Will the ACA Cadillac Tax Reduce Healthcare Costs?

The ACA's Cadillac Tax has repeatedly been delayed
The Cadillac Tax is intended to reduce costs but has been repeatedly delayed.

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The Affordable Care Act was signed into law in 2010, and most of its provisions had been implemented by the beginning of 2016. But one aspect of the law dubbed the "Cadillac tax" won't take effect until 2022—if it ever takes effect.

The Cadillac tax was originally supposed to be implemented in 2018, but in December 2015, lawmakers passed an omnibus spending bill that included a two-year delay on the Cadillac tax. And then in early 2018, another spending bill again delayed the Cadillac tax, this time until 2022.

Although that's technically still the date the tax is slated to take effect, it may end up being delayed again or repealed altogether. In July 2019, the House of Representatives passed the Middle Class Health Benefits Tax Repeal Act of 2019 (H.R.748), which calls for the Cadillac tax to be repealed. The measure has not yet been taken up by the Senate, so its fate is unclear. But it's certainly possible that the Cadillac tax might remain forever in the garage, or relegated to the junkyard.

How the Tax Will Work (Assuming It's Eventually Implemented)

If and when it's eventually implemented, the Cadillac tax will impose a 40 percent excise tax on the portion of employer-sponsored health insurance premiums above a specified dollar level (the revenue from the tax would be used to cover other ACA provisions, like the premium subsidies in the exchanges). The Congressional Budget Office estimates that the initial threshold above which the excise tax will apply in 2022 is $11,200 in total annual premiums for a single individual, and $30,100 in annual premiums for family coverage. This includes both the premium that the employee pays, along with the employer's contribution to the premium, and the dollar amount will increase with inflation over time.

So if your health insurance plan's annual premium ends up being above those amounts in 2022 and the Cadillac tax is in effect, your employer would have to pay a 40 percent excise tax on the portion of the premium above those levels. Clearly, this incentivizes employers to take steps to keep total premiums below the level at which the Cadillac tax applies.

What's the Benefit of the Cadillac Tax?

The idea behind the Cadillac tax is to make very high-end health plans less attractive for employers, and thus less common. The concern is that when people have health plans that have very little cost-sharing and lots of "bells and whistles," they may be more likely to overutilize health care since the insurance plan—rather than the patient—is paying for all or nearly all of the cost.

And employer-sponsored health insurance has long been excluded from taxable income. So when we look at total compensation for employees—including wages in addition to health insurance and other benefits—there's an incentive for employers to provide a larger portion of the compensation in the form of health insurance benefits, rather than wages. Combined with the ever-increasing cost of healthcare, that incentive and the concerns about over-utilization led to the inclusion of the Cadillac tax in the ACA.

What About Inflation?

When the Cadillac tax was originally scheduled to take effect in 2018, the premium threshold above which the tax would have applied was $10,200 for employee-only coverage and $27,500 for family coverage.

The premium threshold—above which the Cadillac tax applies—is slated to increase by the same percentage as Consumer Price Index (CPI) growth each year, and with the current four-year delay, that's projected to have increased by $1,000 for employee-only coverage and by nearly $3,000 for family coverage (to an estimated $11,200 and $30,100, respectively).

So in 2022, if a health plan has an annual premium of $12,000 for a single employee, the portion of the premium over approximately $11,200 (in other words, $800) would be subject to the Cadillac tax. And while that tax would be assessed on the employer, economists generally agree that such costs are passed through to the health plan enrollees (via higher premiums, for example).

The problem? Health care spending has been rising faster than the CPI for a long time. And while it's possible that could change in future years, the distinct possibility that it won't means that the Cadillac tax could eventually become a "Chevy tax," as average premiums rise faster than the premium threshold where the Cadillac tax kicks in.

A recent Kaiser Family Foundation Analysis determined that one in five employers offering health coverage will have at least one health plan subject to the Cadillac tax as of 2022, and that could increase to more than one in three by 2030 (large employers typically offer more than one plan, with some plans having richer benefits than others; an employer might have some health plans that are not subject to the Cadillac tax, but others that are).

It's important to understand that this analysis applies to employers rather than employees. According to the Congressional Budget Office, about 15 percent of covered workers are in plans that are expected to be subject to the tax in 2022, and that could grow to 25 percent by 2028.

