Benefits
Health policy analysts and economists across the political spectrum are in favor of Cadillac tax. They agree that the Cadillac tax will encourage employers to make their health care plans more efficient. We identified four potential benefits of the Cadillac tax:
1. Finance health care reforms with special focus on ACA
The Cadillac tax is expected to reduce moral hazard or inefficient use of health care services and raise the revenues to fund ACA.
- Generous health care plans, offered by the employers are currently not subjected to the tax. These plans often lead to over-consumption of the medical services.
- These untaxed plans traffic around $250 billion each year in tax subsidies [healthaffairs.org].
- The Cadillac tax aims to get employees to switch to less general coverage to avoid paying tax.
- According to The Congressional Budget Office (CBO), the Cadillac tax is expected to generate $80 billion within 10 years
- According to economists, the Cadillac tax will also exert pressure to slow the growth of premiums and health care costs.
2. REDUCE HEALTH CARE COST
The Congressional Researcher Service estimates that this tax would reduce the national health expenditures by $60 billion in 2024.
- Some employers have started adopting innovative strategies to reduce health care costs. For example, several employers are expanding disease-management programs to effectively target employees with chronic conditions. Walmart is considering paying health-related travel costs to hospitals and other providers to ensure quality of care and positive health outcomes [healthaffairs.org].
- The Cadillac tax will urge employers to structure the managed care plans that are focused on long-term care and coordination.
3. INcrease wages
Figure 1: Effects of the Cadillac tax on deficits and wages
Source: Congressional Budget Office
Reduction in health care cost following the implementation of Cadillac tax can potentially increase worker wages.
- The money employers save on health benefit costs can be passed to workers in the form of higher wages
- The CBO and the Joint Committee on Taxation (JCT) have estimated that the tax will increase take home income $45 billion/year by 2025.
- It is still not clear how quickly the wage increase will occur, since compensation packages take time to adjust
4. Lower future deficits in long run
Cadillac tax will boost the economy in the long run.
- Both CBO and JCT estimate that this tax will reduce deficits by $91 billion over the next ten years, largely due to an increase in income and payroll taxes associated with the increase in wages.
- National savings will increase, leading to an increase in capital accumulation, further reducing foreign borrowing [The Hamilton Project].
In Opposition
The Cadillac tax continues to be extremely controversial and many are concerned about its unintentional outcomes.
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Employer Response
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Other Groups
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Employers are already starting to adjust current health benefits and implementing new cost reductions to avoid “triggering the Cadillac tax”. Examples include:
Additional concerns surrounding the Cadillac tax:
- Increasing deductibles and co-payments
- Reducing covered services
- Eliminating “tax-preferred savings accounts” like Health Savings Accounts and Flexible Spending Accounts
- Eliminating higher-cost health insurance options
- Providing less expensive and narrow provider networks as a means to cut costs
- Utilization of a private insurance exchange network
Additional concerns surrounding the Cadillac tax:
- A far greater number of insurance plans will be subjected to the tax than the Obama administration predicts and will have detrimental affects on the middle-class
- Potential bias in hiring due to an employer's desire to not hire employees who may require more expensive insurance
- The assumption of moral hazard, the basis of the Cadillac tax, is unfounded
- Many Democrats and Republican (including both presidential nominees) believe the Cadillac tax should be repealed since they believe it will lead to increase in deductibles and other out of pocket expenses by the employers [The Washington Post].
- Republicans, specifically are eager to kill the tax as part of their overall disregard for the ACA and their preference for lower taxes.
- Labor unions, health insurers, employers are all lobbying against the Cadillac tax. The Alliance to Fight the 40 – a coalition of public and private sector employer organizations, unions, health care companies, businesses and other stakeholders that support employer-sponsored health coverage is a strong opponent. The Alliance seeks to repeal the 40% tax on employee health benefits to ensure that employer-sponsored coverage remains an effective and affordable option for working Americans and their families. The employers are opposing the tax, since health benefits are an important tool for recruiting and retaining workers, with the Cadillac tax in effect they will likely have to reduce or eliminate worker's health benefits in order to avoid tax.