I haven’t written about much about ObamaCare’s “Cadillac Tax” mostly because it seemed (as we shall see) such an obvious union-busting measure that there wouldn’t be much of interest to say. However, a recent Kaiser briefing on how many employers will be affected by it has generated a lot of coverage, and, as it turns out, the Cadillac tax — not that anybody could have predicted this — turns out to be insanely complex, based on a crazypants neo-liberal economic assumption, and will screw over a lot more working people than originally thought. (There’s actually some pressure on the Hill for reform or repeal, and not just by the usual suspects, but I won’t cover the politics of it here).
So, what is the “Cadillac Tax”? It’s an excise tax; a tax you have to pay when you purchase a particular type of good. Excise taxes are often “sin taxes,” as on liquor or cigarettes, since drunkeness and cancer sticks can be seen as the sort of public harms that governments should use their taxing power to discourage, and I suppose, to a neo-liberal economist, an “overly generous” insurance plan is indeed a sort of sin. From the Vox explainer:
The Cadillac tax — which doesn’t go into effect until 2018 — places a 40 percent tax on health benefits above a certain threshold, encouraging employers to offer less expensive insurance or, if they don’t, pay a big fine.
How complex is the Cadillax tax? Despite Vox’s explainer, insanely. (HCPT, “High-Cost Plan Tax,” is the official acronym for the Cadillac plan tax structure.) From the Kaiser briefing:
[T]o avoid the perception that this was a new tax on employees, the HCPT was structured as a tax on the service providers of the health benefit plans providing benefits an employee: insurers in the case of insured health benefit plans; employers in the case of HSAs and Archer MSAs; and the person that administers the benefits, such as third party administrators, in the case of other health benefits. While it is generally expected that insurers and service providers will pass the cost of the tax back to the employer, doing so may not always be straightforward. Because there can be numerous service providers with respect to an employee, the excess amount must be allocated across providers. In some cases, it may not be possible to know whether or not the benefits provided to an employee will exceed the threshold amount until after the end of a year (for example, in the case of an experience-rated health insurance plan), which means that service providers may need to bill the employer retroactively for the cost of the tax they must pay.
In other words, the Cadillac tax is an obvious horror show, and that probably accounts for employer reaction. Forbes:
Universally, when queried, purchasers say they will take whatever steps are needed to avoid paying this 40% tax.
How many employers will be hit by the Cadillac tax? (Oddly, or not, I haven’t been able to find a study that shows how many workers will be hit.) The complexity makes that hard to determine, but 26% in 2018 — tomorrow, in corporate terms — is what the conventional wisdom seems to be, according to the Washington Post. Kaiser describes the process:
Our estimates suggest that a meaningful percentage of employers would need to make changes in their health benefits to avoid the HCPT in 2018, and that this percentage grows significantly over time unless employers are able to keep heath plan cost increases at low levels. In fact, 19 percent of employers already in 2015 have a plan that would exceed the HCPT threshold when FSA [Flexible Spending Accounts] offers are considered; these firms would need to reduce their current plan costs over the next several years to avoid the tax. We estimate that by 2028, 42% of employers would have plans where costs would exceed the threshold for some or all employees. To the extent that health plan premiums continue to grow faster than inflation – a likely scenario – the share of employers affected by the HCPT will grow and eventually reach 100 percent. To avoid the tax, an employer would have to keep plan costs below the threshold and contain growth in costs over time to no more than inflation.
(Towers Watson (a professional services firm) estimates 82% by 2023; that is, more and faster.) Note that the Cadillac tax approaches 100% of employers because it’s calculated not on the basis of the insurance plans’ cost, but on the cost of living (!); the cynical might imagine that designing a tax that ultimately applies to all employers is a complex and obfuscated scheme to get employers to stop offering any health insurance at all.
Why does the Cadillac Tax even exist? Let’s look at the legislative history. From Health Affairs:
When the excise tax was passed by Congress in 2010, the policy rationale was two-fold:
First, the tax was designed to slow the rising cost of health care and put pressure on employers to restructure employee health plans by increasing cost sharing on the part of employees. This would encourage employees to consume less health care, resulting in lower medical spending in the long-term.
