Why the Cadillac tax must go

OPINION:

Now that Congress is back for the fall, it’s time for the Senate to finish the job and repeal the “Cadillac Tax,” a tax on the value of employer-sponsored health coverage above a government-determined threshold amount. After the House voted overwhelmingly to do so in July, a group of almost 100 economists sent a letter urging the Senate not to repeal it. Their reasoning makes little sense to employers and those who make the decisions about employee health benefits and compensation. 

As Congress considers repealing this twice-delayed tax imposed by the Affordable Care Act on the coverage that 181 million Americans rely on, it is helpful to walk through how decisions about pay and benefits are made in practice. Moreover, we suggest that Congress’ time would be better spent addressing the underlying drivers of health care costs that are causing employees and employers alike to pay much more for health care than taxing working Americans and their employers on a valued source of health coverage.

National Business Group on Health data suggest that in 2022, the year the tax will take effect if Congress does not act, 73 percent of large employers will have at least one plan they offer employees trigger the tax and for 56 percent that will include the plan most popular among their employees. In subsequent years, virtually all plans offered by employers will trigger the tax if current health care inflation trends continue.

The economists claim that “as employers redesign health insurance plans to hold costs within the tax-free amount, cash wages or other fringe benefits will increase.” In other words, if employers spend less on health benefits, the money saved will either be returned to employees in the form of higher pay or other benefits. In practice, having spent the better part of my corporate career in compensation and benefits, decisions on health care benefits often happen separately from the discussion on pay increases, and often happen at different times of the year. In addition, many factors unrelated to health care costs take precedence in pay decisions. First and foremost, business performance and forecasted performance play the largest role in determining wage and salary increases. Benchmarking data on competitive market pay, general inflation rates and projected industry-specific wage increases also factor into the decision.

To argue that employers will enhance wages and other fringe benefits when they reduce health care benefits is a false assumption not based on experience. We need look no further than the experience of the last nine years. Under the threat of the Cadillac tax and in response to ever-rising health care costs, employers aggressively migrated to high-deductible plans. Most large employers offer them today. The move to offer them, either as an option, or exclusively, yields one-time cost savings for employers. Yet, over this same time period, by and large, employers did not shift the savings from reducing health benefits into higher wages.

Why not? At best, health care costs are one consideration among many when determining wage increases, as described above. Additionally, health care inflation has continued at rates beyond overall economic inflation, raising costs for both employers and employees. As long as they do, employers must plan for higher health care costs in future years.

While the economists claim that the “tax will encourage employers to limit the cost of plans to the tax-free amount,” that will be hard to do as many supply-side factors, beyond the control of employers, and for that matter employees, put pressure on costs and contribute to the increases. These factors include a largely still-extant fee-for-service payment system that encourages unnecessary and wasteful spending; rapid consolidation of health systems and providers, particularly in certain specialties and localities, that has diminished competition; unreasonable pricing models for prescription drugs; and the costs of defensive medicine due to the lack of common sense health care legal reform.

For these reasons and the fact that the threshold amounts to trigger the tax are tied to general inflation, not medical inflation, many employer health plans that provide far less than “Cadillac” benefits will be taxed. Given the ubiquity of high deductibles, it’s safe to say that there are few “Cadillac” plans left. At the end of the day, “Cadillac Tax” is a misnomer; this is just a tax on all plans.

Taxing employers and employees, which in economists’ terms, is a demand-side lever to control costs, will not do anything to stem our nation’s rise in health care costs if we do not tackle supply-side drivers of spending. Weighing the two, we believe that getting supply-side drivers of health care costs under control would be much more effective. Rather than make health benefits more unaffordable through a tax, Congress should focus more on transforming health care delivery.

• Brian Marcotte is president and CEO of the National Business Group on Health.