Debate rages as 'Cadillac tax' gets closer

Five years after the Affordable Care Act became law, debate rages about whether one of its final provisions will do more harm than good.

While most of the law's major elements have already taken effect, a final provision — the "Cadillac tax" — looms on the horizon.

Beginning in 2018, the government will impose heavy financial penalties on employer-provided health plans it deems overly generous. The tax was imposed to rein in health care inflation, an effect cited as a key goal of the Affordable Care Act. It was also put in place to raise tens of billions of dollars.

More than half of Americans are enrolled in employer-sponsored health care plans. Former Sen. Jeff Bingaman, D-N.M., a member of the working group that created the "Cadillac tax," said lawmakers at the time figured a hefty 40 percent tax on expensive health plans would force employers to be much more demanding shoppers as they determined which plans to offer to their employees.

Insurers and providers, then, would have strong incentives to keep prices low.

"I think we saw it as a way to keep the cost of health care from continuing to grow at the rate that it had been growing," Bingaman said.

Higher costs for consumers? Or fewer unnecessary costs?

But Rep. Joe Courtney, D-Conn., thinks the tax will add an additional burden onto consumers already struggling to pay their medical bills. High-deductible health care plans, in which consumers take on high out-of-pocket expenses in exchange for low premiums, are already commonplace.

Five years ago, Courtney helped pass legislation that would delay the "Cadillac tax" from taking effect until 2018. He's now sponsoring legislation that would scrap it altogether, and says he has support from lawmakers on both sides of the aisle. His bill, if passed, would add to the federal budget deficit.

Business groups, including many health care companies and the U.S. Chamber of Commerce, support repealing the tax, too, as do many national unions.

But more than 100 economists, including the Brookings Institution's Henry Aaron, have signed a letter urging lawmakers not to repeal the tax. Giving workers less-expensive plans that require them to pay for more of their care, Aaron said, will reduce wasteful health spending.

It's still unclear who's right — and it's unclear whether businesses will end up changing their health care plans to avoid the tax, or swallow the penalty and keep their current plans.

Some consulting groups, including The Advisory Board Company and Towers Watson, say as many as half of all employer health plans in the country are on track to trigger the tax.

But Elise Gould of the left-leaning Economic Policy Institute said most companies will avoid the tax by spending less on their health plans.

"Health insurance providers are going to provide plans that are cheaper and, all else equal, cheaper plans are thinner plans — which means that consumers are going to have to pay more out-of-pocket," she said.

Bingaman and his colleagues on the working group expected that companies would pay the tax, making it an important source of revenue that could cover consumer insurance subsidies. The Congressional Budget Office estimated it would bring in about $87 billion in its first 7 years.

Over-hyped concerns?

Courtney, the congressman trying to prevent the tax altogether, has found support in the Senate, where a companion bill sponsored by a Republican and a Democrat has been introduced.

"The opposition has really grown like wildfire," he said. "Trying to control health care costs by sharply increasing people's out-of-pocket costs is not good health policy, because it discourages people from getting care that they need."

But Aaron, the Brookings Institution economist, said giving workers less expensive plans that require them to pay for more of their care will reduce wasteful health spending.

"If you have a plan like that, you're going to be a little more price-sensitive when you go and use health care services," he said. "I could tell you stories about my own experience where doctors interacting with me were quite explicit in saying, 'Well, are you covered for insurance on this? If so, let's do it. I'm not sure it's going to make any difference in your treatment, but you'll feel better.'"

Aaron said fewer doctor visits and fewer procedures will also reduce spending on health care administration.

The Congressional Research Service estimates the Cadillac Tax could cut annual U.S. health spending by 3 to 4 percent. That's as much as $60 billion by 2024.

Economist Jared Bernstein, who advised the Obama Administration when the health care law was written and passed, thinks the threat of the "Cadillac tax" is being exaggerated.

"I don't think that it's going to be nearly as biting as lots of people claim," he said.

Bernstein argues that even if a health plan triggers the tax, the tab won't necessarily be crippling.

"The issue isn't how many plans are over the threshold, it's how much of the plans' costs are over the threshold," he said. "And if you look at that, you get a much smaller number."