By Ed Mendel
March 30, 2015
Employer and employee groups are urging CalPERS to “undertake all efforts” to avoid the “Cadillac Tax,” a 40 percent tax on high-cost health plans imposed in 2018 by President Obama’s health care law, a CalPERS staff report said this month.
But it’s far from clear that one of those efforts will be Gov. Brown’s proposal to give state workers the option of a low-cost plan with a high deductible, even though the administration mentions the looming penalty tax as a reason for offering the plan.
At a legislative hearing on high-deductible plans this month, which did not include a presentation of the governor‘s proposal, unions and retiree groups denounced the plans that require large out-of-pocket payments before insurance coverage begins.
Retirees fear a cut in their health insurance payments. If enough state workers choose the low-cost health plan, increasing their take-home pay, it could lower the average cost of the four highest-enrolled health plans that sets the retiree payment.
Unions fear paying the high deductible could be ruinous for low-wage workers hit by an accident or major illness, despite the governor’s plan for state contributions to a health savings account to help cover uninsured costs.
High deductibles are said to hinder doctor visits, reducing early problem detection and raising long-term costs. And if the young and healthy, less in need of health care, choose a high-deductible plan, other plans left with older members may need rate increases.
In the opposite view, advocates of the Cadillac Tax say high-cost plans insulate workers from the expense of health care and encourage the overuse of tests, hospitalization and other medical procedures.
The excise tax on health plans with annual premiums above a cost limit ($10,200 for individuals and $27,500 for families) is intended to reduce the growth of health care costs by prompting employers to cut coverage and offer more high-deductible plans.
The renewed focus on cost control also is expected to yield tax revenue needed to expand the President’s Affordable Care Act. A major tax break, employer health plans, would be reduced, and the cut in worker benefits may be offset by higher taxable wages.
A business group predicted that 38 percent of large employers would be hit by the Cadillac Tax in 2018. Because the cost limit, growing with inflation, is likely to be outpaced by health costs the average family plan is predicted to be taxed by 2031.
For state workers, a Cadillac Tax was included in the actuarial projection issued by the state controller last December showing a $72 billion debt or “unfunded liability” for retiree health care promised current employees over the next 30 years.
“The ultimate trend rate for future retirees was increased by an additional 0.14 of a percentage point to 4.64 percent on and after 2025,” said the controller’s report by Gabriel Roeder Smith & Co. actuaries.
A preliminary report by the staff of the California Public Employees Retirement System this month used the example of two high-cost plans that would be hit by an annual “Cadillac Tax” estimated to total $3.9 million.
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