Before it kills your job-based health insurance.
If you like your health plan, you can keep it. That is, unless you get it from your employer. In which case, you’re going to lose it. Sorry.
Why? Because of the Cadillac Tax.
That’s the impending federal tax on “excessive” health insurance benefits. If you’re one of the 160 million Americans who relies on an employer for your health coverage, you can expect to lose that coverage within the next decade or so, thanks to this new tax.
Enacted in 2010 as part of President Barack Obama’s Affordable Care Act, and scheduled to take effect in 2018, the Cadillac Tax is already causing employers to pare back health benefits. Formally, it applies only to “high-cost” health plans. But it’s designed to snare all plans in time, which will bring the employer-based system to an end.
How it works. The tax imposes a 40 percent excise on the value of a health plan that exceeds $10,200 (for individual coverage) or $27,500 (for family coverage). The average workplace health plan today is worth about $6,000 (individual) or $17,000 (family). That means the tax won’t hit most plans, at first – maybe only one in six, in 2018. But by 2028, it will be hitting more like three in four.
The tax is designed to expand over time. Although the dollar thresholds rise automatically with inflation, medical costs always rise faster than inflation; so over time, the tax will expand to hit more and more plans. At some point, it will hit all plans. As it nears that point, the employer-based health care system will disappear. Tens of millions of Americans will be on their own. As health economist Chris Conover explains:
“[T]he actual rate of increase in premiums for employer-sponsored coverage over the past decade – despite the dramatic slowdown in health spending in recent years – has averaged more than 15% a year above inflation! Thus … over 100 million Americans very quickly will find themselves in what the government labels “Cadillac” health plans. In fact, Bradley Herring, a health economist at Johns Hopkins Bloomberg School of Public Health, estimates that as many as 75 percent of plans could be affected by the tax just in the next decade.”
The tax is so stiff, employers will do almost anything to avoid it. Since it’s assessed on the overall value of health benefits offered, including employee contributions, employers won’t be able to avoid it by shifting costs onto employees; they’ll have to drive down the total value of the benefit. At first, most employers will shrink benefits just enough to avoid the tax. But when the tax becomes unavoidable, they’ll drop benefits altogether.
The good news is economists believe employers will also be forced to give their workers pay raises to make up for the lost benefits. The bad news is this will happen only in those highly competitive labor markets where workers have a lot of leverage over their employers.
What the tax will do. Recently, Obama touted a new talking point suggesting the health care law is working to bring down health costs: “By one leading measure, what business owners pay out in wages and salaries is now finally growing faster than what they spend on health insurance. That hasn’t happened in 17 years.” Well, yes, Mr. President. But that’s because employers are paring health benefits in anticipation of your Cadillac Tax!
What will replace job-based health insurance? Nothing. Or rather, nothing new. We’ll be left with four basic options: Medicare, Medicaid, Obamacare, and being uninsured. Individually purchased coverage will still exist, at least on paper. But it will be expensive. Obamacare has made it so expensive, in fact (and yet so skinny), millions of Americans will choose to pay the IRS fine for being uninsured rather than shell out for it. Meanwhile, Obamacare’s sizable Medicare cuts may put as many as one in three hospitals out of business.
A bipartisan conspiracy? Some health policy thinkers like this tax. They don’t care for employer-sponsored health care (progressives, because it relies on private insurers; conservatives and libertarians, because it puts the employer rather than the patient in charge). Thinkers on the left would happily trade the current system for a centralized, government-run system (“single payer”). Thinkers on the right would happily trade it for a true market akin to those that currently exist for auto, home, and life insurance.
But it’s the progressives who stand to get their wish. Thanks to Obamacare’s mandates, there is no real health insurance market left, to speak of. The ultimate result of the Cadillac Tax is most likely to be single payer.
That, I suspect, is why Obama devised this tax and, with congressional Democrats’ help, rammed it into law over the strenuous objections of their own friends among organized labor. (The tax will hit union health plans first and hardest.) Professor Jonathan Gruber of MIT, one of Obamacare’s principal architects, admitted this was their goal. In a speech at Boston’s Pioneer Institute in 2011, Gruber explained that the tax’s thresholds were intentionally designed to decline over time so that “the tax that starts out hitting only 8 percent of the insurance plans essentially amounts over the next 20 years – essentially [gets] rid of the [tax] exclusion for employer sponsored plans. This was the only political way we were ever going to take on one of the worst public policies in America.”
When he says, “one of the worst public policies in America,” he means employment-based health care, a system that benefits half the U.S. population.
How to stop it. Wonks like Gruber have a point. The employer-based system is flawed. But it should not be killed before we can establish a true market in its place. For 70 years the employment-based system has acted as a bulwark against socialized medicine. Under current conditions, its elimination would make socialized medicine inevitable. That would be a disaster.
The first step to averting that disaster is to neutralize the Cadillac Tax. This could be done in a number of ways: repeal the tax, postpone it, dramatically reduce its 40 percent rate, or actually limit it to Cadillac plans.
In 2008, Obama savaged his rival Sen. John McCain for proposing to tax workplace health benefits “for the first time ever.” A year later, President Obama did that very thing, via his Cadillac Tax. Now Hillary Clinton, campaigning to succeed Obama, is coyly courting big labor with hints she might end or soften the tax.
If Republicans are smart, they’ll jump out in front of this parade. If they’re really smart, they’ll put Clinton and Obama on the spot with the unions by calling for the tax’s complete and immediate repeal, separate and apart from their goal of total Obamacare repeal. (The estimated 10-year deficit cost of repealing the tax is $87 billion, not a big number in the grand scheme.)
In terms of threatening workplace health benefits, the Cadillac Tax is not just the camel’s nose under the tent, it’s the whole camel, including the hump.
If you want to keep your health plan, kill the Cadillac Tax.
Dean F. Clancy, a former senior official in the White House and Congress, writes on U.S. budget and constitutional issues. Follow him on Twitter: @DeanClancy.