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December 28, 2015 12:00 AM

Some call for replacing the Cadillac tax with a better cost-control tool

Shannon Muchmore
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    Now that Congress has delayed and probably killed the Affordable Care Act's tax on high-value employer health plans, two health policy experts who disagree about most aspects of the ACA agree that Congress should move forward to craft a better cost-control mechanism. But the politics of that are daunting.

    The omnibus budget agreement Congress reached before recessing this month included a two-year delay of the ACA's Cadillac tax on high-value employer health plans, a two-year suspension of the 2.3% medical device tax, and a one-year suspension of the health insurance premium tax. Most observers doubt that any of these taxes will ever be reinstated in their current form.

    White House Press Secretary Josh Earnest said during a news briefing this month that the tax changes will have a moderate overall effect on the law, particularly given that the ACA coverage expansions have cost substantially less than originally projected.

    “The total amount of revenue that is derived from the suspension of those taxes is $35 billion, which sounds like a lot of money,” he said. “But when you consider that during that time period—essentially over the next four years, between 2015 and 2019—the Affordable Care Act is slated to cost $203 billion less than was originally projected. And that means the net outcome here continues to be a healthcare policy that saves the government money.”

    Some of the reasons for the lower-than-expected costs arise from ways in which the law didn't succeed as its authors intended. Since the 2012 U.S. Supreme Court decision that made Medicaid expansion optional for states, 20 states have chosen not to expand their Medicaid programs, leaving billions of federal dollars unspent. In addition, enrollment in private plans through the insurance exchanges has fallen short of projections by the millions, also saving lots of money. On top of that, exchange plan premiums have been lower than expected, reducing the amount of money the government has paid out in premium subsidies.

    ACA critic Douglas Holtz-Eakin, a former director of the Congressional Budget Office who now heads the conservative American Action Forum, said the healthcare reform law is “riddled with some of the worst tax policy I've ever seen.” In his view, the projections of how much revenue its tax provisions would raise never added up.

    Still, he said Congress' bipartisan move to freeze the three ACA taxes—with the likelihood that they never will be restored—is a blow to the law, said Holtz-Eakin, who advised Sen. John McCain on healthcare policy during McCain's 2008 presidential campaign.

    He said the Cadillac tax was intended to push employers to pare back on gold-plated health benefit plans. The Obama administration and congressional Democrats designed it in a way that differentiated the tax from McCain's proposal to cap the tax exclusion for employer plans, which candidate Barack Obama had sharply criticized.

    Now, Congress should again consider capping the tax exclusion, which could receive bipartisan support, Holtz-Eakin said.

    While some GOP presidential candidates and members of Congress do support limiting the tax exclusion, it may be difficult to convince many anti-tax Republicans to support this approach since they likely would consider it a tax increase. It's even more politically dicey because employers and labor unions almost certainly would put strong pressure on both Democrats and Republicans not to cap the exclusion.

    Henry Aaron, a senior fellow at the Brookings Institution who supports the ACA and opposed the tax delays, said he thought White House spokesman Earnest was “basically right” in his statement that the law is saving money overall even with the suspension of the three taxes.

    Like Holtz-Eaken, Aaron supports capping the tax exclusion for employer health benefit plans. The Cadillac tax was flawed, he said. “Let's see if we can design a better way of achieving the goals of the Cadillac tax,” he said.

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