(Bloomberg View) — A push now under way in Congress to defer or repeal the so-called Cadillac plan tax is the biggest legislative threat the Affordable Care Act (ACA) — the package that includes the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA) — 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 plan 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 plan 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 longstanding 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.