One of the striking features of the early episodes of AMC’s hit television show Mad Men is the similarities in the lifestyle enjoyed by the lowest paid members of Don Draper’s advertising company and its wealthy partners. In the show’s 1960s setting, regardless of class, these folks largely lived in similar homes, went to the same schools, and summered in the same locales.
These parallels fade in the show’s later episodes, set in the early 1970s, as the economic, cultural, and most of all social lives of differently situated Americans begin to separate. It’s a point made by my American Enterprise Institute colleague and famed cultural observer Charles Murray in describing the widening divide between the growing urbanity of affluent Americans, and the economic struggles (and cultural isolation) experienced by a working class and middle class that is increasingly falling behind.
This growing economic and cultural gap – between the working class, and the increasingly cloistered rich – is animating political sentiments in both major parties. It also provides a powerful framework to understand what’s happening in American healthcare as a result of the Affordable Care Act.
For decades, even as other aspects of peoples’ lives started to drift apart based on income, for most middle and working class Americans, their health benefits remained within reach of their much wealthier counterparts. Employer sponsored insurance was a big part of that. The ability of working class Americans to bargain for health coverage at work gave them access to the same basic packages of benefits as executive management teams. For the most part, middle class Americans could show up in the same doctors’ offices and access the same treatments as their much wealthier counterparts. Now, Obamacare is deliberately eroding this last vestige of proportional egalitarianism.
That’s because at the very same time that Obamacare expands access to coverage outside the workplace, the same scheme deliberately degrades the quality of the coverage that employers can offer to their workers. The end result is that, over a short period of time, the middle and working class will end up in the same high deductible, narrow network, HMO style plans sold in the Obamacare exchanges — replete with closed drug formularies and tight restrictions on technology.
The very rich and merely affluent have already found ways to buy themselves out of these schemes. This is evidenced, for example, by the growing popularity of concierge and subscription based practices. It’s also seen in the movement of self-insured plans toward high deductible health savings accounts coupled to preferred provider organizations. The movement toward high-end, on-site medical clinics at services firms like those found in Silicon Valley will also help insulate wealthy, services workers from Obamacare. All of these structures will let firms and employees who are able to spend up for better care retain choice and flexibility in their treatments and doctors.
One element of Obamacare that’s driving this growing division is a furtive tax that whacks the health benefits that people get through their workplace. Outside of healthcare benefit managers, few people are focused on the “Cadillac Tax,” a provision tucked into Obamacare as a way to help raise money, and to limit the richness of the coverage that businesses can offer at work. In the next decade, it will take out a total of $100 billion from the health benefits people get at work.
Experts now say that the true price for the 40 percent “Cadillac Tax” on higher cost health plans will be closer to a 61 percent levy, once the tax goes into effect in 2018. That’s because the tax will first be levied on insurers who will then have to collect it from employers and their workers, adding costs to how much eventually gets charged to consumers. It won’t just hit the gold plated health plans, either, which was how it was first billed. By the year 2031, the tax hits half of all health plans.
Nor will the tax hit everyone equally. Higher wage services job may choose to pay some of the tax, and more likely they will be able to buy their way out of it with cost-sharing adjustments. Think law firms and investment banks. There’s already a trend toward more small, higher-wage services businesses seeking to self-insure, in part to avoid some of the new costs being imposed on fully insured plans. For everyone else with middle wage incomes that nonetheless enjoyed comprehensive workplace coverage, many of them are likely to end up in Obamacare. This is the new egalitarianism.
Like the Independent Payment Advisory Board, whose underlying function was to cap the rate of growth in Medicare spending, the “Cadillac Tax” will set an upper boundary on the value of the health benefits that employers can offer at the workplace. But there is an important twist. From the fiscal years 2015 through 2019, IPAB pegged its maximum rate of growth in Medicare spending to inflation gauges. Starting in 2020, the target for the “Cadillac Tax” is based on the growth of the gross domestic product plus one percentage point. The problem of course is that the rate of growth in healthcare costs has been much faster than the overall rate of GDP growth. The spending per person for private healthcare coverage is projected to grow an average of 5.6 percent annually, while GDP will increase only two percent according to the Congressional Budget Office.
The “Cadillac Tax” is really an excise tax that applies to plans with “pre-cost sharing costs” above $10,200 for individuals and $27,500 for families. So if a family’s benefits were valued at $30,000, then they would pay a tax on the extra $2,500 in value. The calculation of those costs is based on the total cost of premiums, rather than by what the insurance plan covers. This includes both the employer and employee contributions. So employers can’t lower the liability by increasing the worker portion of the premium costs. The tax also applies to contributions made to HSAs and FSAs, as well as supplemental insurance. Businesses can reduce plan values, and skirt the tax, by cheapening the coverage (by offering narrow networks or closed drug formularies, for example) or increasing cost sharing. The idea is to obligate everyone to the same low end Obamacare plan.
Employers with a lot of working class employees will hollow out the benefit or just move their employees into Obamacare where at least workers get access to the government subsidies. Higher wage service employers (whose workers who earn too much to qualify for subsidies) will design plans that skirt the tax. Think law firms and investment banks. They will use cost sharing to stay out of the tax, because their workers will be able to afford the out of pocket spend. They will still be able to maintain better access to doctors and drugs than what people will get under Obamacare. The gap between those with good and those with average health insurance will grow much wider.
It’s worth noting that the tax is highly regressive. The flat 40 percent levy hits everyone regardless of their income. In the end, rather than making the market more egalitarian, the “Cadillac Tax” will exacerbate the gap between those with good health coverage that they get at work, and those with barer bones, Obamacare plans. Many working class union members, for example, bargained for years to obtain rich health benefits that were better than they might have otherwise afforded on their own. That helped a whole generation of Americans build some upper middle class comforts.
Now, the “Cadillac Tax” will take that away. It will replace the current employer coverage with the same sort of cheapened, skinny plan that they can buy on Obamacare. Goldman Sachs estimated in a recent analysis that the “Cadillac Tax” could reduce employer-based health spending by $100 billion by 2025. This represents a reduction of close to 10 percent of employer health spending.
It should be little surprise that the unions are now some of the sharpest critics of the tax. Estimates show about one-third of employers will be hit by the tax in 2018 if employers do nothing to cheapen their plans, according to a survey by Mercer. By 2022, almost 60 percent will be facing the tax.
President Obama’s healthcare adviser Jonathan Gruber, in one of the infamous videos that surfaced late last year, said that rising healthcare inflation will mean that the “Cadillac Tax” will effectively eliminate the tax deductibility of health insurance bought at work. For many in Congress, that’s just fine. The tax exclusion has long been a source of criticism from those who argue that it causes workers to over consume health benefits, contributing to rising medical costs.
The problem is that the alternative to the tax deductibility of health benefits bought at work will be the Obamacare exchanges. Without the benefits of the tax exclusion, it will make even more sense for businesses to move their workers into the exchanges, where at least they will benefit from the Obamacare subsidies. This is a back door, surreptitious death spiral for employer provided insurance, and a nod toward Obamacare, at least for the middle and working classes.
For generations of Americans — even while other aspects of the daily lives between the rich and working classes pulled further away — healthcare was a place where people of different economic classes often shared prospects. The well-employed middle class enjoyed largely the same benefits as their wealthier peers. Some will argue a reckoning was inevitable; that those workplace benefits were already being eroded. But Obamacare sealed the deal. It left no doubt about that end game.
In the late episodes of Mad Men, by the early 1970s, Don Draper moves out of his suburban home and into a city penthouse. It’s one sign of a widening cultural gap between the economic classes. It’s a migration that has accelerated in our time, but until Obamacare, didn’t fully transform healthcare.
Before Obamacare, many working class Americans had an upper middle class healthcare benefit that they got at work. Now they’ll be put on a plan benchmarked to Obamacare — one that looks a lot like Medicaid. Only the wealthier services firms, and their upper income employees, will be able to buy their way up, and out of this scheme. That’s progressive egalitarianism under Obamacare.
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