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Obamacare 'Cadillac tax'—who wants it, and who won't pay

A group of 101 health-care economists and analysts Thursday strongly urged the U.S. Congress to keep Obamacare's much-loathed "Cadillac tax" in place in the absence of a better alternative, as a new survey suggested that many companies that face the tax intend to avoid it by having their workers pay a bigger share of health-care costs.

The U.S. Capitol building
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The U.S. Capitol building

The survey of 442 employers that currently offer health benefits to employees found that nearly 60 percent of them have calculated that they will eventually be subject to the tax if they don't make changes to their health plans.

The tax is a 40 percent levy on what employers and workers jointly pay for an employee's health coverage above a certain threshold — $10,200 for individual coverage and $27,500 for family coverage.

But only 5 percent of companies that expect eventually to be subject to the tax actually expect to pay it. Those companies say they either already have or plan to make changes to their health coverage programs that will allow them to avoid the tax, according to the survey by the International Foundation of Employee Benefit Plans.

Overwhelmingly, those changes involve reducing benefits, shifting costs to employees in the form of higher copayments or coinsurance, and switching to health plans that have higher deductibles. Such moves to have workers pay a bigger share of their health costs out of pocket, as opposed to in the form of premiums, would help get health plans under the Cadillac tax threshold.

Julie Stich, director of research at IFEBP, said she believes the survey shows employers are "serious" about the threat and impact of the tax.

"They're going to be starting to take actions to change their plans so they don't trigger the tax," Stich said. "All of that will have an impact on their workforces."

Almost 9 out of 10 of the companies surveyed by her group reported that they already have calculated whether they will trigger the tax at some point. The majority of employers who expect to be subject to the level, 62 percent, said it would affect them in 2018 if they did not make any change to their plans.

Others said they expect, in the absence of any changes, to be hit by the Cadillac tax in future years.

Hillary Clinton
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Hillary Clinton

The tax's thresholds are indexed to overall inflation. Because health-care costs traditionally rise at a higher rate than overall consumer costs, the tax is expected to capture a growing share of employers in future years.

The Kaiser Family Foundation, in a recent report, found that nearly 25 percent of employers would be subject to the tax when it starts in 2018. After that, Kaiser said, 30 percent of employers are projected to pay the tax by 2023, and 42 percent of employers by 2028.

IFEBP's survey does not reflect those projections, in part because the survey just looked at companies that already are offering health coverage to workers. But the survey included a mix of large and small employers from almost 20 industries.

And the survey reflects the degree of the concern among employers that would be subject to the Cadillac tax, and their desire to avoid it even if that means having workers bear a bigger share of health costs.

"Workers will be angry when they see their benefits cut," said Larry Levitt, senior vice president of Kaiser, who nonetheless added, "This is not a tax that anyone wants to pay."

He noted that the "tax itself is not deductible as a business expense, so the effect of the tax is bigger than" the 40 percent levy.

The size of the tax and the effect it's expected to have in driving up employees' share of health costs has led to "an emerging consensus among politicians and interest groups against the tax," Levitt said.

Earlier this week, former Secretary of State Hillary Clinton, who is seeking the Democratic presidential nomination, called on Congress to repeal the Cadillac tax, and "to fully pay for the cost of the repeal."

Clinton, who had already seen her leading competitor for the nomination, Vermont Sen. Bernie Sanders, call for such a repeal, is believed to be motivated in part by opposition to the tax among labor unions, a key constituency for the Democratic Party. Unions are largely against the tax because health-care benefits are among the most valued parts of negotiated labor contracts.

The U.S. Chamber of Commerce, usually no friend to unions, also is strongly against the tax. And Republican politicians have lined up against the tax.

But the letter sent Thursday to the Ways and Means and Finance committees of both houses of Congress underscores the fact that repealing the Cadillac tax won't come without a cost. That letter cited the tax's role in both controlling rising overall health-care costs, and generating tens of billions of dollars of revenue for the U.S. Treasury.

The letter from 101 economists and policy analysts noted that the tax was included in the Affordable Care Act to address the "economically inefficient and regressive" tax policy that allows the "unlimited exclusion of employer-financed health insurance from income and payroll taxes."

Among the signatories were MIT's Jonathan Gruber, an architect of the ACA who gained notoriety last year when it was revealed that he publicly cited "the stupidity of the American voter" as one of the factors that led to Obamacare getting passed into law.

The group wrote that the tax "will help curtail the growth of private health insurance premiums by encouraging employers to limit the cost to the tax-free amount."

They also said that the tax will discourage insurance that is so generous to workers that they "have little incentive to insist on cost-effective care, and providers have little incentive to provide it." A key theory behind the tax is that if workers are forced to pay more directly for medical services, they will be smarter consumers and less apt to get treatment that is unnecessary, or which could be obtained at a lower cost.

The economists and analysts wrote that "as employers redesign health insurance plans to hold costs within the tax-free amount, cash wages and 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 economists wrote.

Kaiser's Levitt said, "The only people who seem to like this tax are economists and deficit hawks."

But the tax is "so powerful" in controlling health-care inflation as well as providing revenue used to expand health coverage under Obamacare, Levitt said, that it will be difficult politically to get Congress to agree on a full-scale repeal of the tax, much less an amendment that delays or lessens its impact.

"There is no clear consensus about what to replace it with," Levitt said.

He also said, "I really do believe [the Cadillac tax] will be one of the biggest issues facing the next president."