Second, the tax was intended to raise significant revenue to pay for other key components of the ACA, including subsidies to help low- and middle-income families afford coverage through the health insurance marketplaces. Before the President signed the ACA in March 2010, the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO) scored the tax’s revenue impact and estimated that it would raise $30 billion in additional federal revenue in its first two years (2018 and 2019).
So, two rationales: First, to put pressure on employers to slow costs; second, to raise revenues. Both, in fact, depend on how employers will react to the tax, as we shall see. (Those of use present at ObamaCare’s creation will recall how important CBO scoring was, politically, and you can see that the Cadillac Tax would have been one of the many moving parts that went into making ObamaCare “revenue neutral”).
What is the crazypants neo-liberal assumption behind the Cadillac Tax? Let’s consider how the revenue from the Cadillac Tax is to be raised, from a contemporaneous SAGE study:
These revenue estimates from CBO actually combine both direct and indirect revenues. The direct revenue is simply the 40% excise tax collected from private health insurers. accompanying a switch to plans with lower actuarial values and the outright dropping of coverage expected to occur in response to the net price increase. … In their analyses, the CBO and JCT [Joint Committee on Taxation] assume that workers ultimately pay for their health insurance benefits through lower wages because total compensation (i.e., the sum of wages and benefits) should remain unchanged in competitive labor markets. (If this wage/ benefit trade-off does not actually happen in a one-to-one manner, then the estimates of indirect revenue raised by income and payroll taxes will be overstated.)
Let’s parse that “indirect revenue” from “the increase in federal income and payroll taxes.” Why is that going to happen? Vox explains:
[According to Bradley Herring, a health economist at Johns Hopkins University:] There’s a vast body of economics research [Oh, OK] that shows workers bear the cost of more expensive health plans with lower wages. These papers suggest there’s a lump sum amount that companies spend compensating workers. It goes into either wages or benefits — so when benefits get more expensive, wages go down.
“If you think this through, once the Cadillac tax is imposed, employers will do things to increase the deductible or change the drug formulary to try and lower costs,” Herring says. “They’ll offset that by raising the wages of workers.”
You got that right. When employers cut benefits, they raise wages. And that’s why the income and payroll taxes are going to rise, so CBO can make its numbers. Is that craziest, most not-real-world, pencil-necked neo-liberal economist idea you’ve ever heard? And the Cadillac tax is based on that assumption! Vox once more:
“I mentioned this when I was presenting at the American Bar Association,” says [Herring]. “And if you want to know how to get a room full of lawyers to laugh, have an economist tell them that the Cadillac tax could raise their wages.”
And not only lawyers are laughing. From the International Association of Fire Fighters:
The CBO assumes employers will simply give raises with the money saved; history and common sense tell us a different story. The Cadillac tax won’t lower costs; it will shift them to workers. That’s why it should be repealed.
And from another “strange bedfellow” fighting the Cadillac Tax, in Business Insurance:
In a letter sent to federal lawmakers, the Alliance to Fight the 40 organization says there is little, if any, evidence to support a key assumption behind the tax: that it will raise billions of dollars in new federal revenue as employers cut benefits to avoid the tax and instead boost employees’ wages.
“It is economic theory, not hard evidence, supporting the claims that employers will make up lowered health benefits with higher wages,” the letter said.
It seems far more likely that employers will simply crapify the plans and leave wages where they are. I mean, that’s how — at the very best — how the game has been played for the last forty years, right?
How will your health insurance plan be crapified? What happens when the Cadillac Tax means your plan is “too generous” or “too robust” or “too expensive”?
Before answering that, we should point out that the whole “generous” framing is distorted; “power concedes nothing without a demand” is as true for the provision of health insurance by employers as it is for anything else. These plans were negotiated:
For years, many workers, including firefighters, have negotiated to secure quality health care in lieu of raises. For many Americans, the exclusion from this tax is one of the only real tax breaks they enjoy.
In other words, the “too generous” trope assumes that unions negotiate luxuries, and not necessities, for their members. How much sense does that make? And that’s before we get to the union-busting aspect, which, for the Obama administration, is a feature, not a bug. Los Angeles Times:
Unions have spent decades negotiating better health benefits for their members as alternatives to wage increases, only to find their hard-won benefits tipping over the Cadillac thresholds.
