Thursday, May 30, 2013

The Obamacare Shell Game: The Crash that is Coming for Cadillac Insurance (Part 2)

Yesterday, I discussed the subsidies that will be paid to health insurance companies over the next two years, which will make premiums for health exchanges look reasonable.I pointed out , it is just a shell game. The costs will be absorbed by other health insurance organizations and by the government (that is you the taxpayer). Once the subsidies are removed, premiums will likely soar.

Today, I want to discuss, so-called "Cadillac insurance" and what is likely to happen to those covered with health insurance by their employer. NYT has a pretty good introduction:
Say goodbye to that $500 deductible insurance plan and the $20 co-payment for a doctor’s office visit. They are likely to become luxuries of the past[...]Expect to have your blood pressure checked or a prescription filled at a clinic at your office, rather than by your private doctor.

[...]blame — or credit — the so-called Cadillac tax, which penalizes companies that offer high-end health care plans to their employees.[...]

Bradley Herring, a health economist at Johns Hopkins Bloomberg School of Public Health, suggested the result would be more widely felt than many people realize. “The reality is it is going to hit more and more people over time, at least as currently written in law, ” he said. Mr. Herring estimated that as many as 75 percent of plans could be affected by the tax over the next decade — unless employers manage to significantly rein in their costs. [Say what? Are 75% of people driving Cadillacs?-RW]

The changes can be significant for employees. The hospital where Abbey Bruce, a nursing assistant in Olympia, Wash., worked, for example, stopped offering the traditional plan that she and her husband, Casey, who has cystic fibrosis, had chosen.

Starting this year, they have a combined deductible of $2,300, compared with just $500 before. And while she was eligible for a $1,400 hospital contribution to a savings account linked to the plan, the couple is now responsible for $6,600 a year in medical expenses, in contrast to a $3,000 limit on medical bills and $2,000 limit on pharmacy costs last year. She has had to drop out of school and take on additional jobs to pay for her husband’s medicine.[...]

“It’s really one of the most significant provisions” in the Affordable Care Act, said Jonathan Gruber, the M.I.T. economist who played an influential role in shaping the law. “It’s focusing employers on cost control, not slashing,” he said. 
Cynthia Weidner, an executive at the benefits consultant HighRoads, agreed that the tax appeared to be having the intended effect. “The premise it’s built upon is happening,” she said, adding, “the consumer should continue to expect that their plan is going to be more expensive, and they will have less benefits. ”[...]

Although the tax does not start until 2018, employers say they have to start now to meet the deadline and they are doing whatever they can to bring down the cost of their plans. Under the law, an employer or health insurer offering a plan that costs more than $10,200 for an individual and $27,500 for a family would typically pay a 40 percent excise tax on the amount exceeding the threshold.[...]

“You’re getting taxed at 40 percent,” explained Larry Boress, the chief executive of the Midwest Business Group on Health. “That kind of hit is something that is viewed as untenable by employers in general.”

What's really going on is a bizarre shell game. Many firms offer significant healthcare coverage because there are tax advantages to doing so. Peter Schiff noted, in 2009, the perverse incentive system:
The real tragedy is that the current bill does nothing to restrain the forces that are propelling healthcare costs into the stratosphere, namely: regulatory bans of insurance competition, the out-of-control medical malpractice industry, federal programs and subsidies, and a tax code that favors a third-party payment system — which alienates the patient from the cost of his care.  
Thus, instead of fixing the system by reducing the healthcare dependence that favors a third party system,  by cutting the link between businesses and health insurance and recognizing this will increase the tax burden on businesses, a burden which should then be reduced by lower taxes on businesses elsewhere, Obamacare breaks up part of the third party system by using a different formula. Instead of reducing taxes for firms elsewhere, Obamacare actually charges firms more in taxes if they plan to continue with a so-called "Cadillac insurance" plan.

Follow, the pea under the shell, your deductible is likely to go up significantly, if you have quality health insurance through your employer. Otherwise your employer will have to pay a huge excise tax penalty (40%) for providing you with "Cadillac insurance."

In bizarre fashion, this may cut out part of the third party system. Jonathan Cohn in The New Republic explains:
The story is about Obamacare's "Cadillac Tax," which isn't really a tax so much as a convoluted attempt to undo an existing tax break. To simplify things a bit, the government today doesn't treat employer health insurance as taxable income. That makes a dollar of insurance worth more than a dollar of wages, giving both employers and employees incentive to load up on insurance.
Most economists think that contributes to rising health care costs, since people with more insurance tend to spend more on medical care. The Cadillac tax would limit the value of the tax break, effectively reducing that incentive[...]
Of course, some employers will throw up their hands entirely and not provide any insurance, which will throw many into the various health exchanges, which include one per year no cost preventive medical visits, adding an entire new meaning to third party system insanity.For now there are two things to expect, 1. overtime insurance premiums will increase and benefits will decrease and 2. we haven't seen the last of the moving shell game. Who really knows what else is hidden in the 960 page Patient Protection and  Affordable Care Act?

Part 1 of my discussion on the Obamacare shell game is here.
Part 3 is here.


  1. Today's Cadillac Plan was a dog pan in the 1990's. Both employers and Uncle Sam want to shift the burden to the individual. That can happen by employers dropping coverage altogether or continuing to shift higher out of pocket expenses to the insured(s). End result: the individual pays more.

  2. As for Gruber: