We Should All Have 'Cadillac' Health Coverage

Some [1] in Congress want to pay for health care reform in part by taxing so-called ‘Cadillac plans.’ As the Center for Budget and Policy Priorities explains [2] it:

“Starting in 2013, the Finance Committee bill would impose a 40-percent excise tax on the portion of the value of health insurance coverage that exceeds $8,000 for single individuals and $21,000 for families.”

But what exactly is a ‘Cadillac’ health plan? According to [3] Len Burman of the Tax Policy Center:

“There's some plans for which almost everything is paid for. So you go to the doctor, you don't worry about what's prescribed or how much is being spent, because you're not responsible for any of it.”

Does that sound so terrible? Other industrialized countries give all their residents Cadillac coverage, and spend half [4] as much as we do in the process. For example, do you know any U.S. resident who can claim the kind of treatment — and out-of-pocket costs — this proud Canadian [5] received?

“After a recent accident, I phoned up to see my doctor (who is in Toronto) for a checkup. It wasn’t an emergency, so it took me a few days to see her. (Somedays I have gotten in on the same day, but she is busy, so it usually takes me a day or two. And by the way, I have a harder time getting a haircut appointment or a plumber.) I had to get an X-ray and an ultrasound. I literally walked out the door to the office building 1 minute away and put my name down for both. They said the wait would be an hour. I went and had lunch and then got it done. I was called by the nurse with the results in two days. Total cost for all this care: $0.” [Emphasis added]

One objective behind the excise tax on high-premium health plans is to tax plans that the wealthy enjoy, but in fact many middle class Americans would be affected by the tax.

As Ezra Klein explains [6]:

“But though extremely high-cost health-care plans are concentrated among the wealthy, they're not limited to the wealthy. Workers in high-risk professions, or workers laboring in high-cost areas (insurance is more expensive in New York than in Montana), have pricier health-care plans. Older workers, or workers who have negotiated really good benefits, also have pricier health-care plans. And unions represent a lot of folks who fit some or all of these boxes.”

In addition, plans offered by small employers are more likely to be hit with the excise tax. According to [7] Beth Umland, director of research for Mercer, a consulting firm that conducts an annual survey of employee benefits:

“About 14 percent of small employers, counted as those with fewer than 500 workers, now offer policies that would be subject to the excise tax. That compares with just 5 percent of large employers with 500 or more workers.”

That the tax will end up affecting more than just the rich is only part of the problem with such a policy. The other part is that the tax is strictly based on the cost of the premium and does not distinguish between the types of coverage offered. Simply not having a deductible or a copay when you get medical care should not be seen as an extravagance.

It would be different if they were talking about taxing non-medically necessary benefits, for example if a plan offers coverage of cosmetic surgery. Few would be opposed to taxing the portion of a benefit that pays for face lifts — if such coverage exists. But that is not what is being planned here.

Truthfully, the ideology behind the excise tax comes down to the bizarre belief [8] that if people don’t have to pay much out of pocket for their health care, they will be flocking to the doctor for unnecessary tests and raising the cost of health care for all of us. By discouraging such comprehensive plans, they therefore believe, overall costs will be lowered.

Such a belief, though apparently widespread, seems rather illogical. I don’t know anyone who enjoys being poked and prodded by his or her physician and thinks a trip to the lab for a full work up would make for a delightful excursion. And none I can think of would prefer a stay at the hospital to a resort.

Yes, I realize there are some hypochondriacs out there who would like to see their doctor every time they sneeze, but doctor visits are not where most of our health care dollars go. Most go to expensive hospital care and tests, all of which must be ordered by a physician and approved by the health insurance plan as medically necessary.

A report [9] by the federal Agency for Healthcare Research and Quality (AHRQ) shows that most of our nation's health care spending goes toward hospitalizations: Inpatient hospitalization costs comprise 33 cents out of every dollar spent on health care.

In addition, the AHRQ also reports [10] that — surprise — sick people use up most of our health care dollars:

The 15 most expensive health conditions account for 44 percent of total health care expenses.

Patients with multiple chronic conditions cost up to seven times as much as patients with only one chronic condition.

These are not healthy people getting unnecessary care. These are people who will get sicker if they don’t get the care they need.

The famous RAND Health Insurance Experiment [11] showed that cost sharing — making people pay more out of pocket — can be a blunt tool, reducing both needed and unneeded health services in roughly equal proportions:

“Cost sharing reduced the use of health services at all levels of effectiveness, from highly effective care to less effective care, and in roughly equal amounts among most groups of participants. Both the proportion of inappropriate hospitalizations and the proportion of inappropriate use of antibiotics were the same for cost-sharing and free-plan participants...

“Nonetheless, subsequent RAND work has reaffirmed that cost sharing alone, while reducing costs and waste, neither improves the overall appropriateness of care sought by patients nor raises the quality of care delivered by doctors. But perhaps appropriateness, quality, and even savings could all be increased if cost sharing were reduced for people with conditions for which treatment is cheap and effective.” [Emphasis added]

Such evidence appears to have been taken to heart in other countries. As the AARP European Leadership Study: Health Care Cost Containment [12] (PDF) found:

“Patient cost sharing, which is used in all study countries, is for the most part low and generally used to encourage cost-effective behavior rather than to suppress demand. If the cost sharing is high enough, it can change behavior by suppressing demand, which affects lower-income individuals more than others. This does not appear to be a goal in these countries. While increased cost sharing may lead to less use of unnecessary care, it may also reduce access to needed services.”

If we want to encourage our health policies to be evidence-based, then we should not be punishing plans that provide good comprehensive health coverage. We should be trying to lower cost sharing for everyone — in other words providing ‘Cadillac’ coverage to all.

To raise funds for health care reform, Health Care for America Now (HCAN) supports [13] President Obama’s plan for having people who earn more than $250,000 pay their fair share:

“That's what the House bill does and it's what the President's initial proposal to fund health care through lowering tax deductions for people who earn more than $250,000 does too.”

Such a policy directly targets the wealthy, as the excise tax on high-premium plans purports to do, but more directly, without discouraging good coverage and unwittingly affecting middle class families.