Cadillac Plan Disguised in Chevy-Clothing–High Deductible Health Plan

The Cadillac tax (officially the High Cost Plan Excise Tax) is supposed to apply a tax on overly generous, employer-sponsored health insurance plans (the so called Cadillac plans). A Cadillac health insurance plan therefore is a high cost  (and overly generous) health insurance plan .  A Chevy health insurance plan is a lower cost (and less generous) health insurance plan.

cadillac health insurance plan

The Overly Generous Taxpayer

Before I can explain what a Cadillac Plan Disguised in Chevy-Clothing means, I have to answer one important question; namely, who exactly is overly generous in paying the “high cost” of employer-sponsored health insurance?  Because your employer subsidizes health insurance premiums, you might think that it is the employer who is overly generous. It is not the employer. They balance the total compensation package (wages, health benefits, pensions, etc.) as needed to attract qualified employees and strive to pay the minimum needed to achieve this goal.  It is, in fact, the American income taxpayer who is overly generous with employer-sponsored health insurance. The American taxpayer subsidizes this benefit for qualified  individuals and their employers to the tune of $250 billion a year.  All money spent on health insurance premiums (or contributed to medical savings accounts) for this employer-sponsored health benefit is tax exempt from income, Social Security, Medicare, and Federal Unemployment taxes.

250 billion dollar lost revenueThis taxpayer-subsidy is not tied to income (in fact, high income individuals receive higher subsidies). So when our government is looking for an extra $250 billion to fund Medicare, Medicaid, or subsidies on the Health Insurance Marketplace, this $250 billion is looking more and more like the place to mine for riches. Voile! The Cadillac tax is born!

High Deductible Health Plan—The Cadillac Health Insurance Plan?

Officially, the Cadillac tax is paid by the health insurance coverage provider–the insurance company (for fully insured plans), the person who administers the plan benefits (for self-insured and government employee plans), or the employer (for HSA-qualified High Deductible Health Plans). In the end, the employee  will be paying the tax in higher premium costs or reduced wages (the groups who pay the tax will undoubtedly pass it down to the employee).  While the Cadillac tax doesn’t start until 2020, employees are already feeling its pain in their workplace health benefits because employers are preparing for the tax now. How?  In order to reduce the cost of health insurance premiums, employers are moving employees to High Deductible Health Plans (HDHP).  The premium price for the HDHP is about 15% lower than premium price for a Preferred Provider Organization  (PPO) insurance plan. The premium price of the HDHP is lower because it is designed to shift health costs onto the healthcare consumer and away from the insurer (or employer if he is self-insured) in the form of higher cost-share.   Taking into account JUST the cost of the health insurance premium, our employers and government have made the following “total picture” and flawed assessments

flawed-Govt-and-Employer-Assessment-Cadillac-Tax

For this assessment, our government officials are not considering the total cost to the American taxpayer ($250 billion per year), just the cost to individual government programs (subsidies in the Health Insurance Marketplace are only for health insurance premiums). Low cost-share plans are the health insurance plans that most employees have had for the past 30+ years (like Preferred Provider Organization plans) before employers started switching to High Deductible Health Plans.

What Do I Mean by “Cadillac Plan Disguised in Chevy-Clothing”?

Let us now look at the concept of high cost (overly generous) health plans from the American taxpayers’ viewpoint.  In an earlier blog post featuring a Cadillac tax calculation for two 2016 Federal Employee Health Benefit (FEHB) plans, I have shown that a lower premium, High Deductible Health Plan (HDHP) is in fact more “generous” than a Preferred Provider Organization (PPO) plan when the maximum tax-exempt medical savings account contributions allowed by law are added to the cost of the health benefit!  This puts a new spin on the concept of high cost (overly generous) health insurance plan that our government is not advertising.

When we include all tax exempt costs associated with the employer-sponsored health benefit, the definition for Cadillac health insurance plan (from the taxpayers’ perspective) becomes…

taxpayer assessment of cadillac taxThe overly generous taxpayer-subsidized medical savings accounts (Health Savings Account (HSA) or Health Reimbursement Arrangement (HRA))  associated with the High Deductible Health Plan (HDHP) turn this Chevy Plan into the Chevy Plan with All the Options for individuals who take advantage of the maximum contributions allowed by law. When our government does not acknowledge the overly generous nature of this Chevy Plan with All the Options, it is helping to market a Cadillac Plan Disguised in Chevy Clothing.

One might ask why our government is encouraging this Cadillac Plan Disguised in Chevy Clothing (the High Deductible Health Plan)? The answer lies in the fact that our government’s first priority is always with individual government program sustainability and not with the overall well-being of the taxpayer. Funding for Health Insurance Marketplace subsidies are based on health insurance premium costs—the higher the premiums, the higher the subsidies required and therefore the higher the government funding needed. The increased cost-share to individual employees for the High Deductible Health Plan is the price our government is willing to pay for reduced health insurance premiums and lower subsidies. It is politically easier to make individual Americans pay more than it is to reduce the health insurance premiums by bringing down total health spending (we do spend twice what other industrial countries spend after all).

Employers have little to no control over costs charged by medical providers and therefore they have only one way to decrease their costs for the healthcare benefit they provide; namely, to shift the costs onto their employees. They will continue to do so until key employees leave for better benefits elsewhere. The Cadillac tax is an added cost and therefore must be avoided if possible. If that requires that the employer replace low cost-share insurance with high cost-share insurance, then he will do so. The employer also does not care that the American taxpayer is being overly generous (to the tune of $250 billion per year) in funding the employee health benefit.  He, in fact, welcomes it. The more the taxpayer subsidizes, the less demanded of him.

If every employee with a High Deductible Health Plan took advantage of the maximum allowable Health Savings Account (HSA) or Health Reimbursement Arrangement (HRA), then every employee would benefit. This is not the case. High-income and older tax filers both established Health Savings Accounts (HSAs) and fully funded them at least four times as often as did low-income and younger filers, who do not have the extra money to shelter in these accounts. These highly compensated Americans view the HSA simply as a second taxpayer-subsidized retirement account. After the age of 65, people can use HSA funds for non-medical purposes without penalty.

The Bottom Line

From the taxpayers’ perspective, a Cadillac health insurance plan is not the low cost-share health insurance plan that employers are getting rid of, but it is the high cost-share, High Deductible Health Plan (HDHP) with maximum tax-free, medical savings accounts contributions. For those of us taxpayers who do not contribute the maximum tax-free medical savings account contributions year after year, the High Deductible Health Plan (HDHP) is simply an overly generous Cadillac Plan Disguised in Chevy Clothing. This plan does not forward “Affordable Health Care and Beyond for All Americans” but rather SHIFTS the cost of healthcare onto employees, their dependents, and taxpayers.

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