Most people won’t have a Cadillac health care plan. The threshold for Cadillac taxes to kick-in are fairly high at 180% the average individual plan total premium level or 180% average family plan coverage. Cadillac taxes don’t start until 2018, so everything right now is speculation dependent on plan design choices as well as aggregate health care inflation rates.
But as a quick check, if you are curious, people should look at box 12DD on their W2. If you have single coverage, and the number is greater than $8,500, there is a decent chance this plan absent signficant changes will have at least a dollar of Cadillac coverage in 2018. If you have family coverage, Cadillac coverage is a decent probability if the 2013 box 12DD value is greater than $24,000.
So what does a real Cadillac plan look like?
A spokeswoman for the senator confirmed Cruz’s $20,000 coverage plan with the paper. “The senator is on his wife’s plan, which comes at no cost to the taxpayer and reflects a personal decision about what works best for their family,” Catherine Frazier said.
According to a 2013 Kaiser study, the average for a employer-provided family coverage plan is $16,351. A 2009 New York Times report shows that Goldman Sachs’ plans for executives and managing directors are worth double the average plan–more than $40,000 annually in premiums for each family.
This is a plan with 24/7 on-call doctors who treat only a very limited number of patients, minimal restrictions on services, minimal restrictions on network and an attitude that money does not matter, keeping the Galtian overloads happy is what matters. It is an extreme case, as there are Cadillac plans which are very comprehensive plans for older and sicker risk groups in very high cost areas (like SW Georgia) that would also qualify as Cadillac.
But the mechanics are simple. Let us assume the Goldman Sachs’ plan has a total cost of $40,000 a year for family coverage. The Cadillac threshold would be $27,500. The first $27,500 of the premiums for the Cruz family would be tax free and enjoy an implicit subsidy of $10,800 in tax benefits. The Cadillac margin is the premium minus the threshold. That margin is $12,500. At a 40% excise tax, the government would levy a tax of $5,000. The Cadillac threshold is indexed to change at CPI-U+1 for the first two years and then CPI-U in the out-years. CPI-U is the base measure of inflation for urban residents and it tends to be increase at a lower rate than healthcare inflation.
The economic thought is that most if not all of the excise tax will be passed along to the employee which will create a strong pressure group for high end cost control.
There are two goals with the Cadillac tax. The first is to raise revenue for the government in order to pay for the affordability tax credits. The second is to encourage firms to engage in legal tax avoidance by finding ways to get under the threshold or minimize the size of their Cadillac margin. If firms can begin to reduce the size of these plans, that is seen as a significant public policy win as that means there are more payers that are willing to say no. More payers willing to say no to some providers means there should be a downward pressure on per-unit pricing. Saying no can mean narrower networks, and it can also mean fewer elective and ineffective procedures.
These two goals are in tension (much like the use of raising cigarette taxes to pay for CHIP). If the taxes are high enough to produce significant revenue gain, they will produce significant behavioral gain that will move people away from smoking and away from high cost plans. I think solving the revenue problem in 2025 is a good problem to have if healthcare spending grows at or below the rate of the general economy for a decade or more.