Should We Keep the ObamaCare “Cadillac” Tax?

 

Is the ObamaCare “Cadillac” Tax a good thing or a bad thing? That’s today’s question as Republicans continue to tinker with President Obama’s legacy healthcare system.

The ObamaCare “Cadillac” Tax was originally slated to begin in 2018 but thus far it has been delayed until 2022. House Republicans want to pass a bill further delaying this tax by another year to 2023. Is this a good idea? 

First, let me explain the ObamaCare “Cadillac” Tax. It is a 40% excise tax on high-cost employer-provided healthcare insurance plans. It applies only to those insurance premiums costing greater than $11,000 for individuals and $30,000 for families.

The tax is actually paid by the insurance companies, but the impact on the insured is ultimately the same as if they paid it themselves. As ObamaCare co-architect Jonathan Gruber famously noted, ““We just tax the insurance companies, they pass on higher prices that offsets the tax break we get, it ends up being the same thing. It’s a very clever, you know, basic exploitation of the lack of economic understanding of the American voter.” This was one of many deceptions of the American people Gruber bragged about in his candid remarks that were caught on videotape.

The Cadillac Tax Purpose

The pre-ObamaCare tax treatment of insurance policies has been unequal since the 1950’s. In the post WW II era of wage and price controls, employers were limited in their ability to attract new and better employees with higher wages. To offset these limitations, employers began offering health insurance benefits as an incentive to attract better workers. The IRS did not treat the cost of the insurance policies as extra income. Those who purchased their insurance as individuals apart from an employer did not enjoy this tax exclusion. This unfair and unequal tax treatment of insurance premiums has continued to this day.

ObamaCare imposed the Cadillac Tax as a method to discourage employers from increasing spending on insurance benefits as a means of avoiding higher taxes. By imposing the Cadillac Tax on amounts above the limits, the Obama administration hoped to lower expenditures on health insurance, which they falsely labeled “lower costs” to support their narrative that ObamaCare “bends the cost curve” of healthcare.

James C. Capretta, a healthcare economist at the American Enterprise Institute, writes in The Wall Street Journal that the ObamaCare Cadillac Tax is worth keeping. He explains the current tax system encourages employers to shift compensation toward generous health benefits. “Overly rich health plans encourage consumers to use more health services than they otherwise would, which drives up costs. On average, employer plans cost 35% more than they would if health benefits were fully taxed like cash compensation, according to a 2008 study.”

This issue has been a political football kicked around by both parties for years. President Reagan tried to cap the tax exclusion in 1983 and President George W. Bush tried in 2007. These efforts failed due to opposition by business and labor unions. In 2008, John McCain campaigned on a proposal to tax job-based health benefits to level the playing field but Barack Obama hammered him in political ads for “taxing health benefits for the first time in history.” Then Obama reversed himself, once he was president, when he supported the Cadillac Tax.

Pros and Cons

Capretta says the Cadillac Tax impact would be higher wages for workers as employers were forced to use savings on the expensive plans (which they would avoid) to raise wages in a competitive labor market. He says this tax is essential for a market-based approach to cost control. The current system, which is subsidized by the tax exclusion, undermines the incentive for employers and workers to seek out lower-cost options.

In 2015 I did a three-part series on the Cadillac Tax. (Understanding the ObamaCare Cadillac Tax – Part I, Understanding the ObamaCare Cadillac Tax – Part II, Understanding the ObamaCare Cadillac Tax – Part III) In that series I explained the impact of the tax using the work of Duke University economist Chris Conover. The conclusions of that series were:

  • The Cadillac Tax would eventually affect nearly everyone
  • The impact would be greater on larger businesses than smaller businesses
  • The impact would be harsher for low-income workers than high-income workers

 

Capretta concedes that while the initial impact would affect only 4% of all employer plans, over time, more employer plans would be affected. But he believes the Cadillac Tax should nevertheless be retained. He says, “Many provisions in ObamaCare should be repealed, but the Cadillac tax isn’t one of them. Republicans should look past its origin as part of ObamaCare and leave it alone. They don’t have the will to replace it with something better, and killing it would help those who say the only answer to rising costs is more government regulation.”

Below is a chart put together by former Senate Majority Leader Bill Frist (R –TN) that projected the impact of the Cadillac Tax over time:

The chart shows that in 2018 only about 15% of employers would be impacted by the Cadillac Tax. But by 2029 the tax will impact 76% of employers.

The problem is the tax exclusion of health benefits paid by employers. The playing field must be leveled by some means. Eliminating the tax exclusion for everyone would be an obvious solution but it is politically impossible. The Cadillac Tax provides a disincentive for abusing the current tax exclusion but has drawbacks as we have discussed above. It’s a complex issue that deserves greater study and bipartisan compromise to achieve the greater good. Unfortunately, that’s unlikely to happen in Washington today.

