The “Cadillac” Tax is Coming, And Could Hit Your Midsize Health Plan

According to new projections from the Kaiser Family Foundation, one in four employers will be hit with the Affordable Care Act's insurance excise tax when it takes effect in 2018. The tax, sometimes called the “Cadillac” or "Cadillac plan" tax, could affect as many as 42 percent of all employers within 10 years. Larger employers, who typically offer better benefits, are more likely to face the tax.

That means that nearly half of all American workers – who have already been hit hard by rising out-of-pocket health care costs – could wind up paying more for medical care by 2028. With 48 percent of the country currently covered by employer health insurance, and larger employers more likely to be taxed, as many as 70 to 80 million people could be affected.

There must be a better way to run a health care system.

First, about that nickname: A Cadillac is a luxury vehicle, but it's misleading to suggest that the plans affected by the tax are equally extravagant. According to data published by the Wall Street Journal, less than 7 percent of the automobiles sold last month in this country were luxury cars. At one in four employers, rising to nearly one out of two, the plans affected by this tax are as common as midsized sedans.

They’re not luxurious, either, at least by international standards. Even a higher-cost plan isn't likely to meet, much less exceed, the benefits offered in many other developed countries. Even Americans who earn a higher than average income – and are therefore likelier to have health insurance – are more likely to go without medical treatment because of cost than their peers in other industrialized nations.

Here's how the tax works (we’ll try to keep it simple, although the mechanism is extremely complicated): Employer health-related benefits whose costs exceed the average by a certain amount will be subject to a tax on the overage. These benefits include health insurance, and the pre-tax savings accounts currently offered by many employers.

Why was this tax invented in the first place? There were two reasons. One was to create a new source of revenue to pay for expanded coverage offered by the Affordable Care Act. The other was the product of misguided economic theory. The notion was that employees, as well as employers, would be more discriminating "shoppers" for their own medical care if they had to pay more for it.

The truth is, the middle class is paying plenty already. That's one of the reasons why health-related expenses are one of the major causes of bankruptcy in this country, as Massachusetts Sen. Elizabeth Warren's early studies showed, even when people have health insurance.

Milliman, the health care actuarial firm, reports that a worker’s total cost of care increased by roughly 43 percent between 2010 and 2015. Meanwhile, total income for the bottom 90 percent of earners actually fell between 2009 and 2012. That makes this an especially bad time to add even more financial burden onto the middle class.

And let's be clear: There is absolutely no real-world evidence to suggest that employers or employees will become "smarter health care shoppers" as a result of this tax. As early as 2013, employers indicated that they were preparing for it by simply cutting benefits – which is exactly the response most common-sense observers would expect.

How, exactly, will they cut benefits? The Kaiser Family Foundation report lists many of the ways employers are expected to respond to this tax. They include: increases to employee deductibles and other forms of cost-shifting; a reduction in covered services; and cutting or eliminating spending accounts. These are not "cost-containment" measures, nor are they pathways to new efficiency. These are benefit reductions and cost transfers – nothing more.

It should not be the policy of the United States government to make medical care less affordable or accessible to the middle class.

As for this tax’s revenue goal: Expanding coverage under the Affordable Care Act is a worthy objective. But why should it be funded by working Americans when corporations and the wealthy have enjoyed so many tax breaks in recent decades? When the Affordable Care Act was being debated, an amendment was offered – by Sens. Sherrod Brown (D-Ohio), Bernie Sanders (I-Vt.), and Al Franken (D-Minn.) – that would have removed the health excise tax and replaced the revenue through a surtax on the extremely wealthy. That was a sensible approach, but it was rejected.

There are other problems with this tax as well, ranging from the administrative to the actuarial. But the bottom line is this: The health excise tax won’t cut costs. It will merely shift them to those who can least afford it. It should be replaced – ideally with a rational system of national health insurance, like those enjoyed by the citizens of other industrialized countries.