News & Commentary

Fix, Don’t Ditch, The Cadillac Tax

Don’t discard the Cadillac tax even if other large chunks of the ACA are tossed, urges a joint report by two think tanks. Fixing some flaws in this excise tax, scheduled to take effect in 2020, will help control health care spending and provide money for what’s left of the ACA under the Trump administration (or whatever takes its place), says the Urban Institute and the Brookings Institute.

The tax originally was supposed to be applied to health insurance plans with yearly premiums of over $10,200 for single coverage and $27,000 for families. Because Congress delayed implementation for two years (it was supposed to take effect in 2018), those thresholds will most likely be changed, as will the estimate of $90 billion that the tax was projected to raise over 10 years.

The report highlights some fixable flaws in the tax and proposes remedies. For instance, the tax might encourage some employers to increase out-of-pocket costs that would place a burden on low- and moderate-income households with high medical needs. The report urges the provision of direct aid to those people via tax credits or direct assistance through the ACA marketplaces, if they’re still around.

The thresholds for when the tax would kick in are currently based on the Consumer Price Index, extending the tax to a growing proportion of plans and beneficiaries covered by them. That indexing, say researchers, could force employers to drop health insurance coverage or impose stringent cost-sharing requirements for workers. The report says the index should be based on per capita GDP, or the GDP plus 0.5%.

The tax discourages flexible spending accounts (FSAs) because they may trigger the tax, regardless of total premiums. “A simple solution to this problem is at hand with the Obama administration’s recommendation to permit employers to average such deposits over their workforce and add this amount to employer premium costs when computing Cadillac tax liability.”

Then there’s variation. The current Cadillac tax makes no provision for it. The report suggests that the tax be adjusted for business type, location, worker health status, and other features germane to a particular company and workforce.

Adjusting based on state and industry could be complicated, the report says. “If such variation results from health care that is medically excessive or from needlessly high prices (for example, from hospital prices inflated by a large hospital group with monopoly power or from very broad provider networks), then adjusting the Cadillac tax for such variation would work against the purposes of the tax,” the report states.

However, if premium variations arise from legitimate causes, such as regional variation in the prices of medical inputs and differences in average health status across employer groups, adjusting the Cadillac tax thresholds based on those elements would not only make the tax fairer, the groups say, but would obtain the objectives of the tax.

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