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CMS: 'Cadillac' Plan Tax Could Bend Spending Curve

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Imposing a 40% excise tax on relatively high-cost, “Cadillac” health plans might be fairly effective at holding down health care spending, a government forecaster says.

Richard Foster, chief actuary for the Centers of Medicare and Medicaid Services, includes a discussion of the Cadillac plan tax in an estimate of the financial effects of H.R. 3590, the Patient Protection and Affordable Care Act bill.

The bill, created by Senate Majority Leader Harry Reid, D-Nev., would add new health insurance purchase subsidies for small businesses and low- and moderate-income individuals; create a health insurance exchange purchasing system; impose penalties on some individuals who fail to buy coverage and many employers that fail to offer coverage; restrict the growth of spending on Medicare Advantage programs; establish a new long term care insurance system; impose underwriting and pricing restrictions on private health insurers; and enact changes meant to increase the quality and affordability of health care, such as new health information technology, medical worker education and comparative effectiveness research programs.

The CMS actuaries looked at the original version of the bill introduced in November, and not a Democratic alternative version now being reviewed by the Congressional Budget Office.

Foster estimates the provisions of the bill that his team studied would increase federal costs by about $366 billion from 2010 to 2019, with the annual costs increasing from $16 billion in 2010 to $71 billion in 2019.

The health bill provisions that would hold down Medicare and Medicaid spending increases would cut spending by more than $500 billion from 2010 to 2019, but CMS actuaries are expecting bill provisions meant to hold down overall health care spending, such as the comparative effectiveness and wellness provisions, to lead to less than $3 billion in savings over that same 10-year period.

If the cost-savings programs work as hoped, the savings probably will grow gradually, over time, Foster writes.

But the Cadillac plan excise tax, which, in the version of the bill the CMS actuaries saw would apply to benefits packages with a value over $8,500 per year for individuals and over $23,000 for families, could have a much bigger effect, Foster writes.

CMS declined to include the projected effect of the excise tax in its official analysis.

But, in response to the excise tax, “affected employers would reduce their benefit packages in such a way as to eliminate about three-quarters of the current excess benefit value,” Foster writes.

The effect of the tax would grow over time, because the Cadillac plan threshold would increase at a rate of the Consumer Price Index plus 1 percentage point, rather than the more rapid rate of health cost inflation, Foster writes.

In 2019, Foster writes, the excise tax could reduce the total $4.7 trillion in national health expenditures about 0.3%, or about $15 billion.


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