Understanding the ObamaCare Cadillac Tax – Part III


In the last two posts I’ve been discussing the ObamaCare Cadillac Tax, once thought to impact only the most expensive health insurance policies. But in Part I of this series, I showed how by 2028, or sooner, it will affect 75% or more of insurance policies.

In Part II, I discussed the disparate impact of this tax on people and businesses. It will have a greater impact on low-income workers and on larger businesses (more than 50 full-time employees). This is bad for workers and bad for business and the growth of our economy.

In Part III, I will discuss the politics of the Cadillac Tax; how we got here and how it can be changed. But the political forces that will resist change are formidable and the road to replacement is filled with challenges.

The Cost Curve

The architects of ObamaCare were particularly interested in lowering the cost of healthcare. They promised to “bend the cost curve” meaning to lower the amount spent on health care. Jonathan Gruber, MIT economist and ObamaCare architect, speaking about the Cadillac Tax in 2009 said, “It would reduce the incentives for employers to provide excessively generous insurance, leading to more cost-conscious use of health care and, ultimately, lower spending. In other words, it ‘bends the curve.’”

Robert Book, writing in Forbes, explains Gruber’s remarks in plain English:

“In other words, the tax will cut “costs” (by which they really mean “expenditures”) by reducing access to health care, which it will accomplish by increasing costs (by which they really mean “prices”) for health care.” (emphasis mine)

Book correctly points out it is odd that the Patient Protection and Affordable Care Act (ObamaCare) – a law which is supposed to improve patients’ access to health care and make it more affordable – would contain a provision that it’s proponents specifically say is intended to impede patients’ access to health care by making it more expensive!

Book goes on to say it is entirely possible Gruber and his fellow architects will indeed induce the results they expect. Employers might indeed cut benefits to keep premiums under the tax thresholds to avoid paying the tax. They could do that by increasing deductibles, increasing copayments, and restricting choices of hospitals and doctors through “narrow networks” and eliminating coverage for services not mandated by law or regulation.

He again summarizes: “In other words, they could make it more difficult for employees and their families to obtain health care, and push more of the cost out of their premiums and onto their paychecks. Because the ACA requires that certain “preventive” health services be covered without any out-of-pocket cost to the patient, employers would have to cut benefits that affect primarily people who are sick.”

Then he asks a key question of the ACA architects: “Is reducing access to health care the goal of the ACA?”

Solutions and Political Problems

Solving the tax exclusion inequality between employer-provided health insurance and individuals purchasing their own is a major challenge from a political standpoint. There are two potential solutions: one is to make health insurance premiums deductible for everybody and the other is to make it deductible for nobody.

John McCain in his 2008 Presidential campaign tried to thread the needle between these two extremes. He proposed that everyone who buys health insurance, either through their employer or on their own, would be given a tax credit each year unrelated to the cost of their health plan. This would have made health benefits above a certain level taxable as ordinary income, rather than tax-free as it was then, or taxed at a higher rate than income, as it will be under ObamaCare’s Cadillac tax. This would have leveled the playing field between employer-based coverage and individual coverage.

This fixed tax credit would have removed the differential treatment of high and low-income workers; everyone would get the same benefit. It would have preserved the “tax help” for buying insurance, but also extended this help to individuals.

This reasonable approach to solving this problem was hammered by Candidate Obama. He ran a $100 million ad campaign opposing this “tax” on health benefits, ignoring the generous tax credit of McCain’s plan to replace the tax exclusion. He then claimed McCain would be “taxing health benefits for the first time ever.” Instead, President Obama, through his Cadillac Tax, claimed that distinction for himself.

The Impact of Unions

Unions were among the first to complain about the Cadillac Tax because they enjoy generous health benefits negotiated in their union contracts. Yet, despite the fact that unions represent a major constituency of the Obama coalition, the Cadillac tax was preserved, although delayed until 2018.

But Chris Conover points out that unions will likely oppose a cap on the tax exclusion, even though it is a more equitable means of solving the tax inequality problem. He explains that while the Cadillac tax impacts low-income workers, many of whom are union members, the highly paid union bosses are impacted less. Conover concludes: “So while unions might well prefer to get rid of the Cadillac tax entirely, they almost certainly would fight to preserve the tax if it were a choice between that and a cap on the tax exclusion.”

These are some of the challenges that politicians and healthcare analysts face when devising methods and plans to improve our health care. Plans must not only be designed to achieve the best results for the American people and our economy but must also be crafted to appeal to the voters.

The historical accounts mentioned above merely demonstrate the difficulty of explaining to the American people the wisdom of change. Politicians on both sides of the aisle are inclined to distort the truth if they feel they will benefit politically. But real leaders must speak the truth to the American people – and do so forcefully enough to be heard. Moreover, responsible voters must demand solutions that will stand the tests of close scrutiny and open debate.

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