5 Things About the Cadillac Tax

Democrats and Republicans agreeing on something having to do with the Affordable Care Act (ACA) is unusual, but there is one aspect of the health care law that both parties feel the same about: the excise, or Cadillac, tax.

The Obama administration is one of the last supporters of this particular part of the ACA. Democrat presidential hopeful Hillary Clinton has called for eliminating the tax and her opponent Senator Bernie Sanders (I-VT) was part of the group of legislators that introduced a bill to repeal the Cadillac tax in September.

So why is something so widely disliked being implemented?

1. The point of the tax is to penalize plans that encourage wasteful health care spending. The Cadillac tax targets expensive insurance plans to restrain unnecessary health care utilization.

It is a 40% tax of employer-sponsored plans that exceed $10,200 for individual coverage and $27,500 for family coverage. The tax was slated to begin in 2018 and in 2020 the threshold for plans would grow at a rate tied to inflation.

As The Incidental Economist explained in 2010, right after the ACA was passed, the Cadillac tax was expected to motivate insurers to create policies that avoid the tax and reduce health care costs.

“The major danger is that the tax will be delayed or further eroded,” wrote health economist Austin Frakt, PhD. “It ought to be accelerated and strengthened. At a minimum it should be supported.”

2. Employers and health plans are trying to avoid the tax. The American Health Policy Institute determined that 17% of US businesses will be affected by the Cadillac tax in 2018 with large businesses being affected more: nearly half of companies with 5000 or more employees will reach the threshold. In 2023, 82% of large businesses will trigger the tax, Health Affairs reported.

This year’s Kaiser Family Foundation/Health Research & Education Trust 2015 Employer Health Benefits Survey found that 13% of firms have made changes to avoid reaching the tax threshold and 8% have switched to a lower-cost health plan. In New Jersey, Horizon Blue Cross Blue Shield’s tiered network plan, OMNIA, was created amid much controversy as a way to avoid the looming Cadillac tax.

3. Congress just passed a spending plan that delays the tax; but it doesn’t get rid of the tax entirely. The latest spending plan from Congress, expected to pass the Senate today, includes a delay to the implementation of the Cadillac tax.

Instead of the tax hitting employers in 2018, it would be delayed until 2020.

“We applaud Congress for passing a two-year delay of the ‘Cadillac Tax’ and thank the Congressional champions who made this possible," James A. Klein, president of the American Benefits Council, said in a statement. "The delay provides a much-needed down payment toward the ultimate goal of full repeal."

Employers would prefer for the tax to be entirely repealed, and they are not alone, but the White House has opposed repealing the tax.

4. It’s nearly universally disliked. While Democrats have been largely resistant to any changes Republicans have attempted to make to the ACA, the Cadillac tax is one area they have been more than willing to give. At the beginning of December, the Senate overwhelmingly passed a measure to delay the tax.

The vote was largely symbolic as the president had already vowed to veto the bill, which would repeal other parts of the health care law as well.

5. However, economists love it. While Republicans and Democrats in Congress have been able to agree that they dislike the Cadillac tax, economists across the parties seem to actually love the tax.

One reason is that the tax is not being implemented as a revenue-generating scheme—although, yes, it would generate money for the government—instead the purpose of the tax is to control health care costs. In fact, economists are so in favor, that 101 of them from a wide variety of institutions—American Enterprise Institute, Harvard University, Brookings Institute, Urban Institute, University of California, and more—signed a letter to Congress explaining the benefits of the tax.

Although, the economists do acknowledge there are other measures that could be implemented to restrict high-cost health insurance.

“We unite in urging Congress to take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth,” they wrote.