Proposed tax on ‘gold-plated’ health coverage may hit plans for older, sicker people

Proposed tax on ‘Cadillac’ coverage questioned

WASHINGTON — They call them Cadillac health plans. But a clunker may be hiding behind the sticker price.

Senators scrambling to pay for a $1 trillion health care overhaul are leaning toward taxing health insurance companies on policies costing more than $25,000 a year — about twice the value of the average employer-provided family plan.

But some insurance experts say the reason certain plans are so expensive isn’t that they’re providing lavish benefits like full-body diagnostic scans and tummy tucks. Instead, the super-high premiums are likely being charged to older, sicker people, either as individuals buying their own coverage, or working for a small employer.

“Maybe it’s Cadillac profits for the insurance industry, but it’s not Cadillac coverage for the person,” said Karen Pollitz, a Georgetown University research professor who studies the market for individual coverage. “It’s not like that policy gives you health care that’s gold-plated; it’s just the insurance company manipulating those premiums.”

Indeed, Pollitz says the coverage that members of Congress get could cost $25,000 or more — if the federal health plan were allowed to charge higher premiums just because of age. Under the health overhaul legislation, private insurers selling to individuals and small businesses would still be able to do that. One proposal lawmakers are weighing would allow a five-to-one difference between premiums for 20-year-olds and for people in their 60s.

Pollitz did the math.

Assuming a five-to-one age differential, she said a family of four headed by a 64-year-old would pay $31,725 for the standard federal health benefits package — which is worth an average of $13,500. And a similar family headed by a 59-year-old would pay $25,600.

“The whole notion of Cadillac plans is kind of a made-up notion,” said Pollitz. “A typical employer plan covers all the stuff you’d want and pays 90 percent of the bills.”

Senate Finance Committee negotiators are looking at taxing insurance companies on the high-cost plans as a way to nudge consumers toward more frugal coverage, helping to curb unsustainable medical inflation. They hope to raise as much as $90 billion over 10 years by means of a tax rate that could range as high as 35 percent.

“The idea of taxing insurance companies is getting some serious consideration,” said Sen. Ron Wyden, D-Ore., a Finance member. “I’m open to looking at it, but I can think of a variety of circumstances — age is a big one — that ought to be looked at.”

Only a tiny fraction of health insurance policies — perhaps fewer than 1 percent — cost more than $25,000 a year. The Kaiser Family Foundation estimates that 0.3 percent of workers with employer-provided family coverage in 2008 were in plans worth more than $25,000.

It’s unclear if such a narrowly targeted tax could have much of an impact on health care costs overall. It is a fact that a small number of patients account for most costs. Government statistics show that about 20 percent of people — often those with chronic conditions such as diabetes and heart disease — account for 80 percent of medical costs. But the proposed tax doesn’t appear to affect the way care is delivered to the costliest patients.

“I question the impact its going to have ultimately on health care use,” said Paul Fronstin, an economist with the nonprofit Employee Benefit Research Institute.

How would the insurance industry respond to the tax? “I don’t see the companies eating it,” said Fronstin. “They’d either pass it on directly to the plans being taxed, or they’ll pass it on by increasing their premiums across the board.”