The problems with repealing the 'Cadillac tax'

Rep. Joe Courtney, D-2nd District, has finally caught his white whale or, more accurately perhaps, his white Cadillac.

That’s not necessarily a good thing.

Though a supporter of the Affordable Care Act, the Connecticut congressman has long worked to repeal its “Cadillac tax” provision and helped delay its implementation, initially set to begin last year. Unless repealed, the tax will begin in 2022, a 40 percent levy on the value of employer-sponsored health plans that exceed certain high thresholds (about $11,200 for individuals and $30,100 for families in 2022).

After years of trying to gain repeal of the pending tax, Courtney’s bill last week received 419-6 approval in the House. The unusual bipartisan support on a health policy issue is attributable to the fact this is a part of Obamacare that businesses, insurers and labor have come to hate. Business doesn’t like it because, well, it’s a tax. The health insurance industry doesn’t like it because it would discourage the purchase of expensive health plans. Labor wants to kill it because many unions negotiated great health plans, often in lieu of pay raises. These plans would be taxed and eventually trimmed.

But we like some things about the scheduled tax — or at least recognize the positive that it would do — and don’t see axing it without any alternative plan as a good option.

The provision was included in the ACA as a way of countering the economic distortions caused by the fact workers pay income taxes on wages but not on the value of their health policies. Many labor unions considered this reality in negotiating for strong health benefits in lieu of higher wages. Even non-union businesses have sought to appease workers with boosted health benefits, which caused no corresponding uptick in income taxes paid by the employees, while holding down wages.

Let the tax go into effect, Courtney and others argue, and employers will reduce the value of their health benefits to avoid the tax and shift costs onto workers. The Kaiser Family Foundation estimates nearly one-in-three employers offering health benefits would face the tax in 2022, increasing to 46% by 2030.

Employers are already shifting health costs to workers, said Courtney, with deductibles rising 212 percent over a decade.

What the congressman leaves out is that many employees who shifted to high-deductible plans also saw significantly reduced premiums. If the tax is imposed, more workers would be shifted into these high-deductible plans. When paying out of pocket, employees tend to become more discerning health care consumers, questioning whether testing is redundant or necessary, asking if there are cheaper medication alternatives, and more carefully reviewing bills.

Conversely, providing workers with so-called Cadillac plans can promote the excess use of health care. If it is all covered by your insurance plan why not get the test, or opt for the high-cost, name-brand medication, and why bother examining that bill?

The tax, if implemented as planned, could also spur employers and plan administrators to negotiate lower payment rates with hospitals and other health care providers and to encourage their employees to use providers that deliver care at lower cost.

The goal of any health care policy should include driving down overall health care cost. Blocking the planned tax on high-price plans will result in the opposite happening.

And then there are the budgetary implications. Repealing the tax would cost approximately $193 billion in lost revenue through 2029, but the cost of repeal then rises rapidly, totaling as much as $1 trillion in the 2030s, according to the Center on Budget and Policy. There is no plan in the bill to offset that revenue loss.

Courtney makes the case that in the long run there must be a comprehensive health law passed, his preference being to expand and improve upon Obamacare. But abandoning the current tax plan on the hope of a better solution is not sound policy.

Despite the broad approval in the House, the repeal bill’s fate in the Senate remains uncertain. The better alternative to outright repeal is adjusting the tax, perhaps making it smaller and less burdensome, or phase it in, but keep its incentives to drive down costs.

An outright repeal without an alternative plan in place strikes us as medicine that would prove worse than the disease.

 

The Day editorial board meets regularly with political, business and community leaders and convenes weekly to formulate editorial viewpoints. It is composed of President and Publisher Tim Dwyer, Editorial Page Editor Paul Choiniere, Managing Editor Tim Cotter, Staff Writer Julia Bergman and retired deputy managing editor Lisa McGinley. However, only the publisher and editorial page editor are responsible for developing the editorial opinions. The board operates independently from the Day newsroom.

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