What is the Obamacare Cadillac tax?
The Cadillac tax is a 40 percent excise tax applied to plans that exceed the number of benefit levels permitted in the Affordable Care Act. The Cadillac tax is a controversial part of Obamacare because it seems to take away benefits.
The tax is an excise tax on the provider of the insurance. It does not reduce the earnings of the employee beneficiaries, but it discourages such overbroad policies. Comparison shopping is the ideal way to assess health insurance plans. Consumers can use their priorities and search for the best values.
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Health Care and Employment
There is a strong history of employment and health coverage that enhances the worker’s compensation. During the wage and price controls in the early 1940s, the federal government excluded health benefits from wages. Companies used health benefits to compete for workers.
Since WW II, employment and health care have combined to help employers get and keep the top talent they need. A generous health plan is worth thousands USD in income to an employee that might otherwise have to go out on the open market to find similar protection. The Affordable Care Act connects employers and health coverage.
What is a Cadillac health plan?
Cadillac plans provide very high levels of coverage and a wide range of benefits with little or no out-of-pocket expenses. Many employers and unions negotiated generous health coverage. These generous plans had the effect of extra income for the employee and made employment more attractive.
The Cadillac, or “Super Platinum plans”, occurred in some industries more than others such as the film industry. Some notable companies have lavish health plans for their executives and employees such as Koch Industries.
Cadillac plans encourage high usage because they cost the beneficiary so little. The beneficiaries may use doctors, tests, specialists without regard to price or the total amount of spending.
Impact of the Tax
Health care resources are abundant in the US when compared to most other nations. There are regions in the US that are not well-served. There are many Americans that lack regular medical care because of the costs.
The Cadillac tax would fund the Affordable Care Act and make more people insurable by costs subsidies, lower out-of-pocket costs, and overall limits. Starting in 2018, the Cadillac tax applies to the below-listed dollar amounts.
- Benefits above $10,200 for individuals
- Benefits above $27,500 for family coverage
The Cadillac tax won’t go into effect until 2018. There is a good chance of political action to repeal or change it drastically. In the interim, the IRS published information for the program. The Internal Revenue Service issued rules for the Cadillac Tax so that businesses could prepare for 2018.
Policy Behind the Cadillac Tax
Excessive benefits include extensive coverage with no or small copays. Excessive benefits as defined by the Affordable Care Act have some harmful consequences for those not covered by the plan. Cadillac plans can distort the healthcare market, create shortages, and encourage the unnecessary use of resources including doctor’s and hospital visits and skilled medical care.
Lavish plans inflate the demand for medical services, and medical professionals raise prices in response to high demand. The lavish plan, therefore, raises the price of medical care for everyone. In a sense, there is a balancing role for the consumer to play. Ideally, consumers should get all the medical they need, but they should not overuse medical care just because it costs nothing.
- Reduces available resources in a community or region
- Raises prices for services
- Encourages overuse of resources
- Leaves no incentive to find low prices
Taxes Help Those in Need
The proceeds from the excise tax would benefit people in need of medical care. The Cadillac tax is the largest source of funding within the Affordable Care Act based on preliminary estimates. The estimates assumed that high-end policies would continue.
The dynamics of the health care marketplace changed after the rollout of the Affordable Care Act. The proceeds of the excise tax would help Marketplace policyholders, Medicare, and Medicaid users too.
Shaping the Marketplace
The existence of the Cadillac tax may move some insurers to stop writing policies that exceed the guidelines. The market for a plan that will cost the sponsor an additional 40 percent in taxes is unlikely to materialize. The Cadillac tax provided a reason for employers that wished to switch employees into other forms of coverage.
The frequent option is a high-deductible plan with a health savings account or employer arrangement. Businesses fear that dropping health coverage for employees would put them at a competitive disadvantage with other firms for talent. Businesses also understand the rewards from the investment in employee health.
Collective Bargaining and the Cadillac Tax
In some industries, unions struggled for years to gain exceptional benefits and coverage for their members. The results were wages and benefit packages that reflected the years or decades of negotiated arrangements. The Cadillac tax strikes at the heart of these hard-won deals.
The interference with collective bargaining may be the unintended consequence of the provision, but the impact would be immediately felt at the bargaining table.
Employers and insurers would seek to pass on the excise tax to employees and the public.
Braking the Price Inflation Cycle
The Cadillac tax would initially affect few people. One estimate was as low as six percent. In an inflationary period, insurance prices would rise until many more plans would reach the threshold for the Cadillac tax.
With a 40 percent payment as an incentive, the economists believe that prices would turn down and insurers would find lower priced products for employers. Employers have choices including raising deductibles and offering assistance with expenses.
The Cadillac Tax Tries to Even the Playing Field
The overall impact of Cadillac plans is to drive up the price of medical care. In some markets, it may reduce the available medical services by price discrimination. The lavish plans with little or no out-of-pocket expense create a consumer behavior that is indifferent to prices paid for their medical care.
They do not shop for the best price and don‘t hesitate to use medical services for the slightest reason.
The Cadillac tax would plow back into the public funds for those with lower incomes to increase the benefits and financial assistance available in the Obamacare Marketplace.
Comparison shopping is the proven method for finding high-value health insurance coverage. Using comparison shopping one can go far beyond premiums to find the true costs of insurance.
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