Has the Cadillac tax hit a dead end?

The delay of the tax on high-end insurance plans will not have much of an immediate effect on healthcare economics or the success of the Affordable Care Act, but if the tax continues to be pushed off and is essentially dead, consequences loom large.

Congress announced the omnibus budget agreement and tax extenders bill late Tuesday with a vote planned before the end of the week. White House officials have indicated the president will sign the package into law.

It includes delaying for two years implementation of the "Cadillac" tax, which was scheduled to go into effect in 2018. It also freezes the medical-device tax that began in 2013 for two years and delays the annual tax on health insurers by one year.

The Obama administration is one of the last defenders of the so-called Cadillac tax, which has never been politically popular even among those supporting the ACA. Several Democrats, including the top contenders for the party's nominee for president next year, have come out in favor of repealing it.

The Cadillac tax is 40% of the value of employer-sponsored plans that exceed certain thresholds: $10,200 for individual coverage and $27,500 for family coverage. An August report from the Kaiser Family Foundation estimated that about a quarter of businesses would be subject to the tax in its first year, increasing to 42% by 2028.

Employers have been scaling back medical coverage for years, shifting more of the direct costs to workers and their families through higher annual deductibles and cost-sharing. Increasingly, they have cited the Cadillac tax as a factor.

Loren Adler, research director at the Committee for a Responsible Federal Budget, said estimates show the delay of the Cadillac tax and pause of the device tax will cost about $36 billion in the next few years but will increase dramatically after that.

If the tax is fully repealed, which Adler said looks likely, its check on healthcare cost growth will also fall by the wayside.

Employers will likely stop any investment in controlling costs with the Cadillac tax at least on hold, he said.

The ACA was crafted to strike a balance between increasing insurance coverage and controlling healthcare costs, but as time passes, politicians are losing sight of the importance of the pay-fors, he said.

“It's basically just economists and policy wonks pushing for it,” Adler said. “And economists aren't great at messaging, apparently.”

In October more than 100 economists signed a letter asking Congress not to “weaken, delay or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth.”

James Klein, president of the American Benefits Council, which is part of an alliance that aims to repeal the Cadillac tax, said the delay is a positive development that will give employers breathing room.

“We view it as a first step toward the ultimate goal of repeal,” he said.

He said the nonpartisan Joint Committee on Taxation's estimate that a repeal of the tax would cost $91 billion over the next decade was “vastly overstated” and “based on some very faulty assumptions.”

The calculations include the notion that employers will make up for a decrease in health benefits by increasing wages, which would bump up revenue from income taxes.

“Employers just simply say that that's not going to happen,” Klein said.

Linda Blumberg, senior fellow with the Urban Institute, said a two-year delay on its face doesn't have a major economic effect, but how the next president approaches the tax will.

Democrats may not support the Cadillac tax specifically but would likely be more inclined to find other sources of revenue that would support the ACA, she said.

“I don't look at this as the end of the Affordable Care Act or the beginning of the end,” she said. “I don't see it that way at all.”

Cost containment will continue to be a major issue, but there are tools available other than the Cadillac tax, like capping the tax exclusion on employer-based insurance. Still, strong lobbies will fight measures to control costs, and political consensus becomes difficult, she said.

“When you say cost containment, that means somebody is getting paid less on the provider side,” she said.