Obamacare's Cadillac tax is under siege.
The health law provision levies a hefty 40 percent tax on the most expensive employer-provided insurance plans: those above $10,200 for individuals and $27,500 for families.
Economists love the idea of limiting the tax exclusion for employer-sponsored coverage. For one thing, subsidizing employer-based care is regressive — it's a tax subsidy paid, in effect, by people who don't have good jobs that give them health care. But perhaps more important, it encourages employers to spend more and more money on lavish health insurance, which in turn pushes up health-care costs across the system.
Limiting the exclusion has long had bipartisan support. The Democrats who drafted Obamacare (obviously) liked it. President George W. Bush likes it, Sen. John McCain endorsed the idea during his 2008 presidential run, and it's even present in Sen. Marco Rubio's newly released health-care plan.
But voters? They hate it. And employers really hate it. Coalitions have sprung up in Washington, DC, for the sole purpose of killing it. Hundreds of legislators on both sides of the aisle have backed a bill to repeal it. It's become one of Obamacare's central weaknesses — and thus one of the GOP's main targets.
"The irony is it's working just as Republicans wanted, and now they're starting to call for repeal," says Jon McDonough, who helped write Obamacare.
The point of the Cadillac tax isn't to tax health insurance. It's to change health insurance.
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.
In the tax's first year, that threshold will be $10,200 for individual plans or $27,500 for family plans. So if a plan cost $11,200, it would face a $400 tax — 40 percent of the amount above the threshold.
Over the past year, there's been a slew of papers that estimate how many current health plans could get hit by the Cadillac tax. The Kaiser Family Foundation estimates 26 percent of current plans could get hit with the tax in 2018; Towers Watson pegs it at 42 percent.
Here's the thing to keep in mind when you see those numbers: The aim of the Cadillac tax isn't to collect tax revenue. It's to encourage employers to offer plans that fall below the spending threshold, a back-door tactic to scale back too-robust plans.
So the hope is that very few companies will end up paying Obamacare's Cadillac tax because most companies will pare back their insurance benefits — and raise worker wages as compensation. But they'll do that in a way workers are likely to hate: by choosing insurance with higher deductibles, narrower networks, and more cost sharing.
Economists think the Cadillac tax will give Americans a raise
No, it's not especially intuitive — but it's true.
"I mentioned this when I was presenting at the American Bar Association," says Bradley Herring, a health economist at Johns Hopkins University. "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."
Here's what Herring meant: There's a vast body of economics research 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."
Herring has estimated that between 2020 and 2029, the Cadillac tax will raise $930 billion in revenue. Of that, $550 billion will come from the tax directly. Another $375 billion will be from increased payroll taxes paid on newly increased wages.
The Cadillac tax will hit more than just "Goldman Sachs" bankers
The big worry with the Cadillac tax is that it won't just tamp down on unnecessary care, but that high deductibles and increased copayments will put necessary care out of reach, too.
The most cutting critique of the Cadillac tax is that it's a blunt instrument that doesn't take into account granularities in the health-care system. There's no adjustment, for example, for people who live in places where health care is really expensive — so the threshold is the same in the Midwest, where health insurance is pretty cheap, as it is in remote states like Alaska, where it's more expensive to deliver health care.
This is a perennial tension in any policies that aim to constrain health-care spending. The hope is to squeeze out the unnecessary spending — but still protect those who really do need significant medical services.
When Democrats talked about the Cadillac tax, they would often discuss it as a tax targeting the ultra-rich. Obama adviser David Axelrod described it in 2009 as "an excise tax on high-end health care policies like the ones that executives at Goldman Sachs have."
Herring, the Hopkins economist, has looked at the research on income and health plans. And he says there's actually not much evidence to show that higher earners are the ones getting better benefits packages. Consider state employees, for example: They tend to have robust health plans, if not Goldman Sachs-level salaries.
"We definitely know higher-income people are more likely to have insurance than lower-income people, but there isn't any hard data to show they get better health insurance," Herring says. "We just don't have great data on that point."
So the Cadillac tax could end up hitting people we don't think of as rich, like teachers who have good health benefits and who have, to some degree, accepted lower wages in return.
At some point, the Cadillac tax could hit Fords and Pintos, too
Perhaps the most serious objection to the Cadillac tax isn't about what happens in 2018 — it's what happens over the next decade, as the new fee hits more and more health insurance plans.
The health-care law has the threshold for the Cadillac tax grow at the same rate as inflation. But health spending usually grows faster than the rest of the economy. If that trend holds true in the future, it means that more and more plans will end up subject to the threshold. The Kaiser Family Foundation estimates that the percentage of plans subject to the Cadillac tax will rise from 28 percent in 2018 to 42 percent a decade later.
Towers Watson thinks health-care costs will grow even faster, with 82 percent of plans getting hit by 2023. In other words: A decade from now, it might not be just the Cadillacs getting taxed. It could be the Fords and Pintos too.
In that world, the Cadillac tax isn't a tax on the most expensive plans. It becomes a tax on most health insurance, even the plans that aren't particularly robust. And that could leave employers with uncomfortable options: either raise the price of premiums to incorporate the new fees, or make significant cuts to benefits to get under the threshold.