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Tax on Cadillac Health Insurance Plans Coming Soon?

Determining how to pay for their massive healthcare reform efforts has been a struggle for Democrats. There have been many proposals, ranging from cutting some funds from Medicare to increasing taxes on certain income brackets to taxing plastic surgery procedures. An enduring suggestion has been that the government impose an excise tax on the purchase of high-cost health insurance plans.

Although the Senate has included such a tax in their version of healthcare reform legislation, the House of Representatives has shied away from it. Many Democratic representatives are worried about alienating organized labor, a key constituency for the party. Labor unions contribute millions of dollars to Democratic candidates, which is especially necessary when they are up for tough re-election fights.

What are high-cost health insurance plans anyway? Generally, they are far more comprehensive than the norm. Policies are more generous, with lower deductibles. They often offer coverage for conditions and services not typically associated with health insurance plans; such as infertility treatments or gym memberships. Detractors consider this level of coverage as a cost driver that may or may not have a sufficiently positive impact on health. They are often called Cadillac health insurance plans, due to the greater variety of luxuries included; in contrast, think of the standard policy as a Toyota. Luxury cars are nice, but an economy automobile can also help someone get around safely and efficiently. In a system where millions of Americans are figuratively on foot, quite a few Democrats feel that a progressive tax is a worthwhile option.

For the purposes of taxation, the Senate considers high-cost health insurance plans to be those that are worth over $8,500 annually for individuals. For family policies, the limit is $23,000. Plans above those levels will be taxed at a 40% rate, which may result in employers downgrading their plans. In general, employer-based health insurance plans are tax-free; the write-offs encourage employers to offer them.

Union members, while generally supportive of healthcare reform efforts, are leery about the proposal. The reason is simple: a higher percentage of union members currently enjoy similarly generous health insurance plans. Such plans were often hard-won concessions in labor negotiations in lieu of pay raises. Police officers, firefighters, and other workers in high-risk (and mostly unionized) professions have a higher threshold before their plans are taxed. Moreover, retirees will also have relaxed standards. These exceptions may not be enough for organized labor. Despite their power, however, only about one-tenth of working-age Americans are members of a union.

With a razor-thin majority, the Senate cannot afford to lose a single vote on the issue; on the other hand, the House has more wiggle room. Most likely, the Senate’s more fiscally conservative provisions will win. President Obama’s public endorsement of the tax on these so-called “Cadillac” health insurance plans will further tip the balance. Obama has remained quiet on specific healthcare reform proposals, and has only given generic support for the bills. Although its absence probably will not stop him from signing the bill when it reaches his desk, he is finally spending some of his political capital on the issue. It is also significant that White House budget director Peter Orszag believes that economic benefits will result from the tax. It will probably assist in reducing the budget deficit.

Yamileth Medina PhotoAbout Author
Yamileth Medina is an up and coming expert on Health Insurance and Healthcare Reform. She aims to help people realize that they can find quality health insurance plans right now. Yamileth lives in Miami, FL.

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