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REHABILITATING HEALTHCARE

The 'Cadillac' compromise

Yes, unions negotiated a better deal for labor. But the goal of controlling costs was preserved.

January 16, 2010

Lobbyists for organized labor usually run into stiff Republican head winds when pushing their legislative agenda. But on healthcare reform, congressional Republicans proved to be the unions' most valuable ally -- albeit inadvertently. With no GOP votes available for the House and Senate reform bills, top Democrats and the White House had little choice but to make peace with the unions on the issue of taxing “Cadillac” insurance plans, giving unionized workers far more time to adjust to the new tax than nonunion employees. That isn't fair, but in the long run the deal preserves an important piece of the bill's approach to controlling healthcare costs.

At issue is the Senate proposal to raise about $150 billion through a new excise tax on the most expensive health insurance policies. Many of these policies currently impose no or minimal co-pays and deductibles, which has the unhelpful effect of insulating policyholders too completely from the cost of care. The result is that consumers make needless trips to the doctor, and healthcare providers spend excessively on diagnoses and treatments. The Cadillac tax would discourage this type of coverage, injecting more market discipline into the healthcare industry. A more direct approach would be to cap the income tax exemption for health benefits, but a tax on Cadillac plans is the next best thing.

The compromise won by the unions would exempt more plans by having the tax kick in at a higher premium amount -- $24,000 per year for family plans, not $23,000. The effective date of the tax would also be delayed from 2013 to 2018 for those covered by union contracts.

Labor lobbyists made a reasonable case that the new tax would hit their members disproportionately because many locals had bargained for richer insurance policies in lieu of higher wages. But the same could be said of any worker with a Cadillac plan -- there's always a trade-off between wages and benefits. And tax laws change all the time, heedless of the disruption that might ensue to those under long-term employment contracts. That's why it makes sense to give everyone a few years to adapt, and why moving back the starting point just for union members smacks of special-interest favoritism.

Still, unions are hardly alone in taking advantage of the Democrats’ scramble to hold onto votes within their party. And keeping a tax on high-end plans, even if it's delayed, will help temper the demand that's contributing to runaway healthcare costs. The next question is how Democrats will recoup the revenue lost through the compromise (about $60 billion over 10 years). Their focus should be on sources that, like the tax on Cadillac plans, serve the goals of health reform, not the cause of political expediency.

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