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2 experts make the case against Obamacare’s controversial "Cadillac tax"


Obamacare's Cadillac tax has, so far, drawn a clear set of battle lines through Washington.

On one side are politicians, who hate the idea of a 40 percent tax on the most expensive health plans. They know it's unpopular because it could lead companies to scale back the health insurance they offer by increasing copayments or deductibles. The Cadillac tax is set to start in 2018 and is the only major Obamacare program that both Bernie Sanders and Hillary Clinton want to dismantle.

On the other side are policy wonks, who really like the Cadillac tax. Right now in the United States, employer-provided health benefits aren't taxed as income the way cash wages or most other in-kind benefits are. More than 100 economists recently signed on to a letter supporting the Cadillac tax as a way to discourage companies from plowing lots of compensation into too-generous health insurance, possibly reducing wasteful spending.

Elise Gould and Josh Bivens are the rare economists who cut across that divide. Both work at the Economic Policy Institute and generally support the Affordable Care Act. But both argue that the Cadillac tax is a bad policy that could lead to Americans skipping out on needed medical care. They think, much like most politicians, that the United States would be better off scrapping the new fee altogether.

What if cutting benefits just makes us all sicker?

A key economic argument in favor of the Cadillac tax goes like this: We know that people tend to use less health care when they have to pay more money. If the Cadillac tax leads to less robust health plans — the ones that charge higher copayments, for example — workers will be more discerning about going to the doctor. They'll cut out unnecessary care, and only get health care when they actually need it.

The problem here, Gould and Bivens argue, is that most research shows patients just aren't that great at discerning the difference between necessary and unnecessary care. And in a way, that makes intuitive sense: We often go to the doctor when we're trying to figure out if something is wrong.

Gould and Bivens cite research showing that patients with higher cost sharing are less likely to take the drugs that doctors prescribe, and that higher copayments can worsen the health of those who are already sick.

New research also strengthens their point: A new study published last Monday looked at what happened to about 75,000 people who switched from a health plan with no deductible to one with a $3,750 deductible. It found that patients reduced care across the board, both services thought to be possibly unnecessary (like imaging scans) and those thought quite necessary (mental health visits).

It's likely that wasteful services will disappear a bit if health plans become skimpier. But the best research we have suggests that will be accompanied by a drop in necessary health care, too.

Employers could band together to demand lower prices. But maybe they won't.

Economists have theorized that one other way the Cadillac tax could drive down costs would be by creating stronger incentives for employers to demand lower health care prices. Jason Furman, who chairs the White House Council of Economic Advisers, made this argument in a recent speech, as did Harvard University's David Cutler in our interview this month.

"Imagine if we were in a world where the new prices from pharma were ones that employers would have to pay a tax on," Cutler said. "Then you’d have every employer saying, 'Why are these prices so high? What are we going to do about that? Maybe we should encourage more generics.' It would bring another pressure to the conversation, and I think that would be a very good thing."

Theoretically, this could happen. But so far, there's not much evidence that it has. Most studies show that when employers scale back benefits, they tend to just pay for fewer services rather than negotiate down the price of those services. Insurers haven't, historically, been heavy-handed negotiators.

"The incentive is already there to negotiate, and it's not entirely obvious to me why the excise tax would mean all of a sudden I'm not fine wildly overpaying for a service," Bivens says. "I don't understand why they're not banding together right now, if it would save them money."

Wages will likely rise — but there will be winners and losers

The last major argument in favor of the Cadillac tax tends to be the idea that companies that cut health benefits will move that spending over to wages. Lower premiums, in other words, would mean higher salaries as companies free up some money they used to spend on insurance.

Bivens and Gould say they think this is probably true; economists generally agree that companies think about their workers' compensation as one big pool of money. When they spend less on one benefit, the money moves to another form of payment.

But they argue it will probably be a long-run phenomenon. It's not that all of a sudden, workers will get a round of wages. Instead, the wage increase will happen slowly, as workers renegotiate their salaries or shop for new jobs — the type of events that tend to trigger a raise in other situations.

"I think in the long run it will shift to higher wages," Bivens says. "But it will take time, and those new wages will be taxed, which means it won't be a dollar-for-dollar replacement for the worker."

How these economists would pay for Obamacare instead

Repealing the Cadillac tax would leave Obamacare with too little money to cover the cost of its insurance expansion. The Congressional Budget Office expects the tax to raise $87 billion over the next decade.

Bivens and Gould favor a different way of raising that revenue that would only affect high-income households in the United States (they use the Obama administration's definition of earning more than $250,000 as high-income). For people who earn more than that, they would like to see a tax placed on the cost of their benefits, which would go up for wealthier individuals. They also favor the White House proposal of a 28 percent limit on all tax breaks for the wealthy, which would go beyond health insurance and raise more than enough revenue to replace money lost with the Cadillac tax.

"The excise tax is much more scattershot," Bivens says. "It could affect low-income people, so the outcome is much less predictable. The way I see it working differently would be to target the people who are already earning more."

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