Why all the experts are wrong about controlling health care costs and why the coming “Cadillac” health benefit tax sends the wrong message

2013

Many, very many, health care policy makers and experts believe you waste money on health care because you don’t care what it costs in part because the “generous” benefits your employer provides are tax free. Many experts believe employers don’t try and reign in health care costs because the cost of providing coverage is tax deductible. These beliefs drive important policy decisions that affect every American.

It is true that the tax free status of employer benefits is unfair to those Americans without that benefit and it’s certainly true that simply because of the math, those with higher incomes and who pay the highest tax rates get the greater tax benefit. It is also true that this tax provision is the single largest tax revenue loser for the federal government.

However, to extend those facts to the idea that because of the tax status of health benefits employers provide generous benefits and workers and their families don’t care about health care costs is pure nonsense. Nevertheless, beginning January 2018 a 40% excise tax will apply to the value of health benefits that exceed certain limits.

During my nearly fifty years designing, negotiating and managing health benefits never once was the tax status a factor in improving or reducing health benefits. Employers are always concerned about costs (with the likely exception of public employers) and unions know that the rising cost of these benefits reduces available funds for wages and retirement benefits (with the likely exception of public employee unions).

Individuals worry about health care costs because most people have coverage with significant out of pocket cost requirements. The plans that provides near first dollar coverage with very low out of pocket costs and freedom to see any physician or hospital are long gone and have been for decades. This is because employers have been trying every latest fad to lower health care cost for the last forty years. The fastest growing plan design today is the high deductible health plan that shifts more and more costs to the individual, also in the hope that these costs will stimulate patients to consume health care more efficiently.

If the tax benefits are so important why would employers be making these changes?

The fact is that the new excise tax is designed to raise revenue, period. However, policymakers will be disappointed as fewer and fewer plans will pay the tax because over the next several years the value of employer-sponsored plans will continue to be reduced … and the cost to individuals increased.