Kansas State University


Issues in Health Reform

The Cadillac Tax in the news: Update

UPDATE Sept 3, 2015

A new analysis by the Kaiser Family Foundation adds some detail to how employers may be affected.  A couple of points to emphasize:

  • This is a tax on employers, not employees.  Yes, there will likely be trickle down to employees in terms of higher deductibles and other cost sharing mechanisms but individuals will not see their income taxed for this.
  • Health savings and flexible spending accounts’ employer contributions are included in the maximum that an employer can spend each month before the tax kicks in.  That is, it is not just the amount paid for the insurance plan that will be used in the calculation.
  • The tax to employers is calculated per employee since the amount paid toward health care varies by employee choices.

Given the growth in health care costs the Kaiser report predicts up to 42% of all employers being affected by 2028, having at least one plan hitting the threshold after which the tax kicks in.  The threshold is $10,500 in 2018.  It will be $13,500 paid toward an individual plan by 2028.

Remember, this is an attempt to have consumers have more “skin in the game” as they make choices about their health care use.  It also is about minimizing the tax free benefit that advantages employees who get compensation as a tax exempt health benefit rather than as taxable wages.  The negotiation for this type of compensation, carried out by many unions, is the reason for union resistance to the tax.  There is little expectation that employers will give wage compensation to make up the difference if they are encouraged by this tax to scale back on benefits.

Finally, this part of the Affordable Care Act is not set to go into effect until 2018.  Expect more political discussion and debate.

July 26 posting

There has been talk about repealing the ACA’s “Cadillac Tax,” by candidate Hillary Clinton most recently. A brief by David Wessel for the Brookings Institute is an excellent and detailed discussion about what the tax is and why repealing it would interfere with the attempts to control health care costs built into the ACA.

Even more briefly:

  • The Cadillac tax is set to go into effect January 2018.
  • It does this by saying that employers who offer and pay for expensive policies (premiums costs of over $27,500 for a family, $10,200 for individual) will be taxed/fined.
  • It was intended to generate revenue and curb incentives for employers to offer very generous (and potentially inefficient plans) that have protected consumers from having more skin in the game (higher copays and deductibles). Basically, the argument is that without more costs felt directly by consumers, poor choices are made to overuse (see note below).
  • Republicans have never liked it. It contradicts their understanding of free markets, and freedom of employers. And it is part of Obamacare.
  • Democrats haven’t talked much about it until now though unions have never liked it since they have negotiated for those better health insurance benefits in lieu of wages.
  • Some say encouraging employers to renegotiate wages based on slightly less insurance benefits would be economically sound (at least it requires that those wages are taxed which gives money to support public work).

On a side note,I find lacking the argument that issue about consumers needing more skin in the game, needing to feel the expenses more directly in their pocketbooks that has fueled the whole movement to health savings accounts and stronger consumer decisions:

  • Yes, the consumer/patient makes the first decision to see a health care provider but
  • After that first decision most of the costs are generated by medical professionals telling the patient what the diagnosis is, what kinds of treatments are best, how many times she should return for visits, etc. That is, most medical costs are generated by the medical system decisions NOT consumers.


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