‘Cadillac’ Tax Delay: A Chance To Refine or First Step To Kill It Altogether?

Opponents of the Affordable Care Act’s so-called “Cadillac” tax won a major victory last month when President Obama delayed its implementation for two years via a spending package.

Under the Cadillac tax, companies pay a 40% levy on the value of generous employee health plans above a certain limit. The first year of the tax calls for a $10,200 annual cap for an individual plan and a $27,500 cap family coverage.

Debate over the tax reached a fever pitch late last year, and Congress was able to successfully push through a delay — and nab Obama’s signature — by tying it to the budget process. Now, many experts say the Cadillac tax is unlikely to ever go into effect, given that it has such a vocal and large number of adversaries. But the Obama administration has dismissed the delay as having a “minimal” impact and is spinning it as a chance to refine the provision, rather than a setback.

Defending the Cadillac Tax

The Cadillac tax is estimated to generate $87 billion in revenue for the federal government in its first eight years. But proponents argue that the real goal of eliminating high-cost health plans is to curb excess health care use and ultimately control health care spending growth.

At the New York Times‘ “The Upshot,” economists N. Gregory Mankiw and Lawrence Summers wrote, “If people have insurance that pays for too much, they don’t have enough skin in the game. They may be too quick to seek professional medical care. They may too easily accede when physicians recommend superfluous tests and treatments. They may not try hard enough to buy services from the lowest-cost provider. Such behavior can drive national health spending beyond what is necessary and desirable.”

Further, “[a]s employers redesign health insurance plans to hold costs within the tax-free amount, cash wages or other fringe benefits will increase,” 101 economists and health policy experts suggested in an October 2015 letter defending the tax.

Peter Orszag — Obama’s budget director when the ACA was signed into law — told “The Upshot” that the tax would encourage both employers and insurers to find more cost-effective ways to provide care.

Ezekiel Emanuel — a former Obama adviser who helped develop Obamacare — concurred, saying that the tax already is having a “psychological” effect on employers and insurers and compelling them to control spending, which has led to several years of the lowest health care cost growth in decades. However, he warned that the threat of a Cadillac tax repeal could quickly drive an increase in health care costs.

Opponents Push for Tax’s Repeal

Opponents of the excise tax take a starkly different view. They argue that the provision will simply compel employers to cut — or even eliminate — workers’ health benefits to avoid the tax. And, they say, the burden ultimately will be passed on to workers, who will be responsible for a larger share of their health care costs.

Meanwhile, opponents have raised concerns that the tax does not take into account geographic differences in health care costs. Further, they take issue that the cap is tied to standard inflation, rather than medical inflation, which has been rising at about twice the rate of inflation.

Timothy Jost, a professor of law at Washington and Lee University, told CNN’s “Money,” “It’s a tax that’s not well thought out,” adding, “It’s not very fair. It’s probably not very effective at accomplishing its goal of reducing health care costs.”

Opponents also aren’t buying economists’ argument that employees will see wage increases to offset a reduction in their health benefits.

A Kaiser Family Foundation survey found that only 20% of workers with employer-sponsored coverage expect their wages to increase if their employer offered less-generous health benefits. Seventy-six percent said they didn’t expect wages to increase.

In a Wall Street Journal opinion piece, Tevi Troy — president of the American Health Policy Institute and a former HHS deputy secretary under President George W. Bush — wrote that 71% of large employers surveyed by AHPI said they “probably wouldn’t increase wages to offset their reduction in health benefits.” Further, he notes that although 16% of employers said they would increase wages, their employees wouldn’t necessarily better off because those wage increases would be subject to income taxes, unlike the lost benefits.

What the Delay Means and What Happens Next

According to Politico, the Obama administration is hopeful that the two-year delay “will give the provision a privilege that so many other parts of Obamacare have been denied: a chance to actually be refined. The original tax was a blunt instrument, and the White House is open to modifying it to make it more politically sustainable.”

For example, Steve Wojcik, vice president for public policy at the National Business Group, said pegging the tax to medical inflation would significantly improve the measure.

But others view the delay as the first step in killing the Cadillac tax altogether, saying a repeal is nearly inevitable at this point.

“It’s hard to believe it is simply being delayed for two years and not repealed,” Jost told CNN’s “Money.”

“The two-year delay itself may not be prohibitively expensive, but it surely makes full repeal far more likely, which would blow a big hole in the budget,” wrote Loren Adler, research director for the Committee for a Responsible Federal Budget.

The congressional Joint Committee on Taxation has estimated that the Cadillac tax will bring in $91 billion over the next decade. But according to “The Upshot,” “the revenue effects of the Cadillac tax are minor compared with the tax’s much larger effects on health care spending.”

Douglas Elmendorf — a Brookings economist who headed the Congressional Budget Office from 2009 to 2015 — told the Huffington Post, “The biggest problem with repealing the excise tax on high-premium plans isn’t replacing the lost revenue, it’s replacing the lost incentive to control health care spending. Without the excise tax from the ACA, our tax code effectively subsidizes higher premiums, which leads to higher health care spending and lower wages.”

Regardless of where it leads, the delay has created a lot of uncertainty for the health care sector.

Larry Levitt, senior vice president at KFF, told CNBC, “There is no clear consensus about what to replace it with,” adding, “I really do believe (the Cadillac tax) will be one of the biggest issues facing the next president.”

Around the Nation

Here’s what else is happening on the road to reform.

Economists were wrong about the ACA killing full-time jobs. In 2014, economists predicted that employers would cut workers’ hours to avoid Obamacare’s employer mandate. But new research in Health Affairs shows that didn’t happen, Sarah Kliff reports at Vox.

Would the GOP really repeal Obamacare? Last week marked the 62nd vote by congressional Republicans to repeal the ACA. This time it made it President Obama’s desk, only to be vetoed. Republican presidential candidates have promised to make repealing the ACA a priority, but Paul Waldman argues at The American Prospect that won’t happen “because it would be an absolute catastrophe.”

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