And if the unions can’t deliver wages, and now they can’t deliver benefits — or prevent existing benefits from being taken away — what exactly do they deliver? So who is to determine what is “generous”? Workers, or pencil-necked< neo-liberal economists? Who never mention whether CEO health insurance -- or top 20% health insurance, for that matter -- is "too generous"? That said, let's turn to the crapification. From the Kaiser briefing:
The potential of facing an HCPT assessment as soon as 2018 is encouraging employers to assess their current health benefits and consider cost reductions to avoid triggering the tax. Some employers announced that they made changes in 2014 in anticipation of the HCPT, and more are likely to do so as the implementation date gets closer. By making modifications now, employers can phase-in changes to avoid a bigger disruption later on. Some of the things that employers can do to reduce costs under the tax include:
- Increasing deductibles and other cost sharing;
- Eliminating covered services;
- Capping or eliminating tax-preferred savings accounts like Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), or Health Reimbursement Arrangements (HRAs);
- Eliminating higher-cost health insurance options;
- Using less expensive (often narrower) provider networks; or
- Offering benefits through a private exchange (which can use all of these tools to cap the value of plan choices to stay under the thresholds).
For the most part these changes will result in employees paying for a greater share of their health care out-of-pocket.
Mission accomplished! In short form, from Our Future:
As early as 2013, employers indicated that they were preparing for [the Cadillac Tax] by simply cutting benefits – which is exactly the response most common-sense observers would expect.
On top of the general crapification, there are two knock-on effects. First, the effects are unequal; and second, more and more plans will be affected. On the unequal (hence unfair) implementation:
There also are no adjustments for geography, so plans in regions with high health costs – such as the Bay Area – more likely will be hit “simply because of where they’re located,” says Laurel Lucia, an ACA expert at UC Berkeley’s Center for Labor Research and Education.
Wow, ObamaCare random with respect to jurisdiction, age, income, or personal circumstances? Who knew? Business Insurance:
[W]hile Congress’ original intent behind imposing an excise tax [assuming good faith –lambert] was to target only “overly rich plans,” the [Alliance to Fight the 40] letter notes that the tax “will hit modest health plans that are expensive simply because they are offered in high-cost areas; or because they cover large numbers of people whose health costs are typically higher than average — women, older and disabled workers and families experiencing catastrophic health events,” the letter said.
Finally, the Cadillac tax will increasingly hit all plans, not just “overly generous” ones. Remember how the tax is figured on the cost of living, not the cost of the insurance? Here’s how that works out in detail. Forbes:
Beginning in 2018, the portion of any annual health insurance premium that exceeds $10,200 for individual coverage and $27,500 for family coverage will be taxed at 40%. For example, for a family plan with an annual premium of $30,000 the employer would be required to pay a 40% tax on the amount above $27,500 ($2,500) or $1,000. Although after 2018, the thresholds will be adjusted annually for the Consumer Price Index (CPI), the number of new individuals who find themselves having to pay this large surtax will grow rapidly, since the MCPI (Medical Consumer Price Index) is projected to increase faster than the overall CPI. This was not anticipated by policy makers, and as a result the assumptions that few plans would hit the threshold or that this excise tax would impact only the wealthiest Americans is looking equally inaccurate.
And so, at least for most of us poor shlubs, we’ve walked all round the barn to end up exactly where we started. Forbes again:
Already, 80% of people with a $5,000 deductible pay essentially all of their healthcare expenses out of pocket in any given year. And if deductibles grow even greater in the future, the barriers to care will rise for an increasing number of Americans who won’t be able to pay the high out-of-pocket expenses required. And when they develop major medical problems for which care is essential, they will face the difficult choice of paying for the needed care and having to default on their mortgages and other financial obligations, or not obtaining the medical treatments required.
So, a race to the bottom that starts out affecting “overly generous” health insurance, and ends up affecting more and more of the rest of us. Typical. I doubt this can be fixed by Congress this year or next, since the Democrats will not be able to admit that Obama has ever made a mistake in any aspect of his sorry administration, and Republicans have no choice but to throw red meat to their base by trying to repeal it all together. Pass the popcorn.
 Of course, health insurance is a product that ObamaCare mandates you purchase, so taxing it seems a little meta (even if employer-based insurance doesn’t come under the mandate).
 Note that the whole “revenue neutral” requirement ruled out single payer tout court, no doubt by design. Single payer is not revenue neutral for the government; it nets out positive for society precisely by using government’s purchasing power for public purpose.