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Cadillac Plan Tax Could Backfire, Study Suggests

The so-called "Cadillac" plans on which the Senate reform bill would place a 40 percent excise tax do not have much richer benefits, on average, than other health plans do, according to a new study published in Health Affairs.

Two major tax strategies have been advanced to pay for healthcare reform, beyond the proposed cuts in Medicare. The reform bill passed by the House of Representatives depends on raising the income tax on the wealthy; the Senate measure relies primarily on the Cadillac plan tax, although it would also raise Medicare payroll taxes for the well-to-do. Economists have lauded the excise tax, saying that it would help lower overall health costs by discouraging employers from providing extravagant health benefits to their employees. Opponents of the tax, including the unions, argue that it would penalize people in areas with high medical costs and those in industries that pose risks to workers' health.

According to the Health Affairs study, "health reform provisions that treat these plans like luxuries might be misguided." Only 3.7 percent of the variation in the cost of family coverage, the researchers found, can be attributed to differences in benefit design. Another 2.4 percent of the variation is related to the type of plan-HMO, PPO, point-of-service plan or high-deductible plan. The type of industry a worker is in and differences in regional medical costs also play a role, but the majority of the variation is unexplained, the study concluded.

The data for the study was primarily drawn from the 2007 employer survey of the Kaiser Family Foundation/Health Research and Educational Trust. The unit of comparison was based on former President George W. Bush's proposal to tax employees on the value of Cadillac plans while providing tax deductions of $7,500 for individual coverage and $15,000 for family coverage. Updating that to 2009, the researchers figured that the standard deduction would have been $13,350 for a family in 2007. The average cost of a family plan worth more than the deduction was $16,266, and family coverage worth less than the deduction had an average premium of $9,874.

The relatively minor differences in deductibles, copays, out-of-pocket maximums and actuarial value of these plans suggests that there might have been major disparities in medical costs from one region to another. But, while large variations in Medicare costs have been exhaustively documented, this study found no positive correlation between the Medicare data and the variation in the cost of family coverage. This may be attributed, the researchers note, to the fact that health plans operate in a competitive market, while Medicare does not. Or providers may charge private plans and employers more or less, depending on how much they receive from Medicare. But no one really knows the reason, they point out.

What this means for the Senate reform debate is that, in the absence of more solid evidence, placing an excise tax on high-cost plans might not achieve the desired policy goals and could harm some people who now have fairly average--albeit high-priced--coverage. To avoid unintended consequences, it might be wise for the Senate to consider another source of funding.

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