‘Cadillac tax’ the next big Obamacare battle
By Brian Faler
Politico, April 6, 2015
A mix of business groups and labor unions are pushing to tee up the next big Obamacare fight: killing its so-called Cadillac tax.
Though the nickname suggests it will apply to a select few, experts say a majority of employers could eventually face the prospect of imposing what will be the first-ever tax on health care benefits.
At issue is a 40 percent excise tax on the health benefits companies provide their workers above a certain threshold. In 2018, the tax will hit insurance and related perks valued at more than $10,200 for singles and $27,500 for families. So for family benefits worth $30,000, the tax would apply to the $2,500 that’s above the limit.
Unions, which often have generous health benefits and have opposed the tax since the law’s inception, say the looming levy is already becoming a factor in their contract negotiations.
“Employers are coming to the table asking for cuts in benefits based on their preliminary projections around the tax,” said Shaun O’Brien, assistant policy director for health and retirement at the AFL-CIO, which backs repeal.
The National Education Association, which is also demanding the tax be rescinded, issued a report Thursday complaining it would disproportionately hit women and older workers.
Congress pegged the tax threshold to a relatively slow measure of inflation. It’s linked to the consumer price index plus 1 percent, even though medical costs typically grow much faster. Private health care spending per enrollee will grow by an average of 5.6 percent annually over the next decade, according to the Congressional Budget Office, while inflation will increase by 2 percent per year.
About one-third of employers will be hit by the tax in 2018 if they do nothing to change their plans, according to a March survey by Mercer, a benefits consulting firm. By 2022, almost 60 percent will be facing the levy.
“‘Cadillac tax’ is really a misnomer,” said Beth Umland, Mercer’s director of research for health and benefits. “Potentially any employer could be hit by this tax.”
Former Obamacare adviser Jonathan Gruber, in one of the now-infamous videos that emerged late last year, said rising medical costs ensure the Cadillac tax will eventually all but eliminate the break companies get for providing health insurance.
Economists in both parties have been pushing the idea for decades as a way to slow health care costs, because it amounts to a cap on benefits.
That’s a good thing, many say, because overly generous insurance shields beneficiaries from costs, which encourages them to use more services, driving up prices for everyone else. It’s also a matter of fairness, some say, because forgoing taxes on health care benefits amounts to a major break for those with jobs offering coverage.
“Capping the tax benefit for employer-sponsored health insurance, I think, is a great idea,” said Len Burman, head of the nonpartisan Tax Policy Center. “Providing an open-ended subsidy for health insurance, which encourages people to get plans that do less to restrain spending, contributes to rising health care costs. Most economists who’ve looked at health care spending have concluded that.”
Congress’ independent budget scorekeepers have said Obamacare won’t add to the deficit, and why the tax will be tough to repeal. The levy, which is projected to generate $87 billion over a decade, ramps up slowly, but is estimated to eventually produce so much money that it alone will cover the cost of providing insurance subsidies through the program’s exchanges.
“What Does the ACA’s Excise Tax on High-Cost Plans Actually Tax?”: An NEA-Commissioned Report by Milliman
National Education Association (NEA), March 13, 2015
Why Did NEA Commission an Actuarial Firm to Assess the Excise Tax on High-Cost Plans?
Always suspecting the term “Cadillac Tax” to be highly misleading, NEA hired the actuarial firm Milliman to determine whether the excise tax on high-cost plans is really a tax on overly generous health plans. In addition, NEA has a much higher percentage of older and female workers than the national workforce, so we asked Milliman whether the tax corrects for the impact of age and sex on premiums.
What Does the Excise Tax Really Tax?
The actuaries found that “although the excise tax is often referred to as a tax on overgenerous health benefits, it is likely to be a tax based on factors other than benefit richness and beyond the control of health plan members.”
For example, Milliman tested the relative impact on premiums of plan benefits and other factors. The actuaries concluded that, compared to their benchmark, geography had a potential 69.3 percent impact on premiums, meaning that area-specific health care costs alone could boost a $9,189 premium in 2018 to $15,556. Among their other findings: Premiums could increase by as much as 15.7 percent for plans with provider networks that have low negotiated discounts for doctors, hospitals, and others. In contrast, plan benefits in the study only increased premiums by as much as 6.2 percent.
