Cadillac Tax: A Portion of Obamacare Both Parties Hate

Unions and employers are on board with repealing the Cadillac Tax.

By Kimberly Leonard
Aug. 14, 2015, 6:28 p.m. EDT

Republicans and Democrats agree on little when it comes to President Barack Obama’s health care law, but one area ripe for bipartisan reform is the Affordable Care Act’s unpopular tax intended to discourage employers from offering expensive health insurance.

Nicknamed the “Cadillac tax,” it originally was intended to help pay for other portions of health care reform and to keep employers from offering overly generous plans that allow for what can often be unnecessary and expensive procedures. The underlying premise is that plans with fewer benefits shift a greater cost of health care expenses onto employees, causing them to be more judicious about asking doctors whether appointments or tests are necessary and ultimately reducing strain on the health care system.

When the tax takes effect in 2018, employers who offer plans with an annual cost of more than $10,200 for an individual and $27,500 for a family will have to pay a 40 percent excise tax on the amount above that limit.

Once touted as a tax that would affect the benefits of only the wealthiest Americans, projections show that the rising cost of health care will contribute to more plans being considered “generous” in nature. A survey conducted in March by Mercer, a consulting firm, found that a third of employers will face the tax in 2018, but by 2022, almost 60 percent will face it. The tax affects not just the cost of premiums, but also of health savings accounts and flexible spending accounts.

The current price of health plans is an average of nearly $7,000 for an individual and $17,000 for a family. Private health insurance, however, is projected by government actuaries to rise at an average of 5.1 percent per year from 2016 to 2018, and by 5.6 percent in subsequent years through 2024.

About 160 million, or 60 percent, of Americans who have health insurance get it through an employer, meaning the tax has the potential to hit all types of jobs, from teachers to bankers to nonprofit workers. Employers and unions alike have come forward to oppose it.

Because of this, the Cadillac tax is a unique target. Even those who support the Affordable Care Act in general are critical of it. Despite being three years from taking effect, employers are already rearranging their employees’ health plans to prepare for it – and workers are seeing their policies shift to higher deductibles and out-of-pocket costs.

“The Cadillac tax seems like the next think in the crosshairs; I think that’s likely,” says Dr. Mark Pauly, professor of health care management at the Wharton School of Business at the University of Pennsylvania. “Nobody likes to pay a tax.”

But health care economists are generally in favor of it, even if they think the current structure under Obamacare – a law that was rushed through Congress – needs work. Health spending continues to grow faster than the economy, in part because Americans with the most expensive plans tend to use more health care than they need.

Still, the approach includes an apparent contradiction. A major component of health care reform focuses on preventive care and giving people the ability to seek medical help when symptoms develop early rather than rush to the emergency room or wait until an expensive chronic condition develops. The potential fallout of the Cadillac tax could look very similar to the problematic landscape that existed before the passage of health care reform.

Some critics of the tax point out that its trigger it is linked to the consumer price index plus 1 percent, so as costs rise the threshold at which the tax takes effect will rise as well – only not as fast as the costs of health care, which grow faster than the rest of the economy. That means the pool of employees whose benefits are affected by the tax will expand over time. The tax also does not vary according to geography or age and only offers a few exceptions for workers such as firefighters, who have high-cost plans not because of wealth but because they have high-risk jobs.

Employers who offer less generous plans will in some cases try to make it up to employees by raising wages, but employees will then be paying higher income taxes as a result. The American Health Policy Institute found in a study published November 2014 that this would cause 12.1 million middle-class workers to see an average increase of $1,050 in higher payroll and income taxes per year if employers increase wages as they reduce health care benefits.

The institute also predicted that workers could see up to a $6,150 reduction in health care benefits without any salary increase.

The Congressional Budget Office projects that the revenue from the tax will bring in $87 billion during the next decade, both from the tax itself and from taxes collected on higher incomes. The revenue would help pay for other portions of Obamacare, such as tax subsidies offered to Americans who do not get health insurance through an employer.

Efforts to repeal the Cadillac tax have become more pronounced following the Supreme Court decision on Obamacare in June, which had been the main vessel by which opponents of the law had hoped to unravel it.

No bills have been introduced in the Senate to repeal the tax, but there are two in the House. Rep. Frank Guinta, R-N.H., has introduced the Ax the Tax on Middle Class Americans’ Health Plans Act, while Rep. Joe Courtney, D-Conn., introduced the Middle Class Health Benefits Tax Repeal Act. Obama has said he would veto any laws that would weaken the Affordable Care Act, but hasn’t spoken specifically on the possibility of repealing the Cadillac tax. When he was running for president in 2008, he criticized his opponent, Sen. John McCain, for proposing a version of the Cadillac tax on health insurance plans, but he ultimately included it in the Affordable Care Act. Critics also point to a promise Obama made as a candidate not to raise taxes on the middle class.

An aggressive lobbying campaign launched during the summer, the Alliance to Fight the 40, is pushing for repeal of the tax, which the campaign’s organizers say could be removed without catastrophically altering Obamacare.

“Unlike other elements of the law that are more integrally connected to the law and how it functions, you pull this out and nothing else about the law would change,” says Jim Klein, president of the American Benefits Council, which leads the alliance.

“As partisan as the Affordable Care Act might be in general, on this issue you have broad bipartisan support,” he says.

It is unclear where additional revenue would come from if the tax were to be cut. Most of Obamacare focused on covering as many Americans as possible, but this aspect of the law could significantly contribute to reducing health care costs, health care economists say.

“This is the one sure thing in the Affordable Care Act to actually cut back on health costs,” Pauly says. “When people have to pay more out of pocket, they spend less.”

Other than revenue, an intent of the Cadillac tax is to encourage Americans to become more conscious of their health spending. The less generous the plan, the more cost is shifted onto employees who will have to think twice when health insurance doesn’t kick in to cover as many health visits, tests or procedures as it used to. Someone with a sore throat that could heal on its own might avoid going to the doctor, for instance.

But Klein says he is concerned that people will not seek out care when they need it. An irritating pain could turn out to be something more serious, and someone could have benefitted from seeing a doctor earlier if they were not as concerned about cost. At the same time, someone may be able to discuss with their doctor which tests are more necessary than others and make informed decisions about how much health care to use.

Pauly says research shows shifting costs to wealthier people is beneficial. Rather than look at repeal, he says, Congress may examine how to better target the wealthiest Americans.

“The current insurance structure makes expensive things look cheap, but this structure puts it closer to what it actually costs,” he says.