As a sign of the continued evolution of healthcare reform, on December 18, 2015, President Barack Obama signed the Consolidated Appropriations Act, 2016 into law,1 which delayed the implementation on the excise tax on high-cost employer health benefits packages, known as the “Cadillac Tax,” from 2018 until 2020.2 Since its inclusion into the Patient Protection and Affordable Care Act (ACA), the “Cadillac Tax,” meant to help curb healthcare spending through employer-sponsored health insurance, has faced heavy opposition from legislators, as well as many employers who would bear the brunt of the excise tax.3 While many legislators and employers in opposition to this excise tax are seeking to transform the two-year delay on the implementation of this noteworthy ACA provision into full repeal,4 other market forces may already be driving many employers to reduce the costs associated with their benefits plans, which could affect overall healthcare spending and ultimately achieve the goals behind this controversial ACA provision.5 This Health Capital Topics article will detail the basics of the “Cadillac Tax,” present the reaction of employers and others in the healthcare industry on the provision’s two-year delay, and discuss how, even with the implementation delay, employers are nevertheless modifying healthcare benefits packages for their employees and its ultimate impact on healthcare expenditures.
Section 9001 of the ACA, entitled, “Excise tax on high cost employer-sponsored health coverage,”6 created a 40 percent excise tax against employees with high-cost health coverage, i.e., an employer-sponsored health insurance plan that provides the employee excess benefit above certain thresholds.7 These thresholds include the following: (1) for employees possessing self-only coverage, the product of $10,200 and the health cost adjustment percentage for such employees based on cost of living; and, (2) for employees possessing any other type coverage, the product of $27,500 and the health cost adjustment percentage for such employees based on cost of living.8 Certain exceptions apply to these threshold cost figures, including long-term care coverage, disability income insurance, fixed indemnity insurance, and coverage for a particular disease or illness.9 According to March 2015 financial projections from the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), the “Cadillac Tax” would raise a total of $70 billion in revenue from 2016 to 2025, a decrease from its previous estimate of $144 billion.10
At the time of passage of the ACA, the primary purposes behind the “Cadillac Tax” were: (1) to generate revenue for the federal government needed for funding provisions the ACA;11 and, (2) to ameliorate rising healthcare costs by incentivizing employers to provide more cost-effective health insurance.12 The need to generate revenue to cover other ACA initiatives, including Medicaid expansion and the creation of health insurance exchanges, was, and continues to be, substantial. At the time of the ACA’s passage in 2010, full implementation of the law was estimated to cost over $900 billion by 2019.13 From 2016-2015, the CBO and JCT estimated that full implementation of the ACA is expected to “result in a net cost to the federal government of $1,207 billion.”14 However, the CBO and JCT noted the potential volatility in its projections, due to likely changes in private health insurance spending on the exchanges.15 While potential volatility in private health insurance spending on the exchanges may impact implementation costs, proponents of the Cadillac Tax argue that the tax would help curtail the growth of health expenditures by incentivizing employers to keep the costs of their employer-sponsored health plans below the tax threshold.16 Currently, employer payments that cover premiums for employee-related health insurance policies are exempt from federal income taxes as an exclusion from gross income.17 Many economists believe that this tax exclusion for employer-sponsored health insurance resulted in an overutilization of healthcare services, which helped drive the growth in national healthcare expenditures (NHE).18 As support, economists note that total NHE in the U.S. have risen consistently, averaging 9.3% annual growth from 1960 to 2012, reaching a projected $3.2 trillion in 2015.19 Further, NHE per capita has steadily increased over the last several years; NHE per capita is projected to reach $10,125 in 2015, and $15,618 by 2024.20
Opponents of the “Cadillac Tax” argue that, in the process of curbing healthcare spending, the excise tax will incentivize employers to shift the tax burden to workers through increased deductibles and co-payments,21 which may negatively affect low-income workers, who often lack disposable income, and the chronically ill, who most utilize health benefits.22 By 2023, the percentage of employers with at least one health plan that would trigger the “Cadillac Tax” amounts to an estimated 30%; by 2028, this percentage is estimated to increase to 42%.23 Many employers whose employee health-benefit plans are likely to be subject to this excise tax have expressed a willingness to modify these plans in order to avoid liability under the “Cadillac Tax.”24 As discussed in the August 2015 Health Capital Topics article, entitled “King v. Burwell: What’s Next?”, a Towers Watson report estimated that 62% of companies facing potential tax liability under the “Cadillac Tax” are working to alter their coverage provisions to avoid this tax liability.25 In an effort to avoid liability under this excise tax, opponents fear that employers will be motivated to increase employee cost-sharing requirements.
