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Lawmakers Weighing Tax on ‘Cadillac’ Health Plans

August 3, 2009 at 12:00 AM EST
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As Congress continues searching for ways to finance a health care overhaul, one option under review is taxing the costliest employer-provided health plans, otherwise known as "Cadillac" plans. After a recap on developments on the health care front, experts discuss the proposal with Judy Woodruff.
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GWEN IFILL: Tonight, taxing benefits. It’s one of the key issues the Senate Finance Committee is grappling with as it tries to craft a bipartisan health care bill.

Betty Ann Bowser begins with this report. Our Health Unit is a partnership with the Robert Wood Johnson Foundation.

BETTY ANN BOWSER, NewsHour correspondent: One idea on the table to pay for health care reform is taxing the most costly of employer-provided health insurance benefits, the so-called Cadillac plans, provided to a small percentage of workers.

Currently, employees who receive their health care benefits through their companies pay no tax on their benefits, but some in Congress are considering taxing insurers or employers if they provide coverage exceeding a set basic cost.

While senators have not laid out any specific numbers yet, here’s one hypothetical example of how the tax might work. If an insurer or employer provided a plan for a worker and his family that costs $22,000, the insurance company or employer might pay a tax on the difference between $22,000 and a base amount to be determined by Congress.

For the purposes of our example, if that amount was set at $17,000, the insurer or employer would pay a tax on the $5,000 difference, and the employer or insurer could choose to pass those costs on to the employee.

Before House members return to their districts for the August break, Speaker Nancy Pelosi told the NewsHour’s Judy Woodruff she’s open to the idea.

REP. NANCY PELOSI, D-Calif., Speaker of the House: I say just put everything on the table, but I think it has to be truly the top of the line. Once you get into sort of the middle income, I don’t think that that is a good idea.

When we talk about at the highest level to have a surcharge or at the highest package, let’s take a look at — insurance package — let’s take a look at it, but there’s a big appetite to insure — to tax the insurance companies.

U.S. PRESIDENT BARACK OBAMA: Your co-payments and deductibles have gone up…

BETTY ANN BOWSER: And although, while campaigning for president last year, candidate Obama was opposed to taxing benefits.

BARACK OBAMA: … that is fundamentally the wrong way to go.

BETTY ANN BOWSER: But President Obama told Jim Lehrer two weeks ago he could support taxing some employee benefits.

BARACK OBAMA: I said during the campaign, when this was raised by John McCain, he had proposed to eliminate completely the exclusion on the taxation of health benefits. I had said that this would be the wrong way to go because it would be too disruptive.

What’s being talked about now, I understand, is the possibility of penalizing insurance companies who are offering super gold-plated Cadillac plans.

I haven’t seen the details of this yet, but it may be an approach that, you know, doesn’t put additional burdens on middle-class families.

BETTY ANN BOWSER: On the Sunday talk shows, Obama administration officials said they wouldn’t rule out a tax hike to pay for health care reform and to help reduce the federal deficit.

But today, White House spokesman Robert Gibbs said there will be no tax hike on the middle class.

ROBERT GIBBS, White House press secretary: Let me be precise. The president’s clear commitment is not to raise taxes on those making less than $250,000 a year.

BETTY ANN BOWSER: Gibbs said the president is scheduled to meet with Senate Democrats tomorrow at the White House.

Defining a "Cadillac plan"

Paul Fronstin
Employee Benefit Research Institute
Many plans cost a lot of money because the group that's being insured is an older group on average, uses a lot more health care on average, because they may be sicker than the typical person, so they would be taxed, as well.

GWEN IFILL: Judy Woodruff picks up the story from there.

JUDY WOODRUFF: As lawmakers ponder whether to tax benefits, we try to understand better how it might work and whom it might affect.

Jonathan Gruber is a health economist at MIT. He was an adviser for several Democrats during last year's presidential campaign.

And Paul Fronstin is the director of the Health Research Program at the Employee Benefit Research Institute.

Thank you both for being with us. And, Paul Fronstin, I'm going to start with you. I think there's general agreement, the average plan, health insurance plan right now, runs around -- you and I were just discussing -- $12,500, $13,000 a year, general agreement. So where do you draw the line? What constitutes a Cadillac plan?

