One piece of the Affordable Care Act (ACA) mandated that health insurance plans for individuals with yearly premiums exceeding $10,200 or family health insurance plans with premiums exceeding $27,500 would be subject to a tax. The tax originally was set to start in 2018, but has since been postponed to 2022. The Kaiser Family Foundation projected that one out of five (21%) U.S. employers will have at least one health plan subject to the tax in 2022. Further, this percentage is projected to grow over time. Another question is, will this tax increase or decrease out-of-pocket cost?
First, let’s look at the consumer perspective. One might think that consumers would move from Cadillac plans to ones that cover fewer services. Would these less expensive plans increase out-of-pocket payments? Although premiums would fall, out-of-pocket costs would rise. This is because less expensive plans may not cover as many services. If this was the case, consumers would have to pay for more out of pocket.
Consider the case where consumers choose plans covering the same services. How would suppliers react? Likely they would also increase out-of-pocket costs. To avoid the Cadillac tax, health insurers would need to reduce premiums. If they don’t reduce the types of services covered, then the only way to reduce premiums is either to reduce profits (unlikely), reduce administrative costs (often difficult to do) or increase cost sharing.
The UC Berkeley Labor Center agrees with this assessment. They write:
…the most likely outcome of the excise tax is that workers will bear the brunt of this tax through increased copays and deductibles. Surveys have shown some employers have already increased cost sharing in anticipation of the tax. Research indicates that higher out-of-pocket costs for workers will not result in the optimal amount of health care consumption or significant improvements in the price or quality of care. Rather, further shifting costs to workers threatens to reduce access to care and financial protection for workers and their families, especially low-income individuals and those with significant health needs.
In short, the Cadillac Tax most likely impact is reducing premiums and increasing out-of-pocket costs for individuals with the most generous types of insurance.
It seems that the problem with the Cadillac tax is not so much in the concept itself as in the lack of indexing. Rather than taxing plans costing above a certain dollar amount, it might have been more effective to tax outlier plans, that is, ones that are, say, more than a certain % more expensive than the average premium. Using the standard deviation of the cost of premiums, this could be chosen to avoid always taxing the most expensive plans, even if costs of plans decreased, and achieve the desired effect of unfairly subsidizing plans that are overly generous.