Our Ongoing Health Crisis, Part 2: The Cadillac Tax Is Still Foolish and Cruel

Richard Eskow

Part 1 of this series took a look at family healthcare costs for people with “good” insurance – better insurance, in fact, than most people will receive from the Affordable Care Act’s health care exchanges. We found that these costs soared above those of other nations, and that they are rising at an unacceptably fast rate.

On average, an insured family of four now pays nearly ten thousand dollars for health insurance and medical care. That’s more than it spends for groceries, and twice as much as it spends for gasoline.

So why would anybody want to make their plight worse?

Making Things Worse

The Organization for Economic Cooperation and Development (OECD) studied personal expenditure on health care services for people with both above-average and below-average income in developed countries. They found that the costs for both groups were higher in the United States than in any other nation studied.

Both higher- and lower-income Americans reported a higher level of unmet medical need due to cost than did similar populations in any of the other developed countries.

Why, then, did the President break a campaign pledge and actively support the “health excise tax,” commonly known as a “Cadillac tax,” on high-cost health plans, since it will make those costs even higher for millions of Americans?

Cadillac Myths

This tax was based in part on a series of ill-advised health economists’ myths, starting with the idea that people “consume” unnecessary medical services and that they’ll stop doing so if they’re required to share in the cost. That assumption was based on flawed research, including a decades-old RAND Corporation study that has since come in for serious questioning.

Here’s another false assumption behind the tax: that plans with higher costs were more expensive because they had more generous benefits. A virtual flood of sound economic and actuarial studies found that generous benefits were a very minor factor in health plan costs. (Benefit “generosity” only accounted for 3.7 percent of the total, according to a study in Health Affairs.)

Punishing the Innocent

But, despite some modifications which the labor movement pressured the Administration into making (another unsung victory for the labor movement), the tax still punishes plans more for including sick people than it does for anything else. It punishes people for decisions made by their doctors, not them. It even punishes people for living in the wrong area.

The tax was also based on an even more fundamental misconception: that shifting costs from employers onto cash-strapped middle-class employees somehow “lowers” costs.

It doesn’t. It just shifts them onto those who can least afford to pay them.

Bad News

Now, as the New York Times reports, employers are already making deep cuts to their benefit plans, and Americans are already seeing them in their deductibles and copayments. “The reality is it is going to hit more and more people over time, at least as currently written in law, ” said health economist Bradley Herring.

The Times story elicited predictable responses. Matt Yglesias wrote that this epic failure was “another piece of good news” about Obamacare, confusing cost shifting with cost reduction.

Jonathan Cohn took a more balanced approach, although he repeated the “most economists support the tax” canard (see here for refutations of the tax from qualified economists.) It’s true that, as Cohn notes, our tax break for employer-sponsored health insurance are unusual. But there’s no reason to believe, as Cohn claims “most economists” do, that this leads to increased use of medical services.

In fact, the OECD study shows that Americans use fewer medical services than people in other developed countries. That should put an end to these outdated and disproven claims about the tax deduction’s effect on utilization – especially since most national health systems have benefits which are more generous than the typical “Cadillac” plan in this country.

Cohn is right when he says that employers were already shifting costs onto employees before the tax came along, but the tax provides them with excellent cover and is likely to accelerate the cost-shifting. (I worked in that world for years; I know how they think and act.)

Less For More, Continued

Other developed nations pay less than half of what we pay per person on health care (on average).They have better benefits, and our mortality and morbidity rates lag far behind theirs.

Wake up and smell the formaldehyde: Our system is broken, and the “Cadillac tax” is only making things worse. It’s “trickle-down economics,” it’s bad policy – and it’s certainly bad politics. It will hurt most people eventually – 75 percent of households, estimates Herring – and they’re not going to be feeling grateful toward the politicians who enacted it into law.

In Part 3 of this series we’ll provide a scorecard which compares the lagging “vital signs” in our health system with Obamacare’s likely effects: the wins and the losses.




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