While it's fairly rare today to have a health insurance plan with an annual premium over $11,200 for a single person, or $30,100 for a family, it might NOT be rare to have a health plan that hits those amounts (increased by the CPI) in 2030 or 2035, if health insurance premiums continue to increase far faster than the CPI.

The way the Cadillac tax is designed, an increasing number of plans would be subject to the excise tax each year, assuming premium growth continues to outpace overall inflation. And eventually, run-of-the-mill plans (as opposed to just high-end plans) would be impacted.

For perspective, the average employer-sponsored health plan in 2018 had a total premium of nearly $7,000 for a single employee and nearly $20,000 for a family—but those are averages, and plenty of plans have premiums well above those levels.

How the Cadillac Tax Will Affect Employee Benefits

The implementation of the tax is still a few years out—assuming it gets implemented at all—but the general consensus is the employers will want to avoid paying it, and will thus work to structure their health plans so that total annual premiums remain below the threshold where the Cadillac tax begins to apply.

The most obvious way of doing that is to increase the cost-sharing on the plan, via higher deductibles, copays, and out-of-pocket maximums (within the maximum out-of-pocket constraints required by the ACA). Of course, that would tackle the problem that the Cadillac tax was designed to solve, since the whole idea was to move away from plans that cover all or nearly all of an enrollee's health care costs, in an effort to ensure that people aren't overutilizing health care.

And while that would be a likely outcome, the problem is that when out-of-pocket costs increase, people tend to cut back not only on unnecessary healthcare but also on necessary health care. Over the long run, that can result in chronic conditions that aren't well-controlled, and health care costs that are higher than they would have been if the care hadn't been avoided due to costs.​

There's also a concern that some employers might have a health plan that isn't particularly "Cadillac" in nature (ie, its benefits aren't dramatically better than average), but that has higher-than-average premiums due to claims history or the employer's industry.

The ACA's ban on using claims history or industry categories to set premiums only applies in the individual and small group markets; in the large group market, claims history and industry can still play a role in premiums. So while the Cadillac tax is aimed at reducing the number of plans that offer truly high-end coverage, the use of a metric that judges plan based on premiums alone could be flawed, in that some high-premium plans might have high premiums for reasons other than their benefit design.

There are also concerns that in states like Wyoming and Alaska, where health care—and thus, health insurance premiums—is more expensive than average, more plans would fall into the Cadillac tax net, despite providing relatively average benefits.

Will the Cadillac Tax Be Repealed?

Between now and 2022, it's possible that the Cadillac tax could be repealed. The tax generally has support from economists (including the President's Council of Economic Advisors). But employers, unions, consumers, and politicians—on both sides of the aisle—are generally opposed to it, and the July 2019 vote in the House was 419-6 on the legislation that included repeal of the Cadillac tax.

Given the bipartisan opposition to the tax, there's a possibility that it will not survive long enough to be implemented in 2020. But there is certainly not universal agreement that the Cadillac tax should be repealed. Policy analysts and economists continue to explain why the tax should be allowed to take effect, noting that it would incentivize value rather than increased spending in health care.

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Article Sources

  1. Congress.gov. H.R.2029, Consolidated Appropriations Act, 2016. Enacted 12/18/2015.

  2. Congress.gov. H.R.195 - Making further continuing appropriations for the fiscal year ending September 30, 2018, and for other purposes. Enacted January 22, 2018.


  3. Congress.gov. H.R.748 - Middle Class Health Benefits Tax Repeal Act of 2019. Passed House July 17, 2019, and sent to the Senate for consideration.

  4. Congress of the United States, Congressional Budget Office. Options for Reducing the Deficit, 2019-2028. December 2018.

  5. Lemieux, Jeff; Moutray, Chad. About That Cadillac Tax. April 25, 2016.


  6. Rae, Matthew; Claxton, Gary, Levitt, Larry. Kaiser Family Foundation. How Many Employers Could Be Affected by the High-Cost Plan Tax. July 12, 2019.


     

  7. Kaiser Family Foundation. Employer Health Benefits, 2018 Summary of Findings. October 3, 2018.

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