PAUL FRONSTIN, Employee Benefit Research Institute: Right now, policymakers are using a premium as a threshold to define what a Cadillac plan is. They're talking about taxing plans that cost $25,000 or more, or $22,000, some level that's very high.

The issue with that is using an arbitrary number doesn't necessarily mean you're going to be limiting the tax only to Cadillac plans. Many plans cost a lot of money because the group that's being insured is an older group on average, uses a lot more health care on average, because they may be sicker than the typical person, so they would be taxed, as well.

JUDY WOODRUFF: So it might be more expensive, but it doesn't necessarily mean you're getting a whole lot better -- a whole lot more coverage?

PAUL FRONSTIN: Well, the fact is, you may find a group with -- on the same exact health plan that pays half as much as the unhealthy group because the healthy group is healthy, so their premiums are low.

JUDY WOODRUFF: Jonathan Gruber, help us understand where you see the line drawn. If $13,000 or so is the average family insurance plan, now, what level does it reach to become a Cadillac, gold-plated plan that might be taxed?

JONATHAN GRUBER, Massachusetts Institute of Technology: Well, I think Paul's right here, that there's no right answer, but I think if you chose a line of around $20,000, that would say that only the 10 percent most expensive health plans in the country would be included in this, would lose the tax break they now receive.

And I think Paul raises legitimate concerns about reasons why it's more expensive in some states or for certain groups that are older, but you can adjust for those in setting up the tax exclusion, setting up this new tax, by adjusting it for higher-cost regions and more expensive groups.

Mapping out the tax

Jonathan Gruber
Mass. Institute of Technology
So the question you have to ask is, are you willing to take away a tax break to the 10 percent of Americans with the most expensive health insurance plans to provide the financing that allows 47 million uninsured to get some coverage?

JUDY WOODRUFF: Well, let me -- before we get into that, Jonathan Gruber, how would it work? Explain who would be taxed, how much would they be taxed? Do we have answers to those questions?

JONATHAN GRUBER: We don't have precise answers, but we can say roughly the idea would be that your employer would get a note from the government saying that, if -- or the insurance company would get a note from the government saying that, if the insurance plan costs more than some level -- let's say $20,000 -- then the difference between the amount and that $20,000 is taxable.

So if the insurer has a $25,000 plan, then they'd be taxed at some rate -- some are talking about a rate of about 35 percent on the difference between $25,000 and $20,000. This would really only affect the very most expensive health plans; this is not going to affect most workers.

JUDY WOODRUFF: And, Paul Fronstin, this question of who would be taxed, we heard in Betty Ann's report, theoretically, it goes to the insurance company or the employer, but then there's a question of whether that gets passed on to the employee.

PAUL FRONSTIN: Right. And there's a question of how it gets passed on to the employee.

If it's the insurance company that's being taxed, they may in turn only increase premiums for those plans that are being taxed, meaning the highest-cost plans. They may also find that they -- you know, they may spread the tax across all their plans. We don't know how they're going to react yet.

If employers are taxed, then, of course, they're going to try and pass it along to their employees as best they can. To the degree they can right now with a 10 percent -- you know, pushing 10 percent unemployment rate, it's easy to do. If it was late 2000, when we were at 3.8 percent, wouldn't be so easy.

JUDY WOODRUFF: Good idea, bad idea?

PAUL FRONSTIN: Depends upon the goal. If you want to raise the revenue, it will raise revenue. If you want a fair tax, you're going to tax the people with Cadillac plans, but you're also going to be taxing people that are more expensive simply because of their health status.

JUDY WOODRUFF: Jonathan Gruber, good idea or not?

JONATHAN GRUBER: I think it's a terrific idea. I think the way to look at it is to think about what you're doing with the money. You're using the money to provide universal coverage.

So the question you have to ask is, are you willing to take away a tax break to the 10 percent of Americans with the most expensive health insurance plans to provide the financing that allows 47 million uninsured to get some coverage? It seems like that's the kind of trade-off we should be able to make as a society.

