Do I have a “Cadillac Plan”?

An Explainer health care FAQ.

The Senate finance committee passed its version of health care reform legislation Tuesday with a 14-9 vote. The bill would expand coverage without increasing the deficit, according to the Congressional Budget Office, in part by taxing the most expensive health insurance plans, or so-called “Cadillac plans.”

How do I know if my insurance plan is a “Cadillac plan”? Look at the cost. The finance committee defines high-cost or “Cadillac” as any plan with premiums higher than $8,000 for individuals or $21,000 for families. Keep in mind that these figures include everything you and your employer spend on health care except for the deductible: premiums for medical (the portions paid by you and by your employer), dental, and vision coverage, as well as any money you put into a flexible spending account, which allows you to set aside pretax money to cover medical costs. Since your pay stub may show only your personal contribution—not that of your employer—the best way to find out the total cost of your plan is to ask your human resources liaison. Many companies already list their employees’ total premiums on their W-2 tax forms. The bill passed by the finance committee would make that mandatory.

What does a “Cadillac plan” offer? The top-of-the-line plans—say, the $40,000-a-year plan offered to Goldman Sachs CEOs—likely have no copayments, no deductibles, few limits on how much you can spend, and no need for prior authorization, i.e., to get special permission before you get treated.

But many not-so-fancy plans also qualify as “Cadillacs” under the finance committee’s definition. That’s because the term refers to total cost—not a particular set of benefits—and many factors—like the state you live in, the size of your company, and the makeup of that company’s work force—can affect costs. Premiums tend to be significantly higher in Massachusetts than in Idaho, for example. (The employer/employee contribution also varies by state.) The smaller the business, the fewer employees who go into the pool, the less leverage the organization has to negotiate lower premiums. And if the workers have an average age of, say, 54, their premiums are going to be a lot higher than if the average is 25.

A lot of basic benefits packages, then, can still qualify as “Cadillacs.” (The Senate finance committee has made exceptions for workers with high-risk jobs like firefighters, whose premiums tend to be high.) The Joint Committee on Taxation has estimated that the tax would hit 14 percent of family health policies and 19 percent of individual policies in 2013, when the legislation would take effect. Those numbers would rise to 37 percent and 41 percent, respectively, by 2019, since premiums are expected to rise faster than inflation.

If I have a “Cadillac plan,” will I have to pay the proposed tax myself? No. The 40 percent tax will be charged directly to the insurer. That is, the insurance company has to pay 40 cents on every dollar spent above the $8,000 or $21,000 cutoff. Some portion of that tax, however, is likely to get passed onto the consumer.

When did we start calling them “Cadillac plans,” anyway? Ever since its introduction in 1902, the Cadillac has been synonymous with American luxury. But the health care metaphor appears to have taken root sometime in the 1970s. In 1977, a hospital administrator in Cedar Rapids, Iowa, complained that “every citizen demands Cadillac health care service and is not concerned about the Cadillac costs because in most instances the patient doesn’t pay this cost personally.” In 1986, an official with the Alabama Medicaid Agency noted that “Alabama has a Volkswagen type Medicaid program compared to the Cadillac or Rolls Royce programs found in other states.” The term was used a lot in the early ‘90s during the push for universal health care. It then made a comeback in 2007, when President Bush proposed taxing health care benefits, and again during the 2008 election, when John McCain made the proposal a cornerstone of his health care plan.

Got a question about today’s news? Ask the Explainer.

Explainer thanks Paul Fronstin of the Employee Benefit Research Institute, Elise Gould of the Economic Policy Institute, Elizabeth McGlynn of the RAND Corp., and Edwin Park of the Center for Budget and Policy Priorities.