As the campaign season heats up, opposition to the so-called Cadillac tax on high-cost health insurance plans is growing. Congress should reject any attempt at outright repeal.
In the past month, both of the leading Democratic Party presidential candidates, as well as the Republican-led House Ways and Means Committee, have called for its total repeal. The only thing standing in the way of a bipartisan bill landing on the president's desk is its 10-year, $91 billion price tag. That revenue, earmarked to help pay for insurance expansion under the Affordable Care Act, must be made up under current budget rules.
Repeal is popular, especially among unionized workers. For many years, they have channeled already skimpy wage increases into tax-exempt benefits to pay for the rising cost of healthcare.
But repealing the tax would be the wrong move at the wrong time. It would send a signal to healthcare insurers and providers that after five years of holding spending in check, Congress and the administration are no longer serious about controlling costs.
It would also undermine the care coordination and quality improvement efforts in the ACA, remove a powerful incentive for encouraging patients and consumers to seek out more cost-effective care, and give the green light to those providers who still see running the meter on fee-for-service medicine as an effective business strategy.
That's why 101 economists from across the political spectrum earlier this month called on the majority and minority leaders of the Senate Finance Committee and the House Ways and Means Committee to reject repeal.
The tax is far from perfect. Starting in 2018, it will impose a 40% excise tax on employers who offer insurance plans that cost more than $10,200 for individuals and $27,500 for families. While that will affect only 4% of plan enrollees and 1% of plan costs in its initial year, it is guaranteed to affect a growing number of plans in later years, since its onset level is indexed to rise with the Consumer Price Index, not economic growth.
Its ultimate target is the exclusion that healthcare spending enjoys from taxation on either the employer or the employee side. That tax exclusion costs the federal government an estimated $250 billion a year, greater than any other tax benefit, including the home mortgage deduction.
The tax exclusion also contributes to the general public's lack of knowledge about the true cost of care. From the vantage point of economic rationality, the best and most economically progressive solution would be to repeal it entirely and distribute the tax money as means-tested subsidies for the purchase of insurance.
History and labor market realities stand in the way of that rational approach. Employers, who began offering health insurance to attract workers under the wage controls of World War II, want to provide benefits like health insurance because it promotes employee loyalty.
On the employee side, many workers correctly understand that, despite economists' insistence that health benefits are just another form of wages, they are unlikely to see those dollars magically turn up in their paychecks should their employers stop offering coverage—as many would if the tax exclusion was ended entirely.
There are ways to modify the tax to make it more acceptable in the short run. Instead of an excise tax on employers, Congress could put a cap on the exclusion based on income.
An analysis by the National Institute for Health Care Reform released last week found that a tax cap designed to raise the same amount of revenue would affect slightly more workers, but on average, would cost less. It also would be slightly more progressive, since it skews the tax toward higher-income individuals.
Adjustments could also be made to take into account regional variations in spending. The Internal Revenue Service is charged with coming up with rules for adjusting the tax based on age, gender and illness differences between health plans. Those rules could be made more rigorous.
The ultimate responsibility for keeping healthcare costs in check rests with providers, not patients and consumers. When people get sick, they usually don't have the time to go shopping for care. When stuck in high-deductible plans, they are just as likely to eliminate necessary care as unnecessary care.
But they need to be part of the cost-control process. Ending the tax on high-cost plans will only make engaging them more difficult.