Some Small Businesses See Burden In 'Cadillac' Tax
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.
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.
This story was produced through collaboration between NPR and Kaiser Health News (KHN), an editorially independent program of the Henry J. Kaiser Family Foundation, a nonpartisan health care policy research organization. The Kaiser Family Foundation is not affiliated with Kaiser Permanente.
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STEVE INSKEEP, host:
Rangel's move comes at a moment when Democrats would much rather focus on passing a health care bill. A big part of that plan offers subsidies so more people can buy insurance. Of course, somebody has to pay for the subsidies, which is why the plan includes a tax. It would apply to expensive insurance plans that are currently tax-free. The people opposing the tax includes some small businesses that wonder how they'll will manage. Jenny Gold of Kaiser Health News has more.
JENNY GOLD: Ellen Warner and her husband run a small online store out of the basement of their home outside Atlanta.
Ms. ELLEN WARNER: We sell products for people with dementia and their caregivers.
GOLD: The Alzheimer's Store is a mom-and-pop operation, with five employees and a budget that just barely breaks even. But they do offer health insurance at a cost of about $11,000 per person in premiums each year. That's well over the rate that lawmakers want to tax, and just over the rate Mr. Obama proposed. But it was the best deal they could find, Warner says.
Ms. WARNER: I ran the numbers on everything to see which one was the most cost-efficient. And the one that was most cost-efficient was the one we took.
GOLD: This is not a fancy plan, the kind the so-called Cadillac tax was supposed to hit. The three employees covered by the plan pay $1,000 out-of-pocket for their health expenses before the insurance kicks in. And they pay $40 co-pays for each visit to a specialist. But their cost takes into account who's getting covered. The Warners are both over 60 years old. And even though the other employee covered under their plan is a healthy 25-year-old, their premium costs are still very high.
Ms. WARNER: It means that instead of making a profit last year, we lost money. It means the difference between success and failure in a business.
GOLD: Warner is a supporter of a health care overhaul, but she says she's not sure her business could sustain a Cadillac tax, which could cost them another $1,000 a person each year, just to keep their health plan.
Ms. WARNER: Yeah, small businesses struggle, and we struggle. And if we have another tax to consider, I think that there was a chance that I would have no other choice than to drop it.
GOLD: Warner isn't alone. Small businesses often have a hard time finding affordable coverage. They pay an average of 18 percent more than a large business for the same health plan. That's partly because they don't benefit from pooled risk the way a large business does.
Mr. PAUL FRONSTIN (Employee Benefit Research Institute): Small businesses are definitely going to be affected by the excise tax.
GOLD: That's Paul Fronstin of the Employee Benefit Research Institute in Washington. He says small businesses are more likely to be caught by the Cadillac tax, even if they only have ordinary coverage.
Mr. FRONSTIN: You may be providing, you know, in quotes, "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.
GOLD: A final health bill is likely to include tax credits to help small businesses keep their insurance. But the details are still unclear. Douglas Holtz-Eakin says small businesses are extremely sensitive to new costs. Holtz-Eakin was director of the CBO under President George W. Bush.
Mr. DOUGLAS HOLTZ-EAKIN (Former Director, Congressional Budget Office): We know small businesses are especially responsive to tax costs and other things associated with providing fringes to their employees, so they are the more likely to stop offering health insurance in the presence of a higher cost.
GOLD: President Obama has been pushing the Cadillac tax, but support isn't limited to the Democratic administration. Gail Wilensky ran the Medicare and Medicaid programs under the first President Bush. She says some small businesses could lower their premiums by changing the kind of health plans they provide. And the bill may ultimately contain provisions that could help people like the Warners by limiting how much more insurers can charge older customers.
Dr. GAIL WILENSKY (Former Director of Medicare and Medicaid): That will mean that the Cadillac tax is much more likely to reflect generous benefits than people who are older or have had some sickness, especially for the small groups, where that can dominate the cost of the plan.
GOLD: She says the Cadillac tax isn't likely to be a major issue for small businesses. With so many variables, it's difficult to puzzle out exactly how health reform legislation would affect any given company. Ellen Warner says she supports the bill, despite the uncertainties her business faces.
Ms. WARNER: I think that for small companies to get good employees, they've got to offer health insurance coverage.
GOLD: And she's determined to try.
For NPR News, I'm Jenny Gold.
INSKEEP: Kaiser Health News, for which Jenny Gold works, is an independent and non-profit news service.
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INSKEEP: You're listening to MORNING EDITION from NPR News. Transcript provided by NPR, Copyright National Public Radio.
