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.