How Obamacare's Cadillac Tax Will Affect You

Obamacare has been controversial since it was first proposed, and the debate about the law has only gotten more heated as more of its provisions take effect. With Americans now starting to see more of Obamacare's elements take shape, such as state health-insurance exchanges geared toward getting insurance coverage for the currently uninsured, analysts are turning their attention to some of the less-followed but equally important aspects of the Affordable Care Act that could have a big impact in the future.

One part of Obamacare that has become newly controversial applies to its taxation of employer-provided health insurance policies that offer extremely valuable benefits. Dubbed the Cadillac tax, this rule doesn't take effect until 2018, but when it does, the impact could be draconian. Let's take a closer look at exactly what the Cadillac tax does and how it could affect you.

President Obama at the 2013 State of the Union address. Source: White House.

How the Cadillac tax works
The way Obamacare will impose the Cadillac tax is deceptively simple. Under the law, if an individual health-insurance policy costs more than $10,200, the employer has to pay a 40% excise tax for any amount above that $10,200 threshold. For family policies, the corresponding threshold is $27,500.

Given those high dollar amounts, you might imagine that not many policies would be subject to the Cadillac tax. But initial projections estimated the potential revenue from the Cadillac tax at $137 billion over the next decade, and even though the Congressional Budget Office recently reduced that estimate to $80 billion, that tax corresponds to $200 billion in additional insurance-value above the Cadillac tax thresholds. Moreover, even though the threshold figures are indexed for inflation, rising health care costs that have historically climbed more quickly than the Consumer Price Index could leave an increasing number of employers having to pay the tax.

Moreover, one big problem with the threshold figures is that they're the same for people of all ages. That doesn't match up with the economics of health insurance, where policies for older workers cost far more than policies with identical benefits for younger workers.

As a result, older workers are more likely to trigger the Cadillac tax for their employers over time, giving employers yet another incentive to favor a younger workforce even as more workers approaching retirement age seek to extend their careers. In addition, although retirees not covered by Medicare who are fortunate enough to get health-insurance coverage from their employers would be subject to higher thresholds of $11,850 for individual plans and $30,950 for family plans, the tax would nevertheless pose another obstacle in convincing employers to provide those valuable benefits for their retired workers.

What employers are doing
Even though the excise tax is still more than four years from taking effect, employers are taking steps now to try to manage its effects. Given the need for many employers to engage in collective bargaining with their employees in order to implement major changes to health-insurance coverage, four years isn't as long as it seems in trying to adapt to avoid the Cadillac tax down the road. The opposition of labor unions against the tax bears out the need for early action.

So far, companies have looked to reduce costs in a number of ways. Wal-Mart has looked at paying for health-related travel costs to get patients suffering from heart and spine ailments to hospitals with better track records of success. Cummins has already moved some workers to high-deductible health plans that put more of the onus on employees to control their health care costs, but it has also implemented wellness programs to try to encourage healthier living that reduces the likelihood of incurring high costs from chronic conditions later in life.

Despite these innovative ideas, the simplest way to cut costs below the Cadillac-tax threshold is to reduce benefits. As a result, you can expect some of the most generous plans offered to employees, whether they work in the public or private sector, to slowly degrade in quality by the time the tax takes effect.

Will health insurers suffer?
Meanwhile, efforts to get rid of high-cost plans could have a negative impact on UnitedHealth , WellPoint , and other health-insurance companies. By imposing a fixed-percentage medical-loss ratio limitation on profits based on premium revenue, Obamacare allows higher-cost plans to retain a higher dollar value for administrative costs and profits than plans that charge lower premiums.

Moreover, because of those limitations, employers' efforts to get their workers to be healthier could end up actually hurting insurers' profits. Ordinarily, a health-insurance company would want to reduce medical claims, because paying less in claims would boost its bottom line. However, once the Obamacare profit limitations kick in, insurers have to return excess profits to customers in the form of rebates. That reduces their incentive to help their customers implement cost-savings strategies, changing the dynamic between insurers and their employer-clients.

Watch your policy
Between now and 2018, you'll want to keep a close eye on your insurance coverage. With a growing number of employers making major modifications to their health-insurance plans, you might find yourself bearing an increasing burden of the cost of your health care in the years to come.

Obamacare has plenty of far-reaching effects beyond the Cadillac tax. The Motley Fool's new free report "Everything You Need to Know About Obamacare" lets you know how your health insurance, your taxes, and your portfolio will be affected. Click here to read more.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Cummins, UnitedHealth Group, and WellPoint. The Motley Fool owns shares of Cummins and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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