White House Economic Advisor defends ‘Cadillac Tax’

Council of Economic Advisers Chairman Jason Furman defended the excise tax on high-end insurance programs contained in the Patient Protection and Affordability Care Act (ACA) in an October 7 speech before the Hamilton Project, a Washington, D.C.-based think tank that promotes broad-based economic growth. “[A]ny changes to the excise tax, or other provisions of the law, must preserve, not undermine, the law’s major benefits for our health care system, our economy and the deficit, which is why the administration opposes legislation that would repeal or delay this provision,” said Furman.

One prominent criticism of the tax, scheduled to go into effect in 2018, is that, rather than applying only to generous “Cadillac” plans, the excise tax will substantially burden workers with more typical “Chevy” plans, Furman pointed out. “If true, this could raise legitimate policy concerns,” he said. “However, the claim that the excise tax will burden ‘Chevy’ plans is at odds with the facts.”

Furman said that, due to the “very high” thresholds above which the excise tax applies, the Treasury Department’s Office of Tax Analysis estimates that just 4 percent of individuals enrolled in employer coverage will be in plans with costs above the excise tax thresholds in 2018, even if employers make no adjustments at all to avoid the tax. According to the same Treasury estimates, only around 1 percent of plan costs will be affected by the tax in 2018, even if employers take no steps to avoid the tax.

Because the thresholds above which the tax applies are indexed to the Consumer Price Index, rather than a measure of health care costs, the tax’s impact is likely to grow over time, and these impacts could become too large in the long run, Furman said. In practice, however, he noted, “It will be many years before the tax’s impact reaches a level that would raise serious concern.” He made the point that, even by 2025, the end of the current 10-year budget window, the Treasury estimates that only about 3 percent of plan costs would be affected by the tax, well below the level that would risk creating unintended consequences for employer coverage.

At the same time, the Economic Policy Institute (EPI) said in a recent blog that the excise tax in the ACA, and other methods of health care cost sharing, are “a deeply inefficient strategy” for trying to contain health care costs. “Taxpayers are already feeling the economic pinch of rising health costs,” stated Josh Bivens and Elise Gould of the EPI. “Policy efforts to make them feel an even greater squeeze will do more harm than good.”

Bivens and Gould said the excise tax on expensive insurance plans contained in the ACA would do exactly that. “While the [ACA] represents an absolutely crucial step forward in providing universal access to health care, the policy virtues of the excise tax are often hugely oversold.” They added that, while it is often misleadingly labeled the “Cadillac Tax,” it is “not well-targeted only toward those fortunate enough to easily bear its costs. Instead, it will eventually increase out-of-pocket costs for tens of millions of American households.”

SOURCE: Hamilton Project, October 7, 2015.

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