The Cadillac Tax – The Long Goodbye?
We may be witnessing the death of the Cadillac tax…a slow, Washington, DC style, death. The two-year delay in the tax, included in the end-of-year budget deal, was the first major legislative change to the ACA and the tax’s first figurative “nail in the coffin”.
Beyond delaying the tax until 2020, the budget deal also included a little-known provision to weaken the tax should it ever take effect. That provision makes the Cadillac tax fully-tax deductible for the employers/insurers that have to pay it. The net effect of this provision weakens the tax as an incentive to control costs for for-profit employers/insurers, and creates a disparity between for-profit and non-profit entities (who are not subject to income taxes).
The Cadillac tax has made for unlikely allies. There is bipartisan political support for repealing it, while a group of prominent health economists and policy analysts, including seven LDI Senior Fellows, have joined together in support of it. In a letter, they urged:
Congress to take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth.
With the tax now weakened and delayed, it looks like the economists may have lost this round.
Proponents of the tax believe that the 40% excise tax on expensive plans will counteract the open-ended tax break for employer-sponsored health insurance, which does not count as taxable wages. In theory, it slows the rate of health care cost growth by encouraging less costly, more efficient coverage. The tax could also lead to a shift from non-taxable benefit compensation to increased wages. Proponents also note that the current structure provides a greater tax benefit to wealthier individuals and that the Cadillac tax is an attempt to fix that problem. A recent analysis, however, suggests that the tax actually exacerbates the inequity.
Opponents of the tax believe it will cause employers to shift more costs onto employees in the form of higher out-of-pocket expenses, such as deductibles and co-payments. They are concerned that the tax will disproportionally affect lower-wage workers, such as union employees who accept lower wages in favor of generous benefits. There is some evidence to suggest that anticipation of the Cadillac tax is already changing employer behavior. In the 2015 Kaiser Employer Health Benefits Survey, 13% of large firms and 7% of small firms stated they have made changes to their plans’ coverage or cost sharing to avoid the tax, while 8% of larger and small firms have switched to a lower-cost plan. The extent to which these shifts in cost-sharing and benefit design are caused directly by the impending tax is debatable, given that these trends already existed. However, it is likely the prospects of the Cadillac tax has exacerbated these changes.
The stakes are high for the future of the tax, particularly for those who will be affected directly. The Kaiser Family Foundation estimated that in 2018, 16% of employers would have had a plan hitting the individual threshold and by 2028 that share will increase to 36%. Herring and Lentz estimated that about 16% of plans would have incurred the tax in 2018, while about 75% of plans would have incurred the tax a decade later due to the indexing of the tax thresholds with the Consumer Price Index (CPI). Although these results are highly sensitive to premium growth assumptions, they highlight the importance of addressing policy concerns.
The budget consequences for the delay are real, roughly $20 billion over the next ten years, according to the Joint Committee on Taxation and the Congressional Budget Office’s estimate. Nevertheless the tax is still expected to save more than $70 billion in that period if it goes into effect.
And what’s the alternative for reducing an unsustainable rate of growth of health spending? The economists note that the Cadillac tax is imperfect, but needs to be replaced by some other tool. Other proposals include placing a cap on the amount of health benefits that can be excluded from taxation, replacing the exclusion with a refundable tax credit, or providing tax credits for employer coverage that scale inversely with income. Other approaches would retain the Cadillac tax but make adjustments for low-income or high-risk people, or based on regional variation in price levels, or by industry. It remains to be seen whether any of these options gain traction among policymakers and economists vested in this fight.
The Cadillac tax debate will likely continue in the months ahead as presidential hopefuls and policy wonks weigh in on its future. Only time will tell if we’ve just witnessed the beginning of the end for the tax or if it will be brought back to life. But a quick look at the history of the Medicare Sustainable Growth Rate (SGR) formula physician pay-cuts – delayed more than 10 years before it was finally scrapped – does not bode well for the Cadillac tax.