Cadillac Tax Necessary, White House Economic Chief Says

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By Sara Hansard

Oct. 8 — The so-called Cadillac tax, the 40 percent excise tax on high-cost employer-sponsored health plans set to begin in 2018 under the Affordable Care Act, is “one of the most important tools we have” to drive cost reductions and quality improvements in the private sector, the chairman of the White House Council of Economic Advisers said Oct. 7.

Speaking at a Brookings Institution forum on economic challenges in the health-care market, Jason Furman said the ACA has reduced the uninsured rate in the U.S. to historic lows of fewer than one in 10 and is playing a role in improving quality and slowing cost growth.

While the federal government has moved to change payment models in Medicare to improve quality and lower cost, for those changes “to work really well we're going to need to see the private sector picking up on alternative models for payment as well,” he said. Implementing the controversial tax “can help solve the adoption problem,” and repealing or delaying it “would be deeply problematic” in terms of achieving the goals of the ACA, he said.

Tax Repeal Support Growing

Bipartisan support has been building for repealing the tax, with Democratic presidential candidate Hillary Clinton saying she would support repeal and some labor unions opposing the tax. The House Budget Committee is set to mark up budget reconciliation recommendations Oct. 9 that would include a repeal of the tax (193 HCDR, 10/6/15).

The tax is to be charged on health plan costs exceeding $10,200 for self-only coverage and $27,500 for family plans starting in 2018. An analysis released Aug. 25 by the Kaiser Family Foundation (KFF) estimated that 26 percent of employers offering health benefits could be subject to the tax in 2018 unless they make changes to their plans, and the share of employers affected could rise to 30 percent in 2023 and 42 percent in 2028 if their plans remain unchanged and health benefit costs increase at expected rates.

The tax will give employers an incentive to make their health-care plans more efficient, and that benefit would help employees, Furman said in his talk. He cited KFF data showing that average premiums for employer-based family plans is $17,545 in 2015, and said if premium growth matches the most recent National Health Expenditure projections the law's threshold will be nearly 40 percent above the average premium in 2018.

4 Percent of Enrollees Affected in 2018

The Department of the Treasury's Office of Tax Analysis estimated that in 2018 only 4 percent of enrollees would be affected by the tax, but many of the affected plans “are only affected to a very small degree,” Furman said. Only 1 percent of plan costs are likely to be affected by the tax in 2018, and only 3 percent of plan costs are expected to be affected by 2025, he said.

Many economists support the tax, Furman said. An Aug. 20 Congressional Research Service report estimated that the tax would reduce national health expenditures by as much as $60 billion in 2024, and reductions in health costs could increase take-home pay by $45 billion per year by 2025, which would be double the wage gains that would come from increasing the minimum wage from $7.25 to $10.10 per hour, he said.

Furman also disputed claims that as employers find ways to reduce the cost of their plans, employees will be faced with higher cost sharing. “Instead, I think a lot of what the high-cost excise tax is going to do is drive the types of alternative payment models” that Medicare is pushing, and it will give employers more incentive “to exercise their market power to slow the actual cost growth of health care,” he said.

Benefits for Those in Less Expensive Plans

Benefits from lower premium growth on high-cost plans will “spill out across the health system,” benefiting people in less expensive plans, Furman said.

In addition, the Congressional Budget Office has estimated the tax will reduce deficits by about $90 billion over the 10 years ending in 2025, Furman said.

“A lot of what we're trying to do is give the private sector a reward for quality and let them figure out how to improve,” Furman said, referring to his contention that the tax is an important tool in reducing costs and improving quality. Implementing the tax will also “let the private sector figure out how to reduce the cost of health care,” he added.

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