Ask Nancy: How will the "Cadillac plan" tax affect my coverage?

Question: I heard on a financial radio program that so-called "Cadillac insurance policies" costing $10,000 or more per year per individual will be taxed at a whopping 40 percent to help pay for the new programs and benefits offered under the law. My educated guess is that the majority of policies offered through employers cost at least this much.  The CFO at our small manufacturing company told me that, given current increases in insurance costs, we will soon reach this limit. At that time, he said, it would literally bankrupt our company to offer the same level of insurance we have been receiving. Instead, we will be forced to switch to a high-deductible, catastrophic illness plan, coupled with a Health Savings Account. It appears the "next step" for my family and millions like ours is to pay more money for much less health coverage. Or do I overstate the case?

Answer: You don't so much overstate the case as mix a case of apples with a case of oranges.

As the guy who writes the checks for the premiums, your CFO knows all too well that health insurance costs have been increasing much faster than inflation (or wages) for close to a decade now. More and more businesses have been forced to switch to high-deductible plans in order to keep premiums at a manageable level. You're actually lucky your company hasn't already done this.

But here's the important thing to understand: these cost and premium increases have absolutely nothing to do with the new health reform law. They were a problem long before health reform was a gleam in Congress's eye, and were going to continue—and maybe even accelerate—if reform had not passed. That's your case of apples.

The health reform law's tax on expensive health plans is not a cause of high premiums, it's one of a number of provisions in the bill meant to reduce those premiums. In other words, part of the case of oranges.

Here's how the tax is going to work. Starting in 2018, health plans are going to be subject to a 40 percent tax on "excess" benefits, defined as plans costing more than $10,200 a year for individuals and $27,500 for families. So if your individual plan costs $11,200, the tax will be 40 percent of the excess $1,000—that is, $400—not, as you seem to have feared, 40 percent of the entire plan value.

The threshold for a Cadillac plan will in some cases be higher, such as for high-risk occupations like firefighting or mining, or for groups with a lot of older workers. If health care costs rise faster than anticipated between now and 2018, the threshold will also be raised accordingly.

(By the way, the average employee plan today costs nowhere near as much you guessed. According to the authoritative annual employee benefit survey by the Kaiser Family Foundation—a nonpartisan research group with no connection to the Kaiser Permanente HMO—in 2009 the average employer health plan cost $4,824 a year for an individual and $13,375 for a family.)

What effect this new tax will have on employer group plans is anybody's guess, say insurance experts we've consulted, because by 2018, health reform will have changed the whole system profoundly. One important change will be that businesses with fewer than 100 employees will be able to buy coverage through the new statewide health exchanges that may well be less costly than equivalent coverage today.

With such a long lead time, it is likely that employers and insurers will try to get the cost of their plans below the tax threshold. They may increase copays and deductibles (as happens today), but it's also possible they'll figure out other ways to save money, such as improving preventive care and management of expensive chronic diseases like diabetes.

—Nancy Metcalf, Senior Program Editor

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