Health Policy$ense

Economists Step Up to Defend Cadillac Tax

101 prominent U.S. economists and health policy experts sign a letter to Congress

What are the chances of getting 101 prominent U.S. economists and health policy experts to agree on something? It seems the embattled Cadillac tax, a key provision of the Affordable Care Act (ACA) that taxes employers for high-cost insurance plans and takes effect in 2018, may have achieved the impossible.

In a letter to Congress, health economists from across the political spectrum stress the importance of the Cadillac tax as an essential tool for controlling health care costs. They warn that if it were to be repealed, without an alternative policy in place to serve this function, the ACA will fail in its aim of bringing down skyrocketing health care costs.

Signatories to the letter include nine experts from the University of Pennsylvania, LDI Executive Director Dan Polsky; LDI Senior Fellows Patricia Danzon, Ezekiel Emanuel (who also has an op-ed in the NY Times), Mark Pauly, Amanda Starc, Robert Town, and Kevin Volpp, and other Penn colleagues Robert Inman and Kent Smetters.

The letter makes the case that:

The Cadillac tax will help curtail the growth of private health insurance premiums by encouraging employers to limit the costs of plans to the tax-free amount. The excise tax will discourage the provision of insurance that covers such a large proportion of health care spending that consumers have little incentive to insist on cost-effective care and providers have little incentive to provide it. As employers redesign health insurance plans to hold costs within the tax-free amount, cash wages or other fringe benefits will increase. Furthermore, repealing the Cadillac tax would add directly to the federal budget deficit, an estimated $91 billion over the next decade according to the Joint Committee on Taxation.

The letter stresses that measures other than the Cadillac tax could restrict the open-ended health insurance tax break, but that unless this alternative tax change is in place Congress should take no action to “weaken, delay or reduce” the Cadillac tax. Recent research by Brad Herring and Erin Trish concludes that the Cadillac tax may exacerbate current inequity in employer-sponsored insurance tax exemptions (that is, higher income people benefit more than lower ones). Possible remedies for the inequity include capping the current tax exclusion or turning it into refundable tax credit. 

Mark Pauly has previously said that if he could ignore politics and design the best way to contain costs, “it would have been to simply limit or take away the tax break that currently enables higher-paid workers to maintain that expensive coverage.” But unfortunately you can’t ignore politics…

The Cadillac tax has taken a battering recently, from the left and right, with its latest high-profile critic being likely Democratic presidential nominee Hillary Clinton. While the economists’ letter certainly sends a strong message, the problem may be that they are the Cadillac tax’s only constituency, and not one with a great deal of political clout at that. This is clear in the coverage of the letter: the Washington Post’s Wonkblog calls it   “a love letter to the Obamacare provision that everyone else hates” and Jonathan Cohn at the HuffingtonPost writes  “somebody’s gotta stand up for it”.  Vox’s Sarah Kliff calls it a fight between politicians and wonks. In which case, who would you put your money on? At least this letter shows that the wonks have some fight in them.


Economists, who aren’t necessarily known for agreeing with one another, seem to be doing a lot of it recently with 284 of them, including LDI Senior Fellow Patricia Danzon, signing a global declaration for a pro-poor path to universal health coverage.