According to the ACA, High-Quality Insurance is Now a Luxury Item

In these tough economic times, the Obama administration has demonstrated again and again that its preferred approach to social policy (and politics) is to scapegoat successful Americans, pit the “haves” against the “have nots,” and seek every opportunity to redistribute wealth.

We see this in the administration’s choice to fund the Affordable Care Act (ACA) in part by imposing a hefty tax on “Cadillac” insurance plans. Currently, these plans—with their minimal co-pays and deductibles and small spending caps—are offered by some employers as part of a benefits package designed to attract and retain top-caliber talent. These plans typically have large provider networks and are among the least restrictive in terms of coverage. This in turn empowers the holders of these policies with a great deal of freedom when it comes to their healthcare; they’re more likely to see a doctor when they need to rather than put it off or otherwise forego care. In many ways the plans represent the ideal of “good health coverage” that the administration and many ACA supporters have claimed to want for the American people.

Of course, not everyone sees it that way. Because workers with good insurance are more likely to use it to access healthcare services, some health economists and reform proponents have claimed these types of plans encourage the overuse of medical services and increase the overall cost of healthcare. Sensing a ripe target, the Obama administration chose to hit the insurers offering these Cadillac plans (and employers that self-insure, of which there are many) with a tax increase. Starting in 2018, the ACA will impose a 40% excise tax on the portion of annual healthcare premiums that exceed $10,200 for individuals and $27,500 for families (not including vision and dental benefits).

For the Obama administration, this approach makes sense. After all, who’s going to complain too loudly when a Cadillac plan (i.e., a “luxury item”) that also is blamed for rising healthcare costs is taken away from those who currently have it, especially if it’s done in the name of fairness and expanding access to coverage for millions of people? Who could it possibly hurt?

For starters, it will end up hurting the workers who currently enjoy the hard-earned benefits from these plans. Because employers pay the premiums for high-end health plans, many of them are planning to scale back coverage levels to avoid the tax. Others are considering passing the cost on to employees in the form of both higher premiums and more cost sharing, requiring higher deductibles and copays in an effort to control health plan costs. Looks like many of the workers who are currently happy with their insurance won’t be able to keep it after all.

Because the dollar value threshold at which the tax kicks in is scheduled to increase at a much slower rate than insurance premiums have been increasing in recent years, the tax will affect more and more people over time, including those whose coverage is nowhere near as generous as that offered by “true” Cadillac plans.

Things could get ugly fast if recent trends hold. A report from the Kaiser Family Foundation found that the average premium for family coverage has increased 80% since 2003. A PBS Newshour report on the Kaiser study noted that health insurance premiums have risen 196% since 1999.

For 2018, the premium threshold after which the tax is triggered is pegged to growth of premiums for the Blue Cross Blue Shield Standard Plan for Federal Employee Health. If premium increases for this plan exceed 55% between 2010 and 2018, based on benefits offered in 2010, the threshold will increase by the percentage of premium growth over 55%. The Congressional Joint Economic Committee released a report in 2010 that noted “Between 2000 and 2011, premiums for the BCBS Standard plans rose annually by an average of 8.63%. If this trend continues, growth in the BCBS Standard plans would be 92% between 2010 and 2018—significantly more than the 55% benchmark set in PPACA. As a result, the [thresholds] would rise by 37%.” In 2019 and beyond, the threshold will be indexed to “the Consumer Price Index for All Urban Consumers (CPI-U), as determined by the Department of Labor.”

As usual, in its zeal for targeting hard-working Americans who are enjoying the benefits of success, the Obama administration will likely end up hurting people who have high-premium insurance without all of those “overly generous benefits.” Kaiser Health News noted that premium costs “can be high for reasons other than generous benefits, including the age, gender and health status of the customer. In an employer-based plan, premiums are based on the pooled risk of employees and may be higher if many of the employees are sick, older, female or live in a region with expensive health costs.”

That article from Kaiser Health News actually offers a pretty succinct summation of the impact on consumers: “Although the tax is to be imposed on insurers, the effects are likely to trickle down to consumers. Insurers or employers might tinker with benefits, for example, by increasing deductibles to reduce premium costs to below the threshold. In addition, more than half of employees with insurance work for companies that ‘self-insure,’ meaning the firms pay for their workers’ health bills on their own. These employers would be required to pay the excise tax themselves and most analysts, including the CBO, estimate that businesses will respond by changing their benefits to have lower premiums, higher deductibles and copayments and terminating employer contributions to health and flexible spending accounts.”

As illustrated by a recent article in the Washington Post, the Cadillac tax in the ACA will also lead many insurers and employers to simply drop coverage altogether. The Fairfax County Water Authority told the Post that it will “likely drop insurance coverage for its nearly 400 employees if taxes on generous health-care plans take effect as planned in 2018 under the federal Affordable Care Act.” The article goes on to outline the thinking that gave us this tax in the first place: “The Cadillac tax was intended to discourage employers from offering overly generous insurance perks. The thought was that plans with low deductibles and low co-payments give workers little incentive to be frugal consumers of medical services, driving up health-care costs for everyone.”

Read that passage again: “discourage employers from offering overly generous insurance perks.” The very same people who have rammed through a ridiculously complex and unpopular law designed to provide insurance to more Americans are not afraid to come right out and say that they don’t want Americans to have insurance that’s too good or generous. They want the right to decide just what kind of insurance most Americans deserve to have, and they will punitively tax those policies they deem as being “overly generous” in order to eliminate them.

The hubris really is stunning. The Tax Foundation’s Alan Cole has noticed this as well. “As it is designed now, there is a massive spike from a zero marginal tax rate on family plans below $27,500 to 40 percent for plans above that amount. It’s as if the Obama administration is absolutely certain that the optimal amount of employer-provided health insurance for everyone -- no matter what the rest of their budget looks like -- is exactly $27,499. I, personally, am not so sure; some epistemological modesty from the architects of the ACA would have been welcome.”

In the end, many Americans who currently enjoy good employer-provided insurance will likely have to pay a lot more money out of pocket to keep that insurance, assuming that their employers continue to offer the same benefits in the face of rapidly rising taxes. By assuming it has the right to decide just how much insurance Americans should have, the Obama administration has once again intruded into the private sphere and imposed a system that raises healthcare costs while reducing healthcare choice.