Wednesday, March 24, 2010

What is a "Cadillac Healthcare Policy" and why is it being taxed? My simple explanation....

    One of the components of healthcare reform is the treatment of  so-called "Cadillac Healthcare Plans/Policies"  What is a "Cadillac Healthcare Plan?"...The word Cadillac implies a certain level of luxury and status.  One might say this type of policy has more bells and whistles, as far as what is covered in the policy, than other health insurance policies.  The Cadillac health insurance plans have been identified as one of the culprits in the escalation of heathcare costs. These plans provide extra benefits and expanded coverage for the policy holders.  Because they have lots of benefits that cover alot of healthcare needs (doctors, hospitalization, prescriptions, dental, vision, etc) AND low co-pays (what YOU actually pay for a doctor visit, prescriptions, etc) policy holders tend to use these benefits more than they perhaps would with a more standard policy.  This leads to "over-consumption" of healthcare, therefore driving up the cost of healthcare services (this is a simplistic explanation and it is more complicated, so bear with me).
     Why do these "luxury" policies exist  in the first place?  They are offered by businesses to their employees as a "non-wage" benefit.  For tax purposes, this "fringe benefit" does not count as income for an employee, therefore not subjected to tax like regular income is.  Although not considered income and not taxed the plans are considered part of an employees overall compensation package that is mostly borne by the employer.   Not all companies provide these high end policies to their employees, and it appears that these plans are a benefit for primarily high(er) wage employees and/or executives.  One exception would be Unions members, because of collective bargaining agreements, who are known to have these types of policies as well.  I do not know the number of people who are the holders of these types of policies and how it breaksdown on income levels.
     The cost of these plans are shared by the employee and the employer.  However, in general, the employer bears most of the cost of the policy.  The employee usually has their part of the cost of the insurance taken out of their paycheck.  The employer negotiates with an insurance company for the total cost of the policy, then decides how much to charge the employee and how much they will pay themselves.
     These plans are certainly going to vary in cost for a variety of reasons, but the cost IS the central issue in regards to its treatment in the Heathcare Bill recently passed.  The bill is going to levy a 40% tax on dollar value of a health insurance policy that EXCEEDS $10,200 for an individual policy and $27,500 for a family policy.  They have determined (I do not know how they arrived at these numbers) that any plan whose cost exceeds these amounts is considered a Cadillac Plan and is subjected to taxation.  Example---You are single and  your policy has a value (or cost) of $14,200.  This is the TOTAL cost--you pay some and your employer pays the rest.  The FIRST $10,200 is exempt from the tax but $4,000 is not ($14,200 minus $10,200 = $4,000).  The $4,000 is then subjected to the 40% tax, ($1,600), which is paid by the INSURANCE Company (not you AND not your employer).  Two things can happen as a result of this---(1) the insurance company will pass on the cost of the tax to the company and/or you in the form of higher insurance premiums for your "Cadillac Plan" or (2) not offer the high cost policies and offer lower cost, lower benefit policies.  It is the Congresses/Presidents hope/expectation that the second will happen.  If so, then a lower cost, lower benefit policy will reduce over-consumption of healthcare and reduce healthcare costs by reducing demand for services that the Cadillac Plans purported to do.  This policy IS NOT scheduled to take effect until 2018...  Hopefully I have presented this in a neutral way.  I tried to avoid loaded terms and not discuss either the positives or negatives that will result from this policy.  Y'all can comment/discuss....:)
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