Cadillac tax and the tax treatment of employer sponsored insurance

The New York Times had a piece over the weekend on how common it is to revisit big pieces of legislation, and how impossible that seems with the Affordable Care Act. There was also renewed focus on the so-called Cadillac Tax of employer sponsored health insurance plans that cost more than $27,500 for family coverage, or $10,200 for individual, beginning in 2018 (amount of the plan greater than these amounts is what is taxable). The point of the tax is for employers to down shift rich benefits to avoid this tax from being passed on to employees; it is a tax that is designed to be avoided, so this article describes it as working as intended, over 4 years before it is enacted.

Doug Holtz-Eakin says some things about the Cadillac tax that are technically true, while other parts of his analysis seem bizarre given what he has been for in the past, unless you realize that everything he says has to be premised on the terrors of the ACA. That was a choice made by Republicans a long time ago, and it has greatly hindered the next steps of health reform.

I think this is a more correct overview of the Cadillac Tax. “Republicans have talked for years about altering the tax treatment of employer provided health insurance. The Democrats actually did it as part of the ACA, even though some of those voting for it may not realize it. The Cadillac tax was sold as a tax on insurance companies, but the tax will be passed on, and indeed must, for it to work (and the news stories of this weekend show that it is). An obvious next step for anyone interested in health care cost control in the private insurance market would be to further limit the tax free income provided by the current (and 70 year) treatment of employer provided health insurance by the tax code, most effectively by replacing the Cadillac tax with a capping and gradual decrease of the tax exclusion over time. This would help focus attention on the fact that health insurance is a tax code subsidy that is upside down (those with higher incomes get more). Make no mistake, however, this would impact more people with generous health insurance plans than the Cadillac plan, not less. The hardest parts of health care cost containment will never be done unless both political parties are on board.”

For what it is worth, Chapter 7 of my book (p. 64) says this about the topic:

The bottom line is that that entire health care system has a cost problem, and cost control efforts must focus on all parts of the system. Changing the current tax preference provided to employer based insurance is the most obvious place to start to address costs in the private portion of the system.

Democrats have already voted for a de facto capping of this tax expenditure via the tax on high cost insurance, but the imposition of the tax was delayed until 2018 in the Reconciliation bill that completed the ACA. Moving to directly cap the tax exclusion earlier and making it apply to more policies would increase the cost saving potential of the ACA.

Be clear, that this will be very hard to do politically. In my experience talking about health care costs to many groups, it is easy to get them riled up about the need to “do something to control out of control health care costs” but they hate most anything that has a chance to do so. Just think if the Republican party had focused on changes to the ACA that moved it in their direction instead of the repeal, root, stem and branch approach?

update: revised for clarity