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Some Small Businesses See Burden In "Cadillac" Tax

Mar 04, 2010

(Jenny Gold/KHN)

This story was done in collaboration with our partner NPR

Ellen Warner and her husband Mark run a small online store out of the basement of their home in Cumming, Ga., a suburb of Atlanta. The Alzheimer's Store, which sells products for people with dementia and their caregivers, is a mom-and-pop operation that at best breaks even.

Even so, the Warners offer health insurance. But the cost is high – it averages $11,000 per person a year for the couple and one other employee – and they fear a proposed new federal tax on high-cost plans could make it unaffordable. Other small businesses may find themselves in a similar bind, some experts say.

"Small businesses are definitely going to be affected by the excise tax," says Paul Fronstin, senior research associate at the Employee Benefit Research Institute, a nonpartisan organization in Washington.

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Under the Senate health bill, a 40 percent levy would apply to premiums above $8,500 for an individual policy and $23,000 for a family policy, and would go into effect immediately. The health care proposal recently offered by President Barack Obama would scale back the tax significantly by raising the premium threshold to $10,200 for an individual policy and $27,500 for a family policy. By comparison, the average cost of a family policy provided by employers is $13,375, according to the Kaiser Family Foundation. (KHN is part of the foundation.) The White House plan would also delay the tax until 2018, and vision and dental insurance would not be included in the total premium cost. The tax would be assessed annually.

Although the tax would be paid by insurers and employers that self-insure, experts expect the cost ultimately would be borne by consumers. Based on the thresholds in the Senate bill, the tax on an $11,000 plan would come to about $1,000 per person. Obama's proposal would result in a $320 tax per person.

Calculating the future tax on a specific plan like the Warners' is difficult, however, because the Senate and Obama proposals would limit how much more insurers can charge older people – Ellen Warner is 62 and her husband is 61. Other factors affecting calculations include the exclusion of vision and dental coverage from the total cost of taxable benefits, the impact of competition in the health insurance exchanges where companies would compete for business and tax credits for small businesses. Obama's proposal also would raise the excise tax threshold for businesses whose workers are older or primarily female.

Higher-cost plans, dubbed "Cadillac" policies by some, often have generous benefits with low deductibles and co-payments, but this is not always the case. Premiums may also be high because customers are charged more because of their age, gender, geographic area or heath status.

Small businesses are at a particular disadvantage. A study published in 2006 in the journal Health Affairs found that the smallest employers pay an average of 18 percent more than large businesses for the same health plan, because they don't benefit from pooled risk the way a large business does, and administrative costs tend to be higher.

This leads many small businesses to offer fewer benefits and pass on more of the cost to workers.

Fronstin says the tax will hit many small businesses even if they offer only ordinary coverage. "You may be providing 'lousy benefits' as a small business, but if everyone in your firm is 55 to 60 years old, the premium for those lousy benefits is still going to be very high," he explains.

Douglas Holtz-Eakin, president of DHE Consulting, former director of the Congressional Budget Office and health adviser to John McCain's 2008 presidential campaign, says small businesses are "especially responsive to tax costs and other things associated with providing fringes to their employees, so they are the most likely to stop offering coverage in the presence of a higher cost."

Ellen Warner says even though she shopped extensively with the help of a broker and "picked a plan somewhere towards the bottom," it was still costly. They've had it for about a year. It has a $1,000 deductible and $40 co-pay for each visit to a specialist.

Warner says the high cost of health insurance coverage "means that instead of making a profit last year, we lost money. It means the difference between success and failure in a business."

Senate Democrats and Obama pushed for the tax in negotiations with the House because it would raise money for coverage of the uninsured and could act as a brake on ever-rising health care spending. Many economists say rich benefit plans encourage overuse of health care.

Gail Wilensky, a senior fellow at Project Hope, an international health foundation, and administrator of the Health Care Financing Administration under President George H.W. Bush, likes the idea of a tax -- and says it isn't likely to be a major issue for small businesses. Some small businesses could lower their premiums by changing the kind of health plans they provide, she says. And provisions restricting how much more insurers can charge based on gender or age could help.

Warner is a strong supporter of a health care overhaul, although she worries that a tax could hurt her business. Yet she's determined to try to find a way to provide insurance for any workers who want it. A few now obtain coverage through spouses' policies. "I think that for small companies to get good employees, they've got to offer insurance coverage," she says.

 

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