What Is This ‘Cadillac Tax’ Health Insurance Thingy?

Dave Johnson

You may have heard about the “Cadillac tax” health insurance thing. As with so much else involved with the health care/insurance discussion, policymakers have chosen wording that causes most people to tune out. Terms like “Cadillac tax” have little meaning to regular people because they convey very little information – or they evoke an image that masks its true impact.

When policymakers talk about a “Cadillac tax” on health insurance plans, what they are referring to is an upcoming tax on employers who provide really good health insurance plans that cover lots of things without requiring employees to pay large co-pays and deductibles when they get medical care. These plans cost more, so they are compared to luxury cars that cost more, hence “Cadillac.”

The tax was written into the Affordable Care Act with the consent of the Obama administration, which saw it as a way to limit federal government spending on health care reform. There are people who thing this tax is a good idea, and people who want the tax repealed.

Arguments In Favor Of The Tax

Those in favor of the tax are “market” economists who believe that people’s decisions, even about health care choices, are mostly driven by economic motives. They believe that people are “homo economicus” – a species of people who have good information and make rational decisions based on what will make them (or save them) the most money. These people are seen as “consumers” who respond to prices over other priorities in their lives.

They claim that with good health insurance, “consumers have little incentive to insist on cost-effective care and providers have little incentive to provide it.” The idea is that a tax on employers who offer good health insurance will benefit the country and:
1) create market forces that will reduce the country’s health care costs over time, and,
2) Translate as higher pay to employees because the employers are spending less on health insurance.

These economists believe that the better the health care plan, the more people will go to doctors and specialists when they don’t really have to. They believe people use high-cost medical procedures and drugs because they do not shop around for the lowest-priced alternatives. They believe that making people pay higher co-pays and/or deductibles and limiting which doctors they can see will cause them to “consume” less and stop “overutilizing” expensive medical care.

They say that setting high co-pays and deductibles, and limits on doctors, will make people put “skin in the game” and:

1) Stop knowingly using medical services needlessly. People know when they don’t really have to see a doctor but do so anyway because they don’t have to pay too much.
2) “Shop around” for the lowest-cost doctors (of those offered) when they do need medical care.
3) “Shop around” when a drug or procedure is needed, whether it’s for fixing a broken arm or treating cancer, and will choose the lowest-cost options.

The Argument For Repealing This Tax

That was the market economist side of the “Cadillac Tax” argument. They want the tax to take effect starting next year, as planned. The other side is people who want to repeal the tax. They want citizens to have more access to good health care, with low co-pays and low deductibles and a wide choice of doctors and care options.

On a conference call Thursday, Economic Policy Institute (EPI) Research Director Josh Bivens and Senior Economist Elise Gould outlined arguments against this tax. They explained that research (and basic common sense) shows that consumers are not equipped with information and knowledge that enables them to cut back only on unnecessary or ineffective care. In other words, people go to doctors to find out if they need medical care, because the doctors are the ones trained in medicine, not regular people.

With high deductibles and co-pays, people cut back on health care across the board. They don’t see a doctor when they need to, which can cause them to be sicker when they finally do see a doctor (which is more expensive and undoes the money-saving efforts) or just suffer, which should not be a policy goal (unless you are a conservative or a psychopath).

In EPI’s “Tax on Expensive Health Insurance Plans Could Cut Care Along With Costs,” Bivens and Gould write,

Evidence shows that making health care more expensive does induce people to consume less of it. But the same evidence shows that people do not cut back only on care that is ineffective or somehow luxurious; instead, they cut back across the board. Expecting sick Americans to decide on the fly in an opaque and uncompetitive marketplace what health care is cost-effective–and what is not–is an unrealistic and unfair approach to containing costs.

While overall costs may be pushed down by the excise tax, this is a good outcome only if one believes that the health care squeezed out is merely the ineffective kind. But a lot of welfare-improving care may also be a casualty, and for some patients, cutting back on medically indicated care because of the increased cost-sharing could increase their overall spending. For example: some patients who cut back on low-cost pills to contain cholesterol end up in emergency rooms.

Cutting utilization is also a limited cost-containment strategy…

One more thing: the market economists claim that employers will pass along savings from lower-cost plans to employees as higher pay. What is the fat chance of that? What world do they live in? World economicus? I mean, really.

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