How Many Employers Could be Affected by the Cadillac Plan Tax?

By Gary Claxton and Larry Levitt
Kaiser Family Foundation, August 25, 2015

As fall approaches, we can expect to hear more about how employers are adapting their health plans for 2016 open enrollments. One topic likely to garner a good deal of attention is how the Affordable Care Act’s high-cost plan tax (HCPT), sometimes called the “Cadillac plan” tax, is affecting employer decisions about their health benefits. The tax takes effect in 2018.

The potential of facing an HCPT assessment as soon as 2018 is encouraging employers to assess their current health benefits and consider cost reductions to avoid triggering the tax. Some employers announced that they made changes in 2014 in anticipation of the HCPT, and more are likely to do so as the implementation date gets closer. By making modifications now, employers can phase-in changes to avoid a bigger disruption later on. Some of the things that employers can do to reduce costs under the tax include:

  • Increasing deductibles and other cost sharing;
  • Eliminating covered services;
  • Capping or eliminating tax-preferred savings accounts like Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), or Health Reimbursement Arrangements (HRAs);
  • Eliminating higher-cost health insurance options;
  • Using less expensive (often narrower) provider networks; or
  • Offering benefits through a private exchange (which can use all of these tools to cap the value of plan choices to stay under the thresholds).

For the most part these changes will result in employees paying for a greater share of their health care out-of-pocket.…

During the markup process for the Affordable Care Act it was common to hear our legislators talk about patients demanding too much health care as an explanation for why our health care spending was so high. They blamed health plans that provided extra-rich benefits – plans they labeled Cadillac plans. The problem is that their premise was wrong.

These supposedly extra-rich benefits were merely standard benefits characteristic of the older employer-sponsored indemnity plans such as Blue Cross and Blue Shield. These were not plans with Cadillac benefits but rather they were plans with standard benefits, but benefits that are now provided at Cadillac prices because of our failure to adopt a health care financing system that would slow the rate of health care inflation.

In recent decades, plan purchasers in the individual market became less able to afford the high premiums commanded by the ever-increasing health care costs. In order to keep their premiums affordable, insurers reduced benefits and increased patient cost sharing, making health care less affordable even for those who were insured. Medical debt became a significant contributor to personal bankruptcy and having insurance often no longer prevented it.

Our legislators, after being spoon-fed by lobbyists and the policy community, decided that these inferior plans on the individual market would become the new standard, and the more traditional plans that provided more effective coverage would suddenly become Cadillac plans.

Thus the advent of the high-cost plan tax (HCPT) – often referred to by the misnomer, Cadillac plan tax – a 40 percent tax on plan costs above a certain threshold. This tax was intended to disincentivize the selection of full coverage plans. By having out-of-pocket money at stake with less comprehensive coverage, patients would be forced to decide which of their medical problems they would want managed and which they would decide to live with (or die from). What a terrible way to reduce spending.

In retrospect, both Republicans and Democrats in Congress have decided that this tax should be repealed, but for different reasons. Republicans are simply opposed to any taxes, and Democrats are concerned about additional tax burdens on lower income individuals with employer-sponsored plans that provide reasonable coverage (assuming the tax is paid by forgone wage increases). Hurdles to the repeal of this tax include reluctance to compensate for the loss of these government revenues by either assessing new taxes (Republicans opposed) or by cutting spending on other programs (Democrats opposed), plus a reluctance for a highly polarized Congress to work together on anything.

The important policy issue is not the tax, it is the decision to control spending by erecting financial barriers to care through the design of the insurance product – consumer-directed health care. This prevents patients from getting care that they should have while exposing them to financial hardship. Instead we should be providing everyone with prepaid health care while controlling spending through more humane, proven policies that are in use in many other nations. Of course, these are the policies that are inherent in a well-designed single payer national health program.

Forget the Cadillac imagery. Let’s talk about providing affordable health care for everyone.