'Cadillac' Insurance Plans Explained

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The Democrats final health bill negotiated by the House, Senate and White House and released Thursday contains a scaled-back tax on high-cost insurance policies. Here is a brief guide to these types of insurance plans.

What is it, and what does it offer the consumer?

Sometimes referred to as a "Cadillac" or "gold-plated" insurance plan, a high-cost policy is usually defined by the total cost of premiums, rather than what the insurance plan covers or how much the patient has to pay for a doctor or hospital visit.

People who have Cadillac plans often have low deductibles and excellent benefits that cover even the most expensive treatments, but this is not always the case. Premium costs can be high for reasons other than generous benefits, including the age, gender and health status of the customer. In an employer-based plan, premiums are based on the pooled risk of employees and may be higher if many of the employees are sick, older, female or live in a region with expensive health costs.

Who has high-premium plans?

Although news accounts have frequently described Cadillac coverage as plans catering to Wall Street titans, with annual premiums of $40,000, not everyone with high-cost coverage is wealthy or even especially well-off. Some union workers and employees of businesses with a preponderance of older or sicker workers may also have premiums in the Cadillac range.

In the Democrats' reconciliation bill - actually an amendment to the Senate-passed health bill - a high-cost health plan is defined as costing more than $10,200 for an individual or $27,500 for a family, including worker and employer contributions to flexible spending or health savings accounts. The cost does not include stand-alone vision or dental benefits. The tax would not be imposed until 2018, giving health plans more time to benefit from possible cost savings from other reform measures. Employers with a preponderance of older or female workers who have higher-than-average health costs would receive a break in the form of higher thresholds.

The "Cadillac" tax has been reduced significantly since it first appeared in the Senate-passed health bill, which defined a high-cost health plan as costing more than $8,500 for an individual or $23,000 for a family, including vision and dental benefits. The tax was set to go into effect in 2013. In an analysis released Nov. 30, the Congressional Budget Office predicted that in 2016, 19 percent of workers who have insurance through the workplace would have fallen under that category. The number of people affected under the latest bill is significantly lower, although exact figures are not yet available.

In 2009, the total cost of the average family policy offered by employers was $13,375, according to the Kaiser Family Foundation. (KHN is a program of the foundation.)

What effect would the Cadillac provisions in the health overhaul proposals have?

The health bill would tax insurers 40 percent on the amount of premiums above the thresholds. The goal is twofold: to generate revenue to help pay for covering the uninsured; and to make the most expensive plans — which some argue encourage overuse of medical care — less attractive.

In their analysis of the new bill, the House Rules Committee estimates that the amount of revenue that the tax would collect is 80 percent less than the under the Senate-passed bill. The Congressional Budget Office estimates the tax would raise about $12 billion in 2018, the first year of implementation, and $20 billion in 2019. (Under the Senate-passed health bill, the CBO estimated that the tax would have raised about $149 billion over the first 10 years.)

The thresholds would increase as the nation's overall rate of inflation goes up.

Although the tax is to be imposed on insurers, the effects are likely to trickle down to consumers. Insurers or employers might tinker with benefits, for example, by increasing deductibles to reduce premium costs to below the threshold. In addition, more than half of employees with insurance work for companies that "self-insure," meaning the firms pay for their workers' health bills on their own. These employers would be required to pay the excise tax themselves and most analysts, including the CBO, estimate that businesses will respond by changing their benefits to have lower premiums, higher deductibles and copayments and terminating employer contributions to health and flexible spending accounts. Economists say employers may pass the savings to workers in the form of higher wages.

For retirees and workers in high-risk professions, such as firefighters and longshoremen, the bill would set higher thresholds — $11,850 for an individual plan and $30,950 for a family plan.

Some employers whose coverage is expensive because they have a sicker workforce may see their premiums decrease if other proposed reforms take effect because other features of the bill would prohibit insurers from charging higher rates based on health status.

This story was produced through a collaboration between NPR and Kaiser Health News (KHN), an editorially independent program of the Henry J. Kaiser Family Foundation, a nonpartisan health-care policy research organization. The Kaiser Family Foundation is not affiliated with Kaiser Permanente.

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