The “Cadillac tax” scam

January 18, 2010

Helen Redmond and Alan Maass explain what's wrong with the proposal for a "Cadillac tax" on expensive health insurance policies.

IT'S HARD to keep track of all the different ways that the Democrats' health care "reform" legislation, if passed, will make workers suffer and guarantee more profits for Corporate America. Now, thanks to a surrender by organized labor, there's another in place--the so-called "Cadillac tax" on expensive health insurance plans.

Last week, top labor leaders announced that they'd reached a deal with the Obama White House and Democratic in Congress--guaranteeing that a proposal in the Senate's version of health care legislation for an excise tax on expensive insurance plans would make it into the final bill that Congress will take up in the coming weeks.

The Senate bill would require insurers to pay a 40 percent tax on the cost of health policies in excess of $23,000 for a family and $8,500 for an individual. Supporters claimed the tax would raise almost $150 billion over 10 years, or about one-fifth the total cost of health care legislation.

For months, union leaders protested the imposition of any tax on health care benefits, rightly seeing this as an attack on unions and anyone who has decent health insurance through their employers. Any excise tax imposed on insurers would be passed on, the spokespeople of labor pointed out, ultimately making things worse for workers. Unions threatened to organize members to oppose any bill containing the "Cadillac tax."

Barack Obama, Harry Reid and Nancy Pelosi announce the outcome of negotiations on a final health care bill
Barack Obama, Harry Reid and Nancy Pelosi announce the outcome of negotiations on a final health care bill

But after a few days of closed meetings with White House officials, all the tough talk dissipated.

Instead of pulling a Joe Lieberman or Ben Nelson and promising to defeat the legislation unless their demands were met, union leaders accepted the "Cadillac tax" with some minor modifications.

The threshold for the tax will increase marginally--to $24,000 for a family plan and $8,900 for individuals--and there are provisions to raise the threshold further for policies covering employees in high-risk occupations or in high-cost states, and groups that have a disproportionately large number of older or women workers.

The key concession to unions was an exemption until 2018 for any insurance plan that covers state and local government workers, or that is part of a union-negotiated collective bargaining agreement--in short, a reprieve for the lucky few.

With that meager gain, organized labor threw its support behind whatever the Democrats come up with--and gave up on the proposal in the House version of health care legislation: a 5.4 percent income surtax on households with more than $1 million in annual income or individuals making more than $500,00 a year. This proposal would raise $460 billion over 10 years.

As Labor Notes journalist Jane Slaughter wrote of the unions' agreement with the White House, "This part of the deal...will be universally seen as a giveaway to a special interest, just like Sen. Ben Nelson's exclusive deal for Nebraska." Meanwhile, workers who aren't represented by a union will be left to the mercies of the insurance industry and their employers.

AFSCME President Gerald McEntee declared, "Negotiations of this kind are obviously filled with compromises on both sides." But labor has done all the giving up. The final bill will contain the modified "Cadillac tax" that unions once vowed to oppose--and won't contain a genuine "public option" for the uninsured or requirements for employers to provide insurance, both of which labor used to insist were non-negotiable.

THERE ARE so many things wrong with the "Cadillac tax" that it's hard to know where to start.

For one thing, just because a health insurance plan has a Cadillac price doesn't mean it offers Cadillac benefits. "The dirty little secret under the hood is that less than 4 percent of the variation in the cost of current health care plans has to do with how many benefits they provide," wrote Robert Reich, the former labor secretary and critic of the Democrats' current health care proposals.

High-cost plans are the result of how the insurance industry uses so-called "risk pools." To start with, insurers use demographic factors--age, gender and type of industry, among others--to set premiums. Industries with an older workforce (autoworkers), or disproportionately more women workers, or where employees face health and safety risks (firefighters, for example) pay higher premiums because their employees are liable to use more health care resources.

But there are other factors involved, too. Geography is one--according to Milliman, an actuarial accounting firm, the average family policy in Miami costs more than $20,000 a year, compared to the average family policy in Phoenix at less than $15,000.

Smaller employers are also at a disadvantage because they don't have any bargaining power with insurers. They pay, on average, 16 percent more in premiums than bigger employers for the same benefits.

In some ways, the deal negotiated by the unions makes matters worse--the "carve-outs" for high-risk professions and groups that have disproportionately older and women workers reinforce one of the sickest aspects of the private insurance system: the use of risk categories to single out those who need and use health care the most.

The direct result is that the Cadillac tax will affect plenty of people with Chevy-level insurance plans.

When he was still an opponent of the Senate provision, AFL-CIO President Richard Trumka pointed out that 31 million insured employees would be hit by the excise tax--and most of them "are not union members." They will still be victims under the sellout agreement that Trumka negotiated with the White House.

Because health care costs are rising much faster than the rate of inflation, some plans that avoid the tax at first will cross the threshold in years to come. Before labor leaders struck a deal with the White House, unions for federal government workers released two reports showing that over time, the excise tax would hit significant numbers of their members.

One of the studies found that Blue Cross/Blue Shield Standard plans--which cover nearly half of all federal employees--would face an excise tax in the first year for individuals and the third year for families. A second report that examined 11 Federal Employees Health Benefits Program plans, covering 75 percent of federal employees, showed that for individual coverage, five of the 11 plans would be hit with the excise tax within three years and for family coverage, four plans would face it within six years.

IT'S A certainty that insurance companies would pass on the excise tax in the cost of premiums. So the incentive for employers will be to seek out policies that keep the cost of premiums just below the threshold where the tax hits.

Supporters of the "Cadillac tax" think that this is a good thing--that it will serve as a way to contain insurance costs, and thus health care costs in general. But because there are no requirements on insurers of what they must provide, the "Cadillac tax" will be a government-sanctioned green light to reduce benefits and increase cost-sharing mechanisms like co-pays and deductibles--whatever it takes to keep the premium below the magic number at which the excise tax is levied.

Probably the most outrageous claim by "Cadillac tax" proponents is that when employers buy cheaper policies to get under the threshold, they'll return the savings to workers in the form of higher wages. Incredibly, Democrats estimate that the vast bulk of federal revenue generated by the Cadillac tax won't come from the levies themselves, but from increased income taxes paid on these higher wages.

Does anyone really believe Corporate America--currently presiding over the fastest decline in household income than at any time since the Great Depression--is going to cut health care benefits and give away the difference in higher wages?

If any evidence were needed that this is a pipe dream, the Mercer human resources firm surveyed 465 employer health plan sponsors--and found that just 16 percent said they would pass on any savings from cheaper health care policies to workers.

For years now, as part of an unrelenting assault on wages and benefits, employers have shifted the cost of health care more and more onto employees--in the form of stripped-down health plans that cost workers more and cover less. The crushing cost of health care has resulted in more and more employers eliminating coverage--and hundreds of thousands of workers refusing employer-based insurance because they simply can't afford the deduction from their paycheck.

The "Cadillac tax" will accelerate these trends. And the Democrats are breaking new ground by taxing health care benefits for the first time--opening the door to proposals to tax other benefits.

This is one more reason to reject the Democrats' health care "reform" legislation as the step backward that it is--one that will transfer billions of dollars into the bank accounts of the insurance industry, and leave working people worse off and the health care system more screwed-up than ever.

The only way to end the crisis and bring down the costs of medical care is a government-run, national, single-payer health care system. The AFL-CIO voted to endorse single-payer last year, but did nothing to fight for it. That has to change.

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