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Bye Bye ‘Cadillac’ Tax? – Pacific Research Institute

Bye Bye ‘Cadillac’ Tax?

As congressional negotiators wrangle this morning over whether to soften the potential blow of the so-called “Cadillac” tax or kill it altogether, health care insiders on National Journal’s Health Care Expert Blog are discussing the plan’s effect on controlling skyrocketing costs.

When congressional Democrats meet with President Obama today, the prospect of cutting the tax outright is likely to come up. Another idea under discussion is for the House to accept the Senate’s tax on high-end insurance plans (the House doesn’t have it), but raise the threshold so that it would apply to higher premiums.

Paul Fronstin, senior research associate at the Employee Benefit Research Institute, says that raising the thresholds of the Senate bill would reduce the number of people affected by the excise tax, but that future health inflation “could push more into its clutches.” The unanswered question, he adds, is “whether a tax on high-cost plans (driven more by incidence of disease than plan design) that reduces the comprehensiveness of plan design will reduce spending on health care services among the chronically ill. If a person with diabetes does not change his or her use of health care as a result of the excise tax, health care costs will not be affected, and the long held hope of economists that taxing high cost plans will reduce total health spending, and increase wages, could be proven wrong.”

The Senate’s tax on high-end insurance plans would tax premiums over $8,500 for individual coverage and $23,000 for family coverage. The tax, imposed on the insurer, would be 40 percent of the value of the plan that’s over the threshold. The threshold would be higher for some — $1,350 higher for retired individuals over 55, employees in high-risk professions, and temporarily for the 17 states with the highest health care costs.

Jason Rosenbaum, deputy director of online campaigns at Health Care for America Now, argues that while taxing health care benefits is designed to get employers to spend less on health care, “that policy will directly shift costs to you, and that means higher deductibles, less choice of doctors, and worse health benefits.” The theory is that taxing health care plans will cause employers to cut heath care and increase wages, he says, but he cites an Economic Policy Institute report rebutting that claim. Health care costs “are not large enough to substantially move wages,” it says, and “examination of actual wage and benefit trends confirms that changes in the trajectory of health care costs did not materially affect wage trends over the last 20 years.”

So what will happen with such a tax? “Companies will lower the value of the plans (lowering the premiums under the threshold for the excise tax) and make up the difference by raising the amount employees have to pay out of pocket,” Rosenbaum writes. “Or, employers could simply cut benefits.”

Sally Pipes, president and CEO of Pacific Research Institute, further argues that “massive new taxes” won’t control costs. “The House doesn’t even head fake in this direction. It offers pure wealth redistribution, raising its money through general taxation on high earners.”

And John Goodman, president and CEO of the National Center for Policy Analysis, warns that because the tax isn’t indexed to medical prices, “eventually it will reach everyone. It’s also very regressive, applying a 40% rate to everyone, regardless of income. Minimum wage workers will be taxed as though they were millionaires.”

He also finds it ironic that defenders say it would encourage economical choices of insurance benefits, “yet the bill has a mandated benefit package that will be more bloated than most people realize.”

Goodman argues that Rosenbaum is off on his assessment of taxes and wages. “Employee benefits are a substitute for wages. I believe every serious study that has ever been done has found that there is a dollar for dollar tradeoff. This is so well established it’s hard to believe anyone would even question it,” he writes.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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