States Become Laboratories of Healthcare

 

U.S. Supreme Court Justice Louis Brandeis is credited with coining the phrase “laboratories of democracy” to describe state governments. He used this phrase in 1932 in his opinion in the case New State Ice Co. v. Liebman to describe “how a state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Today, some states are following this suggestion as they respond to recent changes in ObamaCare by the Trump administration. Liberal states are pushing back on Trump’s de-regulation while conservative states are embracing these changes with more of their own.

For example, ObamaCare imposed a mandate for the first time in our history that forced all Americans to purchase health insurance or pay a tax penalty. This so-called Individual Mandate was so unpopular it was loosely enforced by the Obama administration. The Trump administration repealed it entirely as part of the tax reform bill of 2017.

But now some states are requiring their own residents to pay the tax penalty again – to their state. The State of New Jersey just imposed a “state Individual Mandate” for any resident who fails to purchase health insurance.

Stephanie Armour, healthcare reporter for The Wall Street Journal, says this practice is gaining popularity in liberal state governments. Other liberal states with mandates include Vermont, Massachusetts, and Oregon.

The Trump administration recently increased flexibility of short-term health plans that are non-compliant with all the ObamaCare regulations in order to give patients options to purchase less-expensive plans. Republican state governments have embraced these plans while Democratic state governments have taken steps to limit such plans. The Trump administration also is allowing flexibility in selling plans outside the ObamaCare exchanges. Some states are blocking these changes for their residents. Some conservative state governments are adding work requirements for able-bodied adults who receive Medicaid support.

The different approaches of various states reflect the broad national divide on the issue of healthcare. Conservatives want to give people more flexibility to choose the insurance plan that best meets their needs. Liberals believe the government should make those decisions for you. They are still trying to preserve ObamaCare, despite its failings, and reject Trump administration efforts to fix some of the problems.

Is this a good or a bad thing?

I regard this as a good thing. This will give states the freedom to devise their own healthcare systems and measure the impact on their state without forcing the rest of the country to go along. Liberal states can preserve all the awful regulations of ObamaCare while conservative states can enjoy the freedom of deregulation. The people of each state can decide for themselves if they are better or worse off. It won’t take long to measure the differences.

The differences will impact not just healthcare but state economies as well. Armour says, “ The states’ accelerating tendency to peel off in different directions will have significant financial repercussions for nearly 30 million U.S. small businesses, about 17 million people who buy individual coverage, 75 million Medicaid recipients and scores of hospitals and insurers.”

This trend should continue as long as complete repeal and replacement of ObamaCare is stymied by Congress. The “laboratories of democracy” should soon reveal which direction Americans prefer. I’m betting on an exodus from blue states where high taxes and high healthcare costs will eventually make residence there economically – and medically – unaffordable.

High Deductibles Breaking U.S. Healthcare

 

More Americans have health insurance today than before ObamaCare. But the U.S. healthcare system is still broken.

If you can’t afford the deductible, what good is your insurance? That’s the question many families are asking themselves when they face healthcare decisions. High deductibles are making expensive treatments like surgery and physical therapy unaffordable for many of my own patients.

According to the Federal Reserve, about 40 percent of Americans can’t afford an unexpected $400 medical expense. The graph above shows the rise in deductibles in recent years.

John Tozi and Zachary Tracer, writing in Bloomberg, say since the early 2000s, employers have mostly embraced high-deductible health plans. The thinking has been that requiring workers to shoulder more of the cost of care will also encourage them to cut back on unnecessary spending. But the 2008 recession put added pressure on the family to hold down expenses. Many families put off routine care or skipped medications to save money. The result is a pent-up need for medical treatments even as deductibles are rising even higher.

The truth is that even for many middle class families, these high-deductibles are unaffordable. The result is delayed or neglected medical treatment.

Why are deductibles rising so fast?

The bottom line is that ObamaCare is a failing healthcare system that can’t provide good medical treatment at an affordable price. The reasons for this are many but the main problem is community rating. The architects of ObamaCare elected to scrap the traditional pricing structure of health insurance using actuarial analysis in favor of a community rating system.

Community rating forces insurers to spread the risks of pre-existing medical conditions over only three price levels rather than the usual six. Simply put, high-risk patients, usually older, pay less than the actual cost of coverage while young and healthy individuals must pay more than the actual cost. This unpopular method of pricing was supposed to work because ObamaCare mandated that everyone purchase health insurance or pay a tax penalty. But millions of healthy young people rejected this mandate, preferring to pay the nominal tax (if held accountable) rather than purchase expensive health insurance they didn’t need.

As ObamaCare continues to fail, with more and more Americans refusing to purchase expensive insurance, premiums and deductibles are rising even faster for those who do purchase insurance. This situation cannot continue much longer.

To lower healthcare insurance premiums and deductibles, a new healthcare system, free of the onerous regulations like community rating in ObamaCare, must be implemented. When Democrats stop trying to preserve a failing system they implemented, and recognize single-payer is not the solution, Americans can look forward to affordable healthcare insurance once again. Until then, look for your healthcare premiums and deductibles to continue rising. That’s the sad truth.