Are Employers Really Overindulging on Health Insurance?
(c) Dwight Nadig
We were disappointed to see an op-ed in the Wall Street Journal this week by James Capretta of the American Enterprise Institute defending the ACA’s excise tax on high-cost plans (which I still refuse to call the “Cadillac” tax). He ascribes to the theory that the tax subsidy for employer-sponsored health care has led employers, and by extension their employees, to wantonly overspend on healthcare.
Since the excise tax limits the subsidy, he’s in favor of it – despite the fact that medical plan cost reflects the covered population’s health and cost variations in local healthcare to a greater extent than it does the benefit design. He also ignores that the tax would be exceptionally difficult to administer and that it creates perverse incentives to abandon cost-saving, health-improving initiatives like onsite clinics because these employer investments are also subject to the tax.
The benefit of the excise tax, in his mind, is that it would drive employers to raise deductibles, limit networks, and reduce benefits. And in fact, the threat of the tax already has resulted in higher out-of-pocket costs for employees. Right now, the average PPO deductible for an individual is approaching $2,000 among employers with 10-499 employees and $1,000 among those with 500 employees or more. How much higher would he like them to go? The problem with cost-shifting as a means of staying below the tax threshold is that while some employees can afford to pay more out of pocket for health care, many simply can’t. Employers are looking for ways to help lower-paid employees manage health care costs, but it’s not an easy problem to solve.
Mr. Capretta states “Initially, only about 4% of all employer plans would have premiums above the Cadillac tax thresholds.” That number seems unrealistically low. Using current medical plan premium costs collected through Mercer’s National Survey of Employer-Sponsored Health Plans and trending them forward at 4.7% annually, we estimate that 32% of all employers with 50+ employees offer a plan whose cost will exceed the tax threshold in 2022.
And that’s in the first year. The tax threshold is indexed to CPI and health benefit costs rise faster than that, so each year more employers would be hit with the blunt instrument of this tax, adding to the cost of providing the healthcare coverage that their employees cannot do without, and limiting their options for making progress in addressing the real drivers of cost growth.
If you need more convincing, or just cheering up, read Jim Klein’s piece in the Hill.