Thursday, January 14, 2010

A few thoughts on the "Cadillac" PlanTax

The stated reason behind the proposed Cadillac plan tax (besides the obvious revenue raising) is the discouragement of rich benefit plans. To me, this makes absolutely no sense.

- From a financial perspective, it is immaterial what benefits are offered as long as the plan is priced to cover the actuarial cost of those benefits.

- The bill drafters seem to be saying that expensive plans are, by definition, underpriced. Otherwise, there's no economic reason for a selective tax to discourage their use. I suspect that exactly the opposite is true and that the richest benefit plans have the highest gross's axiomatic in every other industry that premium products have premium pricing.

- People will quickly drop the Cadillac plans. Who wants to pay a 40% tax to the government when you can buy a plan just under the threshold and use the 40% saving to offset the decrease in benefits?

- As the plans are dropped, two things will happen: At the carrier side, maintaining margins will force a compensating increase in the cost of less expensive, lower margin plans. Secondly, projected tax revenue from the Cadillac plans will fall off a cliff.

- An argument can be made that richer benefit plans cause higher utilization. With a fixed supply, higher demand equates to higher prices. But I don't see medical prices driven by capacity limitations. I see them driven by cost-shifting from the public to private sector, prescription advertising, mandated benefits, medical malpractice issues and a host of other factors. Capacity limitations, where they exist, are reflected in waiting times to get appointments, not higher prices.

- Lastly, individual and small group plans are age rated. Even though the proposed legislation compresses the spread in premiums between young and old, the tax will impact older people more than younger people.

Am I missing something?
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