JUDY WOODRUFF: What about that argument?

PAUL FRONSTIN: Well, certainly, you know, if our goal is to cover the 47 million uninsured, the money has got to come from some place. So we're definitely going to raise money by imposing some kind of tax.

You know, it's a question of fairness. Do you want to simply tax the Cadillac plans? Or do you also want to start by including people that are older, on average, that have higher health care expenses on average, as well?

You're talking about people with diabetes and heart disease and various cancers, the people that use the most health care. They're using the most health care and cost the most because they're sick.

JUDY WOODRUFF: There is that question, isn't there, John Gruber?

JONATHAN GRUBER: Yes, I think what you have to remember is, we can adjust this cap for the age of the workers. Employers know their workers' ages, and insurers know the age of the people enrolled in the plan. So the cap that's imposed on insurers could vary by the age of workers in the plan. You could have a higher cap for plans with older workers.

Now, you can't vary it for the illness of workers. But, remember, in this new world we're moving towards with reform, most firms will no longer pay based on the illness of their workers, but rather just the age of their workers. And so, therefore, if you had a cap that was adjusted based on the age of the workers, you could take care of the problem that Paul is rightly concerned with.

Taxing all insurance premiums

Jonathan Gruber
Mass. Institute of Technology
If I work at a firm that doesn't offer health insurance, I don't get a tax break. If I work at a firm that offers health insurance, I get a tax break. So it's discriminatory. The richer I am, the bigger tax break I get, so it's regressive.

JUDY WOODRUFF: The broader version of this, as we heard in Betty Ann's report, Paul Fronstin, is to tax all insurance premiums. What are the pros and cons of that, compared to this Cadillac idea?

PAUL FRONSTIN: Well, certainly, there's more fairness involved if you're taxing all plans and you'll raise a lot more money if you do so.

JUDY WOODRUFF: How much more money are we talking about?

PAUL FRONSTIN: Billions. You could -- you know, I think they were talking...

JUDY WOODRUFF: Hundreds of billions or...

PAUL FRONSTIN: I think they were talking about, if I'm not his mistaken, $500 billion over 10 years. If there was some sort of tax cap whereas when they're looking at a $25,000 cutoff, it's closer to $90 billion or $100 billion over 10 years. So it's quite a difference.

JUDY WOODRUFF: And you in favor of that? Is that a good idea, bad idea?

PAUL FRONSTIN: Well, again, there's pros and cons to any kind of tax change. Certainly, it will raise revenue. It will help pay for health coverage for the 47 million people who are uninsured. But at the same time, some people are going to see their taxes go up who may not be able to afford it.

JUDY WOODRUFF: Jonathan Gruber, better idea to broaden this out and tax all health insurance premiums or to keep it on those first-rate Cadillac gold-plated plans?

JONATHAN GRUBER: So I think -- let's look at three levels. One level is your first idea, which is to tax all plans. That would actually raise over $2 trillion over the next decade, which is much more than we need. It's money that actually could be used for lots of other social needs in society, and the truth is, I would advocate that.

I think that you have to remember what we're talking about is, right now, we've got a system where, if I work at a firm that doesn't offer health insurance, I don't get a tax break. If I work at a firm that offers health insurance, I get a tax break. So it's discriminatory. The richer I am, the bigger tax break I get, so it's regressive. And it's a tax break that induces me to spend extra on medical care, because I'm playing with the government's dollars rather than my own.

So, yes, I would advocate as broad a removal as possible, but I think it really is a question of the politics. You just heard Secretary Gibbs talk about -- you just heard the press secretary talk about not tax the middle class. A broader would hit the middle class more.

JUDY WOODRUFF: Very quick response to that?

PAUL FRONSTIN: No, I think Jonathan's right. The one thing I would question is, will people who use health care a lot because they have diabetes, heart disease, various cancers, use less health care as a result of their health plan being taxed, which in turn means that they have less comprehensive care, higher deductibles, higher co-payments? That's the open-ended question.

JUDY WOODRUFF: Paul Fronstin, Jonathan Gruber, thank you both.

PAUL FRONSTIN: Thank you.

JONATHAN GRUBER: Thank you.