A push now underway in Congress to defer or repeal the so-called Cadillac tax is the biggest legislative threat the Affordable Care Act has faced in the past five years. And, weirdly, the lawmakers to blame are Democrats.
The health legislation was built on three pillars: It was to expand insurance coverage to more Americans, have at least a neutral effect on the U.S. deficit and contain health care costs. These are mutually reinforcing; knock down one pillar and the others may tumble also. An effort to expand coverage without containing costs and improving value, for example, could overwhelm the health system and ultimately undermine the expansion. Lowering payments to health care providers is less painful if those providers have more insured patients.
The Cadillac tax, which is to be imposed on high-cost employer-sponsored health insurance plans beginning in 2018, reinforces the ACA’s second and third pillars. In 2025, it is expected to generate more than $20 billion in revenue — or about 15 percent of the net budget cost of expanding coverage that year.
More important, the tax helps contain health care costs (something that is often confused with, but is quite distinct from, deficit reduction). Indeed, most of the revenue comes not from actually collecting the tax but from the way companies respond to it by reducing the cost of their insurance plans — which, in turn, raises taxable wages and salaries. In a letter to Congress in October, 101 health economists and policy analysts noted that while they “hold widely varying views on other provisions of the Affordable Care Act,” they “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.”
By encouraging employers to avoid high-cost plans, the tax encourages them to find insurance of better value for their employees, and it helps offset some of the excessive spending that economists attribute to the long-standing tax preference for employer-provided insurance. The Congressional Research Service has estimated that, by 2024, the tax would reduce health spending by $40 billion to $60 billion.
Opponents of the tax argue that any reductions it might bring in health spending would be made on the backs of workers, as companies shift more cost-sharing onto them in order to remain below the thresholds at which the tax applies. Since the tax does not apply to employee cost-sharing, that may indeed be one (unfortunate) way that companies initially respond, but only temporarily.
Such cost-shifting is like a crash diet: It may show some immediate results, but they won’t be sustainable. For one thing, there’s a practical limit to how much employers can shift onto workers. And for another, most health care costs are incurred by a very small share of patients (the most expensive 25 percent of Medicare beneficiaries account for 85 percent of costs, for example), and cost-sharing typically has little effect on them. It’s also worth pointing out that, despite all the attention paid lately to employees’ out-of-pocket costs, they actually fell in 2014 as a share of total employer-sponsored insurance expenditures.
In the long run, the Cadillac tax would push down the total cost of care, not just shift it around. That, in turn, involves the hard work of improving population health, changing how providers are paid (according to the quality of care, rather than the volume), and encouraging employers to include better-value providers in their insurance plans.
Therein lies the irony. Those arguing most forcefully for gutting the Cadillac tax apparently believe it’s more important to prevent shifting some costs in the short term than to lower the total cost of health care. Over time, such myopic thinking may well raise, not reduce, out-of-pocket spending.
The ACA was passed in 2009 by a group of lawmakers with varying opinions about the importance of its three pillars. Some now think they can undermine the ones they consider less important without harming those they hold dear. But that’s not possible. Each pillar is stronger when the others stand firm.
Peter Orszag was formerly President Obama’s director of the Office of Management and Budget.