It should be noted that the prevalence of employee cost-sharing, a central concern of opponents of the “Cadillac Tax,” is already increasing for reasons independent of the controversial provision. The potential of the “Cadillac Tax” has contributed, but only in part,26 to the shift from the traditional U.S. employer health coverage system of “defined benefits” (where employers provide a package of defined benefits to their employees) to a system of “defined contributions” (where employers contribute a set amount and then require employees to decide how much of their health benefit dollars to spend by selecting from a range of benefit plans).27 Due to rising NHE, employers already were seeking to limit their exposure to potential double-digit health insurance premium rate increases in order to sustain certain levels of benefits.28 In an effort to avoid bearing the brunt of increased premiums, employers began requiring a greater share of health benefits costs from employees, through high deductibles, coinsurance, and co-payments.29 While the consumer is becoming increasingly responsible for healthcare spending, these alterations to employer health benefits packages may lead to decreased overall NHE; a March 2015 paper released by the National Bureau of Economic Research noted that employers offering high-deductible health plans saw reduced growth in healthcare spending.30 However, this reduction may be fleeting, as questions have been raised as to whether this reduced growth in healthcare spending stems from foregone care, such as preventive care, which may later require the provision of more expensive healthcare services, such as a hospital visit.31
The future of the “Cadillac Tax” – and its ability to produce revenue to cover other provisions of the ACA – remains uncertain In light of the December 2015 delay of the “Cadillac Tax,” as well as a recent modification by the Obama administration looking to modify the statutory tax thresholds to regional “gold” level thresholds on the health insurance exchanges.32 Despite this uncertainty, many employers have already instituted efforts to reduce the costs associated with their healthcare benefits packages. It remains to be determined whether these reductions in healthcare spending growth, through increased employee cost-sharing, reflect a short-term trend of relatively marginal NHE growth, or a long-term decline in healthcare spending growth.33 The ultimate fate of the “Cadillac Tax” – including delay, repeal, or implementation34 – could have a substantial impact on the answer to the overall problem of rising NHE.
“H.R.2029 – Consolidated Appropriations Act, 2016” Congress.gov, 2016, https://www.congress.gov/bill/114th-congress/house-bill/2029 (Accessed 2/25/16).
“Consolidated Appropriations Act, 2016” H.R. 2029, 114th Cong., Division P, Title I, § 101(a) (December 18, 2015).
“Health Care Tax Faces United Opposition From Labor and Employers” By Reed Abelson, The New York Times, July 21, 2015, http://www.nytimes.com/2015/07/22/business/labor-and-employers-join-in-opposition-to-a-health-care-tax.html (Accessed 1/15/2016).
“Congress to Delay ACA’s ‘Cadillac’ Tax on Pricey Health Plans until 2020” By Amy Goldstein, December 16, 2015, https://www.washingtonpost.com/national/health-science/cadillac-tax-and-two-other-aca-taxes-part-of-budget-deal-on-hill/2015/12/16/e2b01ff8-a365-11e5-ad3f-991ce3374e23_story.html (Accessed 2/26/16).
“The Cadillac Tax Delay and What’s Next” By Shandon Fowler, BenefitsPro, February 2, 2016, http://www.benefitspro.com/2016/02/02/thecadillactaxdelayandwhatsnext?page_all=1&slreturn=1456438428 (Accessed 2/25/16).
“Patient Protection and Affordable Care Act” Pub. L. No. 111-148, § 4980I, 124 Stat. 119, 847 (March 23, 2010).
“Patient Protection and Affordable Care Act” Pub. L. 111-148, §§ 9001, 10901, 124 Stat. 119, 847-853, 1015-1016 (March 23, 2010), as amended by "Health Care and Education Reconciliation Act" Pub. L. 111-152, § 1401, 124 Stat. 1029, 1059-1060 (March 30, 2010).
“Patient Protection and Affordable Care Act” Pub. L. No. 111-148, § 9001, 124 Stat. 119, 850 (March 23, 2010); “Excise Tax on High-Cost Employer-Sponsored Health Coverage” 26 U.S.C. § 4980I(d)(1)(B) (2014); “Definitions” 26 U.S.C. § 9832(c)(1) (2014).
“Private Health Insurance Premiums and Federal Policy” Congressional Budget Office, February 2016, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51130-Health_Insurance_Premiums_OneCol.pdf (Accessed 2/26/16); “Updated Budget Projections: 2015 to 2025” Congressional Budget Office (March 2015), p. 16.
“Obamacare’s ‘Cadillac Tax’ Could Help Reduce the Cost of Health Care” By William H. Frist, MD, Forbes, February 26, 2014, http://www.forbes.com/sites/theapothecary/2014/02/26/obamacares-cadillac-tax-could-help-reduce-the-cost-of-health-care/#2715e4857a0b556ca59d64f2 (Accessed 1/19/2016).
