The Affordable Care Act contains several new taxes, and with each tax has come political sparring and, in a few instances, Supreme Court cases.
As the outcry around the individual mandate and the legality of the ACA’s tax credits has died down, the health care industry is turning its attention to the law’s next big tax: the so-called “Cadillac tax,” which is scheduled to take effect in 2018. With less than three years to go until implementation, opposition from unions and employers is heating up, and several lawmakers are backing bipartisan efforts to repeal the controversial tax.
About the Tax
The Cadillac tax was designed to curb health care spending and help fund the ACA. The Congressional Budget Office estimates that it will bring in $149 billion in revenue between 2018 and 2025.
The ACA sets a limit on the total value of employer-sponsored plans — $10,200 for an individual and $27,500 for family coverage — and then applies a 40% tax to the amount that exceeds the threshold. The immediate burden of the tax will be on insurers or employers — whichever is the “coverage provider.” In practice, an employer that provides an individual health care package that is valued at $15,000 ($4,800 over the individual threshold) would be subject to a tax of $1,920 for every employee covered under that package.
Employers will be able to make adjustments to the threshold based on factors such as age and gender of employees, retiree status and high-risk professions, according to consulting firm Milliman. The tax, however, is not adjusted for geographic location.
While the tax targets employers and aims to reduce health care spending overall, employees’ benefits and out-of-pocket costs also will be affected, particularly as their companies look to avoid the tax. Here’s a closer look at who and what the tax will affect.
Surveys show the percentage of employers that will be subject to the tax will increase over time:
- The Kaiser Family Foundation estimates that 25% of all employers would face the tax for at least one of their plans in 2018, and 42% will be affected by 2028; and
- More than two-thirds of employers surveyed by consultancy firm Aon Hewitt in 2014 said they expect at least one of their current health plans to be subject to the tax in 2018, and 68% expect the tax to affect at least one or the majority of their plans by 2023.
Workers’ health benefits
Larry Levitt, a co-author of the KFF study, said, “The downside [to the Cadillac tax] is workers may see an increase in their out-of-pocket costs.”
For example, the majority of respondents — 79% — to Aon Hewitt’s survey said they plan to reduce the value of their health plan packages through higher out-of-pocket costs as a way to avoid the tax, while 40% said they are likely to use cost-control strategies, such as reference pricing or narrow provider networks.
The tax “could cost 12.1 million employees an average of $1,050 in higher payroll and income taxes per year,” if employers increase their taxable wages while reducing the cost of their health benefits, the American Health Policy Institute estimated in a 2014 study.
And many companies are taking other steps to avoid the tax, such as offering only high-deductible plans, using limited provider networks, or considering lower-cost options like on-site health clinics or programs to improve workers’ overall health, Brian Marcotte, CEO of the National Business Group on Health, told the New York Times.
Health care spending
A report from PricewaterhouseCoopers suggests the Cadillac tax could achieve its primary goal of reducing health spending. Changes made to employer health plans because of the tax will help reduce the growth of overall health spending from 6.5% to 4.5%, it projects.
Keep or Repeal?
Several factors could affect whether the tax ever becomes fully implemented — and if it is implemented, whether it will resemble the original tax.
The tax has many critics. A coalition of corporations, insurers and unions created the Alliance to Fight the 40 and launched a campaign to eliminate the tax. The tax also faces opposition from lawmakers on both sides of the aisle. In April, Democratic Reps. Joe Courtney (Conn.), Donald Norcross (N.J.) and Dina Titus (Nev.) unveiled a bill (HR 2050) that would repeal the 40% tax. The bill is being co-sponsored by more than 140 lawmakers from both sides of the aisle. A similar bill (HR 879) introduced by Rep. Frank Guinta (R-N.H.) has gained 87 cosponsors.
While its critics argue that the tax will impose an unfair burden on companies and workers, supporters say it is needed to help rein in spending. In the Wall Street Journal‘s “Washington Wire,” David Wessel, director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, criticized efforts to repeal the tax, writing, “Abandoning it would be a worrisome sign that political timidity dooms almost any policy to slow the growth of health care spending.”
A Chicago Tribune editorial endorsed the tax, noting that while critics have raised “serious concerns,” the tax will “be an incentive for many companies to find innovative ways reduce the costs of employee coverage.” It added, “The prospective benefit here — curbing health care costs — is appealing enough that Congress should let this tax roll out and watch carefully.”
Elections, Final Rules Still To Come
While President Obama has indicated he will not support efforts to repeal the tax, the decision ultimately might not lie with him.
In a Health Affairs blog post, Timothy Jost — a health law professor at Washington & Lee University and one of the nation’s leading experts on the ACA — noted, “Two congressional elections and a presidential election remain between now and 2018.”
Presidential candidate and former Secretary of State Hillary Clinton has raised some concerns about the tax. In response to a question from the American Federation of Teachers, she said, “As currently structured, I worry that it may create an incentive to substantially lower the value of the benefits package and shift more and more costs to consumers.”
Another unknown factor that could reshape the tax is implementation. IRS has yet to release a proposed rule for the tax — although two sets of guidance detailing approaches to the tax are available. According to the AP/New York Times, the Department of Treasury also is considering an exemption for flexible spending accounts for dental and vision care. Officials also say they are weighing options surrounding health savings accounts.
While the final rules will help to shed some much needed light on the Cadillac tax and allow researchers to come up with fresh figures on who will be affected and how, they are unlikely to quell yet another debate over an ACA-related tax.
Around the Nation
ACA goes native. Although Native Americans are exempt from the Affordable Care Act’s individual mandate, tribes and health care advocates are encouraging those individuals to enroll in Medicaid or purchase subsidized health plans through the insurance exchanges, USA Today reports.
Unexpected rulings. House Democratic leader Nancy Pelosi (D-Calif.) said she finds it “astounding” that a judge recently ruled to allow a House Republican lawsuit challenging the Affordable Care Act to advance.