Friday, December 25, 2009

Problems with the Tax on Cadillac Plans

Timothy Noah at Slate provides a detailed discussion about the problems that will plague that tax on "Cadillac" healthcare plans. Initially designed to tax plans with high costs, the tax is designed to reduce healthcare spending. Unfortunately, the tax is not likely to work to reduce overuse of healthcare services.

Noah points out some of the problems:
  1. Plans do not cost so much because of fringe benefits or because unions demand extensive plans. Instead, geography, occupation, and age all add to the cost of plans.
  2. Initially the tax will only affect 3% of all plans. But over time because the tax is designed to be indexed or adjusted to the Consumer Price Index (which measures inflation), while medical costs go up at 1.5 to 2 times the Index, more and more plans will be fit by the tax. That means the middle class will progressively get hit by the tax more and more as medical prices exceed inflation and healthcare insurance plans cost more.
  3. Doctors and hospitals (the major healthcare providers) have no incentive under this tax to utilize fewer services. Noah argues that if insurers spend less to cut healthcare plan costs and doctors keep spending to provide services, patients will find themselves trapped between paying out of pocket for more services and getting less covered by their downsized plans.
We will have to wait and see if the public reacts against the encroachment of this tax in future years.

Michael Shusterman is the Editor in Chief of TuftScope (2009 - 2010).
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