The excise tax was designed to push employers to cut employees’ health benefits, but with factors other than health plan generosity driving tax liabilities, the resulting benefit reductions will be arbitrarily damaging to millions of employees and their families.
What Role Does Geography Play in Generating Tax Liabilities?
Milliman concluded that geography-related premium differences will “lead to much higher premiums and substantial taxable costs in many parts of the country.” When the actuaries tested benefits typical of gold- level health insurance exchange plans, they found that plan members’ location alone would trigger the excise tax in many places, even when the same gold-level benefits in other places would not.
They found, for example, that the premium for a gold-level plan in San Francisco, California, would be 37 percent higher than the exact same plan’s premium if it were in Huntington, West Virginia. In fact, they found striking disparities all over the country.
Does the “Age and Gender Adjustment” Correct for the Impact of Age and Sex on Premiums?
Congress knew that the excise tax on high-cost plans could be unfair to women and older workers, but Milliman concluded that the tax’s attempt to fix the problem “fails to compensate for the impact on premiums of age and sex in many parts of the country.” As a result, health plan members’ age and sex could contribute to excise tax liabilities. It also means that women and older workers could be disproportionately hurt by tax-spurred benefit cuts.
Milliman – Full report: http://www.nea.org/assets/docs/Milliman–What_Does_the_Excise_Tax_Actually_Tax.pdf
By Don McCanne, MD
The Affordable Care Act’s “Cadillac tax” is a 40 percent excise tax on spending on employer-sponsored plans that falls above a given threshold. It has three primary purposes:
- As the revenues from this excise tax increase through the years, they will eventually pay much of the costs of the subsidies provided through the exchange plans,
- The tax should eventually displace much of the current regressive tax expenditures that subsidize employer-sponsored plans, and
- The tax should incentivize employers to reduce health benefits offered to their employees, thereby making employees better health care shoppers by increasing their exposure to out-of-pocket costs when accessing health care.
“Cadillac tax” is a label that creates the impression that the excise tax is applied primarily to plans with exceedingly generous benefits that only the wealthiest amongst us would purchase – a sector that could easily afford the excise tax. That is not true. According to the Milliman study commissioned by the NEA, the tax may apply to the baseline Blue Cross and Blue Shield standard benefit option offered through the Federal Employees Health Benefit Program.
What we have traditionally considered to be standard health plans – “Chevy plans” – are now considered to be “Cadillac plans.” These are plans that union members have paid for through forgone wage increases – wage concessions merely to maintain standard health care coverage, not “Cadillac” coverage.
This attitude that standard coverage is somehow a “Cadillac” plan shows how much the definition of standard coverage has deteriorated. Under the Affordable Care Act, the benchmark plans in the exchanges are silver plans with an actuarial value of 70 percent (patient pays 30 percent of costs) whereas standard employer-sponsored plans formerly had an actuarial value closer to 90 percent (patient pays 10 percent of costs).
What is particularly alarming about the Milliman study is that they show the tax will be applied inequitably based not only on the generosity of the benefits, but also based on factors over which employees have very little control such as age, sex, geographical location, the size of the risk pool, and the industry in which they work. Lower-income individuals with lower actuarial value plans under these circumstances could still be assessed the excise tax. That is really unfair. It is also possible that these factors could allow high-income individuals with very generous plans to escape the excise tax.
So let’s look again at the three purposes of this excise tax:
- An unfair tax is being used to fund administratively-complex subsidies in exchanges that were designed to revitalize the private insurance industry. Instead, the dysfunctional, inequitable, multi-payer system should have been replaced with an equitably-financed, efficient, publicly-administered single payer system.
- The regressive tax expenditures that subsidize employer-sponsored plans do need to be eliminated, but they need to be replaced with equitable progressive financing – the type of financing that characterizes a well designed single payer system.
- Requiring individuals to assume control of health care spending as a means of controlling costs has become a pathological obsession within the policy and political communities. Requiring patients to spend money that they do not have is a blunt instrument that prevents patients from receiving beneficial services that they should have. Costs can be controlled more effectively through an administratively efficient single payer system that provides prepaid health care with first dollar coverage.
There is growing bipartisan support to eliminate this unfair tax, but then what would happen? Both parties would search for new revenues to replace the tax while leaving in place this overpriced system that serves us so poorly that was perpetuated and expanded by the Affordable Care Act. What we really need instead is a single payer national health program.