“Excise Tax on ‘Cadillac’ Plans” Health Affairs, September 12, 2013, http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=99 (Accessed 1/15/2016). “The Cadillac Tax: Why Economists, but Few Others, Love It” By Josh Barro, The New York Times, October 5, 2015, http://www.nytimes.com/2015/10/06/upshot/the-cadillac-tax-loved-by-economists-and-few-others.html (Accessed 1/19/2016).
Health Affairs, September 12, 2013.
“Updated Budget Projections: 2015 to 2025” Congressional Budget Office (March 2015), p. 15.
“Congressional Record: Proceedings and Debates of the 111th Congress, First Session” Vol. 155, No. 196 (December 20, 2009), p. S13581.
“Contributions by Employer to Accident and Health Plans” 26 U.S.C. § 106(a) (2014).
Letter from Henry Aaron, et al., Letter to Orrin G. Hatch, et. al, United States Congress, October 1, 2015. “Excise Tax on High-Cost Employer-Sponsored Health Coverage: In Brief” By Annie L. Mach, Congressional Research Service, (August 14, 2015), p. 1.
“National Health Expenditures Data” May 5, 2014, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/ (Accessed 12/8/2014), Table 1; “National Health Expenditure Projections 2014-2024” Center for Medicare & Medicaid Services, July 30, 2015, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html (Accessed 9/29/15), Table 1. The author calculated Compound Annual Growth Rate (CAGR) based on data found in source. CAGR was calculated using the following formula: CAGR = [(New Population / Old Population) ^ (1 / Years Elapsed)] - 1
“National Health Expenditure Projections 2014-2024” Center for Medicare & Medicaid Services, July 30, 2015, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html (Accessed 9/29/15), Table 1.
“A United Front Against the Cadillac Tax” By Mike Nesper, Employee Benefit News, July 29, 2015, http://ebn.benefitnews.com/news/health-care-reform/a-united-front-against-the-cadillac-tax-2746962-1.html?utm_medium=email&ET=ebnbenefitnews%3Ae4853779%3A2502814a%3A&utm_campaign=ebn_new_health_care-jul%2030%202015&utm_source=newsletter&st=email (Accessed 8/7/15).
“Two Substantive Sides to Debate Over Obamacare’s ‘Cadillac Tax’” By Drew Altman, The Wall Street Journal, October 2, 2015, http://blogs.wsj.com/washwire/2015/10/02/two-substantive-sides-to-debate-over-obamacares-cadillac-tax/ (Accessed 2/3/2016).
“How Many Employers Could be Affected by the Cadillac Plan Tax?” By Gary Claxton and Larry Levitt, Kaiser Family Foundation, August 2015, p. 4.
“2014 Health Care Changes Ahead Survey” Towers Watson, September 2014, p. 5.
Frist, MD, February 26, 2014.
“Private Health Insurance Exchanges and Defined Contribution Health Plans: Is it Déjà vu All Over Again?,” by Paul Fronstin, Employee Benefit Research Institute, July 2012, http://www.ebri.org/pdf/briefspdf/EBRI_IB_07-2012_No373_Exchgs2.pdf (Accessed 5/29/2014), p 1; “Defined Contributions Define Health-Care Future,” by Peter Orszag, Bloomberg, December 6, 2011, http://www.bloomberg.com/news/print/2011-12-07/defined-contributions-define-health-care-ahead-commentary-by-peter-orszag.html (Accessed 5/29/2014).
“Dig Deep: Impacts and Implications of Rising Out-Of-Pocket Health Care Costs” Deloitte, 2014, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/life-sciences-health-care/us-lchs-dig-deep-hidden-costs-112414.pdf (Accessed 1/13/2016), p. 1-2.
“Do ‘Consumer-Directed’ Health Plans Bend the Cost Curve Over Time?” By Amelia M. Haviland, et al., National Bureau of Economic Research, March 2015, http://www.nber.org/papers/w21031.pdf (Accessed 2/26/15) p. 25.
“High Deductible Health Plans Cut Costs, At Least for Now” By Jay Hancock, National Public Radio, March 26, 2015, http://www.npr.org/sections/health-shots/2015/03/26/395491863/high-deductible-health-plans-cut-costs-at-least-for-now (Accessed 2/26/16).
“Obama Budget for 2017 Seeks to Make Cadillac Tax a Regional Affair” By Patrick Connole, AISHealth, February 15, 2016, https://aishealth.com/archive/nhpw021516-03?utm_source=Real%20Magnet&utm_medium=Email&utm_campaign=91018055 (Accessed 2/29/16).
Haviland, March 2015, p. 28.
Fowler, February 2, 2016.