Why One Health Economist Wants to Pay More for His Insurance

Why One Health Economist Wants to Pay More for His Insurance

Health Economist Mark Pauly on the 'Cadillac Tax'

While labor leaders and some well-paid employee groups like Harvard professors rail against increased cost-sharing in health insurance as well as the coming "Cadillac Tax," a top health economist at the University of Pennsylvania has starkly different views about such cost containment measures.

Mark Pauly
Photo: Hoag Levins
University of Pennsylvania Wharton School Professor and LDI Senior Fellow Mark Pauly.

Mark Pauly, PhD, a Professor of Health Care Management, and Business Economics and Public Policy at Penn's Wharton School and a Senior Fellow at the Leonard Davis Institute of Health Economics (LDI) feels a sense of discomfort at having health coverage that is far superior -- and more heavily subsidized -- than that available to most other Americans. He welcomes higher cost sharing and the Affordable Care Act's "Cadillac Tax" that takes effect in 2018 and thinks other high-paid professionals should too.

40% Cadillac tax
In an article that raised the issue's profile in academia last month, The New York Times detailed how professors at Harvard are incensed that the university has increased cost sharing in their insurance and that they could suffer a further financial hit from the coming Cadillac Tax that levies a 40% non-deductible tax on expensive health insurance benefit packages.

Meanwhile, the Cadillac tax has become a high-level target on the hit list of the new GOP-controlled Congress.

Pauly said it was no surprise that so many educational institutions and private companies were now moving to increase cost sharing in their employees' health benefits.

"Employers would like things like the Cadillac Tax to go away but if that doesn't happen, they don't want to wake up on January first, 2018 and realize, 'Oh, my God, I have to do something,'" he said. "They're trying to readjust how they provide health insurance. They have no other choice but to prepare for it."

Cost containment as social goal
"At one level," said Pauly, "the purpose of the Cadillac Tax is to say, 'well, if we have cost containment as our social goal, those buyers of insurance who are choosing very high levels of lavish, resource-guzzling insurance coverage ought to be penalized."

"And in a broader context," he continued, "the Cadillac tax is intended to offset what is already in place as a major tax break for that kind of insurance. The 40% excise tax on those excess premiums would be about equal to the size of the tax break under current arrangements. So the Cadillac tax is intended in a sense to cancel out, at the upper end, this subsidy that, personally, I benefit from, and I'm ashamed of it. People in my socioeconomic stratum benefit from a very generous subsidy to help us buy health insurance that we neither need help buying nor should we be encouraged to buy. It's much more expensive than the average kind of insurance available to other workers or people on the exchanges."

"The tax is really intended to be the same sort of thing as your threats to your children," Pauly said. "You don't really want to ground or punish them; but you want to change their behavior. And so at least in the view of the designers, the Cadillac Tax's primary purpose was to provide incentives to employers and those high-wage employees to stop choosing such expensive insurance and try to find ways to economize on insurance premiums to be consistent with our overall objective of trying to get everybody to economize on healthcare costs."

Given the rising sentiment against it and the new Washington landscape, does Pauly think the Cadillac Tax will actually be implemented?

Why it could fail
"The reason it could fail," he said, "is that there are people who don't want to pay taxes and many of them are upper middle class people with a good deal of power. Then there's the general partisanship surrounding Obamacare that may or may not have attenuated by 2018."

Pauly notes that if he could ignore politics and design the best way to deal with the cost containment issue it would have been to simply limit or take away the tax break that currently enables higher-paid workers to maintain that expensive coverage.

He also pointed out that the current threshold amounts -- $10,200 for an individual and $27,500 for a family -- that trigger the Cadillac Tax penalty are quite high and that the latest analyses estimate that about 17% of U.S. workers might be eligible for the tax penalty. He also admits that once promulgated in 2018, those thresholds could theoretically be lowered to encompass more workers.