Looming Tax On High-End Health Plans Draws Heavy Fire

About half of all American adults get health insurance through their employer, and beginning in 2018, the government will impose heavy financial penalties on any employer-provided health plans it deems overly generous. The tax was designed to rein in health care inflation and raise tens of billions of dollars.

Former Sen. Jeff Bingaman, D-N.M., a member of the working group that created what's come to be called the Cadillac tax, sees the measure as a way to motivate companies to be more demanding shoppers when picking insurers and health plans.

He says if employers were more demanding, insurance companies and health care providers — including hospitals and doctors — would be more likely to curb the prices they charge.

"I think we saw it as a way to keep the cost of health care from continuing to grow at the rate that it had been growing," Bingaman says.

Under the Affordable Care Act, any health plan for employees that is over an annual threshold will be taxed at 40 percent. As of now, amounts over $10,200 annually for an individual, or $27,500 for a family will be taxed; those caps are subject to change in coming years.

All agree the rule will raise cash: The Congressional Budget Office estimates the tax will generate $87 billion by 2025.

Estimates on how many employer plans will be subject to the tax vary widely. Consulting firm Towers Watson says that as many as half of these company plans are on track to trigger the Cadillac tax in 2018.

Still, being on track to get hit and actually paying the tax are different things, says Elise Gould of the Economic Policy Institute.

"Health insurance providers are going to provide plans that are cheaper," she says. "And, all else equal, cheaper plans are thinner plans — which means that consumers are going to have to pay more out-of-pocket."

Opponents of the tax fear that more out-of-pocket costs for consumers will add to the difficulty many Americans already have in paying their medical bills, now that high-deductible health plans are commonplace.

"Trying to control health care costs by sharply increasing people's out-of-pocket costs is not good health policy because it discourages people from getting care that they need," says Rep. Joe Courtney, D-Conn., who is leading a House effort to scrap the tax. Bipartisan bills aimed at repeal are already making their way through both the House and Senate, even though repealing the tax would increase the budget deficit.

"The opposition has really grown like wildfire," Courtney says. "I dropped my bill back in February with a handful of co-sponsors; we're up to 145 on my legislation."

Some business groups, including many health care companies and the U.S. Chamber of Commerce support repealing the tax, as do many unions. And several presidential candidates on both sides have said they want it repealed.

But a large number of economists, including Henry Aaron of the Brookings Institution, are publicly urging lawmakers to let the tax stand. In a letter sent this month to congressional finance leaders, the economists write that Congress should "take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth."

Speaking from his own experience as a patient, Aaron says that without such a tax, motivating doctors and patients to hold the line on expensive tests is very difficult.

"I could tell you stories," he says, "... where doctors interacting with me were quite explicit in saying, 'Well, are you covered for insurance on this? If so, let's do it. I'm not sure it's going to make any difference in your treatment, but you'll feel better.' "

The tax could cut annual U.S. health spending by 3 to 4 percent — as much as $60 billion by 2024, according to the Congressional Research Service.

Still, says economist Jared Bernstein, "I don't think that it's going to be nearly as biting as lots of people claim." Plans deemed excessive would be taxed only on the amount that surpasses the annual limit, he explains.

"So the issue isn't, 'How many plans are over the threshold?' " he says. "It's, 'How much of the plans' costs are over the threshold?' And if you look at that, you get a much smaller number."

The Cadillac tax is the latest in a string of attempts to bring down the cost of health care by shifting more of the bill to consumers, and encouraging them to be savvier shoppers. Some critics of that approach say it dodges the real problem: how much hospitals, doctors and other health care industry players charge.

This story is part of NPR's reporting partnership with Minnesota Public Radio and Kaiser Health News.

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