According to a story published Monday in the New York Times, Obamacare’s famous “Cadillac TaxThe Cadillac Tax is a 40 percent tax on employer-sponsored health care coverage that exceeds a certain value. The aim: to curb health-care cost growth, reduce favorable tax treatment of employer-provided insurance, and help fund the Affordable Care Act (ACA). It was repealed in late 2019 before taking effect. ” is already starting to have an effect on employer health insurance coverage.
Even though the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. goes into force in 2018, companies already are starting to reduce the value and quality of their high-end health plans in order to avoid the coming tax.
Starting in 2018, this tax will be a 40 percent levy on the value of a health insurance plan that exceeds a statutory limit. According to the Times article, that value is $10,200 for individuals and $27,500 for families. So for every dollar over $10,200 for singles and $27,500 for families, the plan will be taxed 40 cents.
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Example Calculation of "Cadillac" Health Insurance Tax |
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.4 x ( Cost of Plan – $10,200 or $27,500 ) = Tax Owed |
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Plan Type |
Total Premium |
Tax Owed |
Total Cost of Coverage |
|
Single |
$11,000 |
$320 |
$11,320 |
|
Family |
$29,000 |
$600 |
$29,600 |
Like an income tax with a progressive rate structure, which discourages earning that additional dollar of income over a specific amount, this tax discourages employers from purchasing plans that are over the statutory limit by making the next dollar 40 percent more expensive. It works almost like a cap on the exclusion for employer-sponsored health insurance.
Apparently it is doing just that. 17 percent of employers this year have revised their health plans, up from 11 percent in 2011 in anticipation of the tax. Employers are either reducing the benefits of plans, increasing deductibles, or attempting to encourage their employees to be healthier all in attempt of avoiding this tax in 2018.
And union members are not happy about this tax. Union members are famous for their generous health benefits and have benefitted from the tax subsidy on health insurance. This explains why unions are put in a rare position of opposing a tax increase.
The point of this tax—and much of Obamacare—was to lower the utilization of health care by making people face the true costs of their care. The excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. attempts to do this by making generous plans more expensive for employers. In turn, this pushes employers to offer higher-deductible plans that make individuals share more of the cost of their own care. This theoretically will contain healthcare costs-a laudable goal.
However, the excise tax is an odd way of accomplishing this. A better way would have been to just cap the tax exclusion for employer-sponsored health insurance. However, that was not politically feasible, especially with strong union opposition. So instead, lawmakers imposed the tax on insurance companies to drive up the price of insurance instead.
It will be interesting to see if this trend towards lower-cost insurance plan continues, or if employees value high-end insurance plans so much that they are willing to take an even larger hit in their wages to get them.
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