The myth of 'Cadillac Care'

(Fortune Magazine) -- Can you tell a Chevy Malibu from a Cadillac Escalade? I'm sure you can, but I've got doubts about the 60 Senators in Washington who want to impose a stiff excise tax on what they call "Cadillac Care" health plans to raise revenue and reduce health spending.

The problem is that they define "Cadillac" not by the benefits a plan delivers but by how much a plan costs. But as any insurance maven will tell you, costs depend more on the people being covered (old, sick, or both?) and location (high-cost New York or low-cost Montana?) than on the level of benefits. "High-cost plans aren't necessarily generous plans," says Beth Umland, director of research for health and benefits for the Mercer consulting firm.

Indeed. Here's an example. Let's say that the 100 members of the U.S. Senate (average age: 63), where the excise tax idea originated, had their own health plan rather than being part of the Federal Employees Health Benefits Program (average policy-holder age: 46).

The plan's Blue Cross option with vision and dental care will cost $6,971 for individuals and $16,124 for families in 2010, well below the threshold ($8,500 and $23,000) at which the excise tax, which starts in 2013, would apply.

This same plan just for senators would probably cost about $14,000 for individuals and $32,000 for families -- way, way up in excise tax land. My estimate is based on the work of economist Henry Aaron, who has analyzed the way people's ages affect health-care costs. See? A Malibu policy for a big pool of employees becomes an Escalade if it covers only older ones.

Now to Medicare -- no Cadillac plan -- which will spend about $510 billion this year to cover fewer than 46 million people. That's more than $11,000 a person, well over the Cadillac threshold of $9,850 for single retirees 55 and up. And that's without counting Medigap coverage (for which I have no numbers), which would send the average higher.

Let me hasten to say that Medicare wouldn't be subject to the excise tax. My point is to show that high costs don't necessarily equate to cushy benefits. Medicare is expensive because its beneficiaries are old, disabled, or both. Not because it's lush.

The tax would be 40% of the amount by which a plan's expense (employer and employee premiums plus flexible spending accounts plus medical savings accounts plus "wellness" programs) exceeds thresholds.

The Senate Finance Committee, recognizing some of the political and social-justice problems with its definition of "Cadillac," has built in several complex adjustments, ranging from 17 (as yet unnamed) states having temporarily higher thresholds, to raising thresholds for plans that cover retirees 55 and up (but not workers 55 and up).

But Rep. Joe Courtney (D-Conn.), a leading critic of the tax, scoffs at the adjustments. "The problem with starting with that tax and trying to adjust for the real costs is that you end up with something that looks like a clown balloon," he says.

A spokesman for Sen. Max Baucus (D-Mont.), who sponsored the tax, says that taxing high-cost plans is good policy. "Encouraging insurance companies to lower costs and improve efficiency is good for America's economy and good for American workers," she said.

There's certainly a problem with the existing health-care "exclusion," which allows employers to deduct almost unlimited health-cost expenses while giving employees tax-free benefits. That encourages health-care spending, while disproportionately benefiting high-income people with good health insurance who live in expensive areas. "They're getting a tax break they shouldn't have," says economist Jonathan Gruber of MIT.

But if we're going to have a tax on health benefits, let's make it simple, broadly based, and intellectually honest. And let's hope that when the House and Senate produce a final health-care bill, they don't confuse Chevys with Caddys.

Reporter associates Marilyn Adamo and Scott Cendrowski contributed to this article.