How Many Workers Will the Cadillac Tax Hit?

The number of Americans whose health-insurance plans qualify for the levy is sure to grow.

Shannon Stapleton / Reuters

The term “Cadillac tax” is evocative: It suggests that the health-insurance plans it would tax—through a provision in the Affordable Care Act—are to regular health insurance as a Cadillac is to a Kia. President Obama once described the levy as targeting “really fancy [health insurance] plans that end up driving up costs.”

But what many Americans may not realize is that “Cadillac tax” is in part a misnomer. While some plans that qualify for the tax may be high-end with extra benefits, or “really fancy,” not all of them are. Nor is every employee with an expensive plan a corporate executive. Over time, the number of Americans affected by the tax is expected to increase, as is the revenue the government expects to raise from their plans. The tension between the tax’s supporters and its opponents is over whether this growing pool is a positive thing for the U.S. health-care system in the long run, or whether it’s prohibitively costly.

Supporters of the tax claim it will hit only “extensive union plans” or “very rich plans,” says James Klein, president of the American Benefits Council, a member of an anti-Cadillac-tax advocacy group. “But the reality of it is: It’s going to affect plans that are expensive, not necessarily the ones that are the most comprehensive.” Advocates like Klein contend that some plans are pricey through “no fault” of insurance-plan sponsors or the workers who have them; cohorts with more ill, disabled, or older workers often have more expensive plans, for example, as do people living in regions with high health-care costs, like Alaska and California. Plans that cover families who have experienced “unfortunate, catastrophic” health events can be pricey, too.

The 40 percent excise tax was designed to kill at least two birds with one stone, by reining in health-care spending and providing funding for other provisions of Obamacare, including insurance subsidies for low-income Americans. Starting in 2020—a new deadline passed by Congress last month—the tax will be levied on plan providers, like insurance companies and self-insured employers. But it would ultimately have effects on workers, too: An insurance company would pass at least some of the cost on to employers, who would in turn make coverage or cost-sharing adjustments to contend with the tax. The tax applies to health-insurance premiums that cost more than $10,200 for a single person or more than $27,500 for couples and families. Those thresholds, which include both the employee and employer contributions, are designed to rise with inflation. But “because health costs tend to grow faster than inflation,” the number of health-care plans that qualify for the tax will rise, too. Kosali Simon, a health economist at Indiana University, suggests that as premiums first rise above the threshold in small amounts, it might not be a “big deal” for individuals. But over time, “more and more” people will find “more and more” of their premiums subject to the tax.

Unions have been among the most vocal opponents of the Cadillac tax, as they have traditionally used substantial benefits packages to attract members. But Klein’s group, the Alliance to Fight the 40—which counts unions, insurance companies, an American Cancer Society affiliate, and county governments among its members—claims every American covered by employer-sponsored insurance, roughly 175 million people, are “at risk,” because of the inflation indexing.

Some economists say that insurers will take pains to avoid the levy, and, through their actions, the nation’s high health-care spending will be reduced. According to Simon, economists are worried that the way the country taxes health-insurance contributions differently from wages has actually changed the structure of health insurance. Because of the different “tax treatment,” the government drives employers to favor doling out pricey health plans over paying employees higher wages. And that leads to a moral hazard: People who are insured up to the gills will spend more on care, increasing the demand and price for services. Simon said the tax is designed to help “neutralize” this problem. The Boston Globe described the tax’s mechanism this way:

[M]any health care economists contend generous insurance plans lead to wasteful, unnecessary care. Imposing the tax should encourage employers to make coverage less generous, which means workers will be hit with more costs in the form of deductibles and copayments.

And that, in theory, will force those consumers to become more discerning, skip wasteful care and duplicative tests, and drive stronger competition in the medical marketplace.

Employers have been prepping for the tax to kick in for years now by adjusting benefits and examining ways to reduce costs. Klein claims the tax is shifting, but not cutting, health-care costs overall. Companies can’t simply increase employee cost-sharing on premiums and call it a day, as that doesn’t reduce the price of plans and thus the likelihood of triggering the tax. Instead, Klein says, companies are looking to increase deductibles and co-pays and are “reconsidering” having benefits like wellness programs and on-site clinics. Some pro-Cadillac-tax economists anticipate that employers will increase wages “or other fringe benefits” for workers in exchange for keeping their plans below the tax-triggering thresholds. (Increased wages would lead to the government seeing more in taxes.) But Klein disputes the “assumption” that providers will pay employees higher, taxable wages to make up for reduced coverage on a “dollar-for-dollar basis,” saying that claim is “vastly overstated.” He cites a recent Kaiser Family Foundation study showing that since 2010, employees’ deductibles have risen 67 percent, but wages haven’t remotely kept pace. The study, he writes in a follow-up email, “debunks … the notion that reductions in the value of health coverage”—for example, higher deductibles paid by employees—are replaced by higher pay.

Just as a dislike of the Cadillac tax is widespread outside Washington—joining, for example, unions and the U.S. Chamber of Commerce in the same unlikely fight—Congress, too, opposes the tax on a broad bipartisan basis. In a symbolic, but illustrative, vote last month, the Senate voted 90 to 10 to get rid of it. And lawmakers, led by top Democratic leaders, discussed postponing or revoking the tax during the omnibus budget negotiations. Ultimately, they managed to include a two-year delay in the tax’s implementation, from 2018 to 2020, in the omnibus. The White House isn’t even holding as hard a line on the tax as it did just weeks before the president signed off on the omnibus. Administration officials suggested “tweaks,” some of which survived negotiations, that make the tax more palatable. Calls to scrap the tax have been heard on the campaign trail as well: All three Democratic candidates oppose it, and Senator Bernie Sanders cosponsored legislation to repeal it. (It goes without saying that the Republican presidential candidates want to get rid of the Affordable Care Act entirely, though it’s not as clear where each stands on the Cadillac tax specifically. Jeb Bush and Senator Marco Rubio have both floated the idea of taxing more expensive health-care plans.)

An adviser to the Alliance says the late-2015 tweaks are a sign that Congress and the White House acknowledge flaws in the tax’s structure and that tweaks will not mend every problem with the tax. Klein cites a letter from the Office of Personnel Management—which claims that changing federal workers’ health benefits will damage the government’s ability to attract and retain high-quality workers—to show that “even the federal government itself realizes the negative implications.”

It would seem that opponents of the tax would be grateful to have the deadline postponed another two years—after all, the extension would give them two more years to lobby against it. But the Alliance, for one, sees the deadline pushback as a “down payment” toward full repeal, and they’re aiming to see the tax revoked in the next year. With support in Congress, and potentially an anti-tax Democrat in the White House next year, they might just get their wish.