Published October 9, 2015|8 min read
If you have any interest in healthcare, politics, insurance, or people yelling at each other on 24-hour news networks, you probably know something about the Affordable Care Act, aka Obamacare. There seem to be as many people out there who hate it as love it. But how much do you know about the most controversial part of the healthcare law?No, not the failed website launch. No, not the Supreme Court’s decision upholding subsidies. No, not the general idea of legally-mandated healthcare coverage. (Okay, maybe I should have said "one of" the most controversial parts...)No, we’re talking about the Cadillac tax. It’s squarely in the sights of seemingly everyone in Washington and around the country, but you might not have even heard about it. Which is a problem, because it could have both an immediate and long-term impact on your healthcare choices.So whether this is its last hurrah or it comes out the other side battle-tested, here’s what you need to know about the Cadillac tax.
The Cadillac invokes images of a luxury, high cost, premium product in the eyes of many Americans. That’s what the originators of "Cadillac plan" had in mind when they coined the phrase for expensive insurance plans back in the 1970s. The Cadillac tax, then, is a tax on those plans that are deemed to be too expensive.Here’s the gist: starting in 2018, employer-provided healthcare plans over $10,200 for individuals and $27,500 for family plans will be taxed at 40%. So, for some simple math, a plan clocking in at $1,000 over the prescribed minimum would be taxed $400. Right now, healthcare benefits provided by employers aren’t taxed like wages are, which is a great way for employers to save on their taxes, so this added cost would be a huge change in the way businesses do business.The minimum plan cost – the amount after which the tax would kick in – would increase with the rate of inflation, so it would go up each year. The Kaiser Family Foundation estimates that this could affect 26% of employers when the tax begins in 2018 and could increase to 42% by 2028.How does that play out in the workplace? Your employer provides health insurance options. Great for you, because it’s cheaper than if you have to buy your own. They provide very expensive plans. Also great for you, because it’s less than you have to pay out-of-pocket and offers more coverage options. The Cadillac tax taxes these expensive plans. Bad for you, because your employer doesn’t want to pay those taxes so they offer cheaper plans instead.But is that actually bad for you? That’s the crux behind the argument on whether or not to repeal the tax. On the one hand, you lose your killer insurance plans and end up paying more. On the other hand, you might get paid more and healthcare costs might go down. That’s the debate that’s raging right now, and it has enemies and allies fighting hard for its fate.
Support for the Cadillac tax comes from a source that might not be top of mind – economists. In fact, they like it so much that 101 of them signed an open letter urging politicians not to give it the axe. This mindset is probably because while the rest of us are concerned about how a specific law will or will not affect our cash, economists more often look at the big picture. And to them, the Cadillac tax is good for two reasons: higher wages and lower healthcare costs.Remember how employer healthcare benefits aren’t taxed the same way income is? There’s a long-standing theory that this suppresses wages. It makes sense; if an employer can pay $X tax-free through insurance instead of paying $X in wages that are going to be taxed, why wouldn’t they? So according to economists, if businesses can be persuaded (read: taxed) to lower the cost of the health insurance they provide, more of that money will go back into employees’ paychecks because there’s no longer an incentive to keep it tied up in insurance benefits.Of course, some people might call that an optimistic outlook. Those same people might point out that wages have stayed relatively flat for some time for the average worker, and that Tim Cook would be able to literally swim in pools full of Apple’s cash reserves like Scrooge McDuck, so maybe instead of raising wages companies would just hoard that money.The other idea is that the Cadillac tax would lower healthcare costs. Since companies don’t really have an incentive to provide cheaper healthcare – quite the opposite, in fact, as they can tout expensive, robust plans as a draw for potential employees – that drives up costs. It encourages employees to make more liberal use of their insurance since it’s relatively cheap for them, so a routine doctor’s visit turns into an all-you-can-eat buffet of tests, or an ailment that could be looked at by a general practitioner is instead looked at by a more expensive specialist. By making people more conscious about the money they’re directly spending on healthcare, they might rethink some of their current practices, and it makes employers allies to individuals in the fight against rising healthcare costs.That employer-provided healthcare drives up costs makes it a type of regressive tax: employers provide tax-free benefits that are cheap for employees, while those who don’t get those perks – typically people with "worse" jobs or part time workers – are footing the bill.
So economists are for the Cadillac tax. Who’s against it? Well...kind of everyone else. Republicans are against it because it’s part of Obamacare. No surprise there. But Democrats are speaking out against it, too. And not just any Democrats: Hillary Clinton wants to repeal it. Bernie Sanders wants to repeal it. It’s in a lot of crosshairs.This might seem odd, but it’s because the group that really doesn’t like it is unions, and many politicians – especially Sanders – side with labor. As part of their negotiating tactics, unions often forego higher wages and opt instead for better benefits. So if those benefits are going to be taxed and, theoretically, taken off the table, you can see how that wouldn’t fly with unions.The average American isn’t too keen on it either, although opinion of the tax changes depending on whether you phrase it as lowering healthcare costs or as increasing out-of-pocket pay. As we crawl from the wreckage of the recent recession and deal with immediate concerns like flat wages, thinking long-term isn’t on the minds of many people. Sure, the Cadillac tax might raise your wages, but it will almost certainly (and a lot sooner) result in higher deductibles and increased copays.People don’t like the government telling them what to do, so you can imagine how well limiting healthcare options goes over. We also cringe at the word "tax" in general, even though supporters are quick to point out that it isn’t about raising revenue, but rather creating an incentive to change spending habits so employers actually avoid the tax. Try as economists might, they’ll have to argue a little harder for people to come around.
"How is this going to affect me?"It’s the question you’ve been waiting to ask since the headline, right? The answer is that it might already be affecting you. Depending on how quickly your employer started making changes in preparation for 2018’s Cadillacageddon, your workplace options might already be pared down. If they haven’t, then they’ll start sometime within the next couple of years. Or they won’t, and your employer will eat the cost of the 40% tax, in which case congratulations! They must really like you. But since the name of the game in America is "profit," it’s unlikely many employers will go that route.Another option: your employer doesn’t provide Cadillac plans, so you’re not going to see a change in your policy. Still, the idea behind the tax isn’t to cut individual plans. It’s to change how we look at healthcare as a whole. So even if you don’t have to switch from Plan A to Plan B, you should – should – benefit from an overhaul on how we spend on healthcare.*Attacks on Obamacare aren’t anything new, but this kind of across-the-aisle teamwork on Capitol Hill is something we don’t see often. It’s also an interesting debate about long-term benefits versus short-term costs, whether you should stay on your employer’s healthcare plan, and whether or not employers should even provide health insurance at all.So will it stick around to see its 2018 debut? Hard to say. The public is divided and the people likely to be in power come the next presidential election, regardless of their party, are looking to strike it down, so things seem gloom for the Cadillac tax. But maybe the hypothetical cost-saving angle will win the day. Either way, the decision to keep or repeal the Cadillac tax will have a big impact on how we spend on healthcare in the future.
Image: Tim Hamilton
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