The Cadillac Tax: Will It Help or Backfire?

Janet Young , MD

Vice President of Operations, Emergency Medicine

Published June 10, 2013

We have the best healthcare in the world. Yet so many hospitals are struggling to make ends meet. And there are too many people in the US who do not have the money to be able to buy health insurance. How can we make our excellent medical care available to everyone who needs it? I think the Affordable Care Act is an important step in this direction, even if it is not perfect. It is a clear indication that the problem is at the top of our national agenda, and that we are trying to solve it.

One of the imperfections is the Cadillac tax provision. It’s a 40% tax on employers for healthcare plans which go above $10,200 for individual coverage and $27,500 for family coverage, adjusted for consumer price inflation. It is slated to go into effect in 2018.

Until this tax begins, employers can attract employees with the tax-free perk of luxury health insurance policies. The tax is intended to create more fairness across the employment spectrum. While well intended, however, the net effect of this tax is likely to be a negative one. At the current rate of healthcare inflation, approximately 75% of insurance plans will be above this level in the next decade, and thus subject to the tax. In order to avoid this tax, employers are likely to reduce benefits. So the question is: how will this affect our patients and providers?

On the one hand, it could cause our Cadillac patients to be more cognizant of and concerned about costs, and could discourage unnecessary visits to doctors and hospitals. If it reduces utilization, it would reduce costs. On the other hand, however, it could also discourage necessary visits. It could motivate people, for example, to wait too long to get that chest pain, stomach pain, or sudden numbness checked out, and thus could lead to more deaths from heart attacks, appendicitis and stroke. Who would really save here? The Cadillac tax is a cost shifting scheme. In some ways, it is robbing from Peter to pay Paul. It’s an attempt to shift health care costs to employees to bring forth awareness, but the issue is whether it will change behavior in a positive or a negative way.

A second tax that may be counterproductive is a tax on employers who do not provide any health insurance at all to their employees. As the costs of health insurance grow, there may come a point where companies will prefer to save money by paying that tax instead of providing health insurance. So not only will companies be financially motivated by the Cadillac tax to supply only bare-bones insurance, they may also be financially motivated to provide no health insurance at all and pay a fine. In that case, everyone will need to turn to the health exchanges for health insurance. But without a reversal in the growth of health care costs, will competition among insurance companies in the health exchanges be enough to make healthcare affordable?

I think that neither the Cadillac tax nor the tax on non-provision of insurance will solve the problem of healthcare costs in the United States. They are simply too high, and growing.

The solution will be to reduce the medical cost inflation rate, which is something we have so far failed to do. How? Perhaps it would be fair to expect wealthy patients to pay a higher deductible than patients with less money. Perhaps we could find a way to standardize and reduce the costs of medications. Today, I can go to CVS and pay $138 for Augmentin, and then find the same drug at Costco for $13. In Sweden the law is that pharmacies must all dispense the cheapest form of a drug. Maybe we could try Sweden’s solution? Or perhaps it would create savings to standardize the costs of medical procedures across the country so that a procedure costs the same in New York as it does in Peoria.

Regardless of these bumps along the road, I do feel optimistic that our society is questioning the status quo, and I am confident that we will take care of all the people who need medical care in the future.

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