 15 percent to 18 percent. Even beer, which most people consider a “sin tax” item, is subject to excise taxes of less than 40 percent per six pack. Is it fair to tax something beneficial like health insurance at 40 percent?
Jonathan Gruber, the Massachusetts Institute of Technology economist who was an adviser when the plan was drafted, made headlines in November 2014 by saying that the administration intended to pay for the plan with taxes. He points out that the Cadillac tax is indexed to the consumer price index, not the relative increase in healthcare costs. So even if healthcare costs stay level with inflation, more people will pay the tax.
Hmm. That means in 20 years almost everyone will be paying the tax. Effectively, the Cadillac tax eliminates the health insurance tax deduction, even though President Obama originally said he didn’t want to do that. But that’s what this plan does.
It’s similar to the Alternative Minimum Tax, which began as a tax on high earners but now affects many average taxpayers. For many, it negates the value of the home mortgage interest deduction. And Congress won’t get rid of it.
If you’re an employer with an aging work force and you want to protect your staff, should you have to pay extra so your staff can have better coverage? Imagine that you have a long-time, dedicated employee with a disabled child who will need extensive medical care in the years to come. Should you have to pay an excise tax to buy that employee’s family more insurance?
As employers, most orthopaedic surgeons will face the same problem as other business owners (Table 1). If we buy cheaper insurance, our employees will want a salary increase to compensate. And that will trigger an increase in both the various employment taxes and pension costs. So the cost of providing the equivalent income benefit will increase approximately 20 percent.
Where does this leave us? We need to join other organizations—both medical and nonmedical—in advocacy efforts. We are all aware of the sustainable growth rate formula, the Independent Payment Advisory Board, and other issues with the ACA, but the Cadillac tax has been under the radar.
The Cadillac tax may not take effect for another 3 years, but we would be wise to consider its potential effects now. Otherwise we’ll all be in the back seat.
It’s time to hit the brakes on the Cadillac.
Stuart J. Fischer, MD, is a member of the AAOS Now editorial board and editor-in-chief of the AAOS patient education website OrthoInfo.