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The Day: ‘Cadillac tax’ delay buys time for needed reform

December 27, 2015
In The News

Passage of the $1.15 trillion omnibus spending bill last week was celebrated by many as a rare bit of bipartisan cooperation in Congress, even though that cooperation involved both sides giving into some of the others’ worst instincts. Spending will continue to increase, unaffordable tax breaks for special interest groups will survive, Medicare and Social Security spending will go unreformed.

As we noted last week, this is a no-sacrifice budget, but one provision was genuinely worthwhile: A two-year delay of the implementation of the Affordable Care Act’s “Cadillac tax,” the surcharge on high-cost, employer-sponsored health plans hated by both union supporters and corporate interests.

The Cadillac tax imposes a 40 percent surcharge on the value of employer-sponsored plans that exceed thresholds set in the law, currently $10,200 for individual plans and $27,500 for family plans.

In Connecticut, Rep. Joe Courtney, D-2nd District, was certainly happy to see the delay make the final cut of the deal, his pleasure only blunted by the fact that the provision delayed the tax and did not kill it outright.

A two-year delay, though, might be good enough, Courtney thinks. “Politically, it pushes the issue off to the next administration,” he said.

Even if a Democrat follows President Barack Obama into the White House, the tax could be in trouble. Both Hillary Clinton and Sen. Bernie Sanders oppose the tax, in part because it would hit many insurance plans for unionized workers.

Ideally, eliminating the Cadillac tax will be just one part of a package of improvements to Obamacare after next year’s elections.

So why is the tax so universally loathed? Because many of the people who would pay it belong to politically powerful groups such as large labor unions (including teachers), high-salaried workers with really good health insurance benefits and health insurance providers.

As Vox’s Matt Yglesias pointed out, the tax targets “one pillar of the GOP coalition and one pillar of the Democratic coalition, making repeal an inconveniently bipartisan cause.” Inconvenient for those who think the tax is a good idea, anyway.

Many economists do support the tax, saying it is one of the more effective cost-control measures in Obamacare, but those benefits are hard to quantify and tie directly to the tax.

But Rep. Courtney believes the entire concept of the Cadillac tax is misguided. “Trying to control health care costs by sharply increasing peoples’ out-of-pocket costs is not good health policy because it discourages people from getting care that they need,” he said.

The notion that people will spend health care dollars more wisely if they come directly out-of-pocket is based on the false presumption that health care consumers are engaged in a traditional, transparent market. The reality is that consumers rarely have the knowledge, information or ability to comparison shop effectively when seeking health care services, even if their insurance plan doesn’t require them to stay in-network.

When your doctor tells you that you need an MRI, it’s practically impossible to find the most affordable place to get such a test, and if it’s needed to diagnose a potentially serious condition, most patients aren’t going to put cost considerations at the top of their list anyway.

Those who do, those who must think about price, just might avoid getting the test at all, putting off necessary care until they no longer have a choice, at which point the care is likely to be far more expensive and put far greater costs onto the health care system.

Bringing down the rate of growth for health care spending is necessary, both for the sake of the federal budget and for the health and financial well-being of Americans. The Cadillac tax will not accomplish that simply by shifting costs from employers to employees, which is essentially all it will accomplish.

Delaying the tax by two years provides the political breathing room necessary to find a better solution.