When enacted in 2010, the Affordable Care Act (ACA) included an excise tax on “high-cost” job-based health insurance—single plans with yearly premiums exceeding $10,200 and family plans with premiums exceeding $27,500—that was originally set to begin in 2018. Congress delayed the implementation of this tax twice and it is now scheduled to start in 2022. The U.S. House of Representatives is expected to vote this week on whether to repeal the tax completely.
New research published by the Kaiser Family Foundation last week projects that one out of five (21%) U.S. employers will have at least one health plan subject to the tax in 2022, with the share projected to grow quickly over time.
The tax will be levied on insurers and administrators of self-funded plans that offer the high-cost plans, but taxes paid are likely to be passed along via higher premiums. In most cases, employers will therefore determine how to respond to the tax: by adopting strategies to purchase health care more cost-effectively, by passing on some or all of the premium increase to workers, or by preemptively reducing the level of plan benefits to keep the premium below the “high-cost” threshold.
As discussed in a prior post, employers and workers have been struggling with rising health care costs for years. Employers and workers contribute more to premiums with each year, and workers with job-based coverage have been increasingly paying more to access care, in large part due to deductibles becoming both bigger and more common. These long-standing cost pressures have already created strong incentives for employers to seek cost control, and many employers have pursued cost containment strategies. However, it is very challenging for employers alone to drive meaningful improvements in health care cost efficiency. This is due to a number of reasons, including high consolidation of health care markets in some regions, which leads to higher health care prices, as well as anti-competitive hospital contracting practices, which can limit the flexibility of employers to prioritize the most efficient hospitals.
Instead of cost containment, the most likely outcome of the excise tax is that workers will bear the brunt of this tax through increased copays and deductibles. Surveys have shown some employers have already increased cost sharing in anticipation of the tax. Research indicates that higher out-of-pocket costs for workers will not result in the optimal amount of health care consumption or significant improvements in the price or quality of care. Rather, further shifting costs to workers threatens to reduce access to care and financial protection for workers and their families, especially low-income individuals and those with significant health needs.
Describing this tax as a “Cadillac tax,” as is frequently done, is misleading. As I discussed in a prior post, “the premise behind the excise tax is that it will rein in overly generous job-based health plans; the evidence indicates, though, that the tax is poorly targeted because premiums depend more on where you live, the health of your co-workers, and your company’s size than on generosity of benefits. It is those factors, not plan richness, that will be more likely to determine whether the health benefits you get through your job are taxed.” For example, one study published in Health Affairs estimated that benefit design and plan type accounted for only 6% of variation in premiums.
The ACA’s excise tax is not a progressive tax policy in spite of the fact that higher-income households are significantly more likely to have employer-sponsored insurance, the only type of insurance subject to the tax. As I previously wrote, “in practice the effect of the excise tax will be regressive because low- and middle-income workers with high-cost plans will face more severe consequences than their higher income counterparts.” Two high-cost plans with the same premium would be subject to the same tax amount regardless of whether the enrollees are high- or low-income (and regardless of whether the premium is a factor of geography, the health needs of the enrolled workforce, or benefit levels). To the extent that employers respond to the tax by increasing workers’ out-of-pocket costs, the tax will disproportionately hurt low- and middle-income workers because they are less able to afford care.
High health care costs are a major concern for workers, with four out of ten Americans with job-based coverage reporting some difficulty affording healthcare in 2018. But the level of benefits in job-based plans is not the cause of our health care cost problems. In fact, the generosity of job-based plans has been rapidly declining over the last decade and Americans spend more per capita on out-of-pocket health care costs than individuals in most other OECD countries. Instead, U.S. healthcare spending is so much higher than spending in comparable countries primarily because “It’s still the prices, stupid,” as Johns Hopkins Professor Gerard Anderson and co-authors concluded in their recent Health Affairs article. Cost containment is sorely needed throughout our U.S. health care system, but this tax is not likely to achieve it. Instead, the most effective cost control policies would address health care prices.
Read the Labor Center’s three-part blog series on the ACA excise tax published in 2015: