'Cadillac Tax' Is Hated, But It Might Be Working

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In a bit of poetic justice, a tax named after an automobile brand got a boost from contract negotiations in the Motor City.

That new federal levy, officially called an excise tax on high-cost health coverage, is better known as the "Cadillac tax." Under this provision of the Affordable Care Act, employer-sponsored health coverage worth more than $10,200 per year to an individual or $27,500 per year to a family will be subject to a 40 percent tax on the amount that exceeds the threshold. The tax doesn't take effect until 2018, and as we get closer to that date, pressure in Congress is building to repeal it.

The tax is unpopular among large employers, about a third of which expect to have plans subject to the tax, according to a 2014 survey by the consulting firm Mercer. It's also unpopular among trade unions, which in many cases won generous health benefits over years of tough collective bargaining. And when management and labor agree on something, it's safe to assume that their Democratic and Republican allies on Capitol Hill will also agree.

So while congressional Democrats generally stand united in defense of the ACA, a House bill to repeal the Cadillac tax nonetheless has 135 Democratic co-sponsors.

That was the backdrop as the United Auto Workers hashed out details of a new labor agreement with Fiat Chrysler Automobiles this month. Autoworkers had won unusually generous health benefits in previous contracts, perks they won't give up just because workers in other sectors have lost theirs. But with health costs rising and the Cadillac tax looming, union negotiators knew they couldn't let this be management's problem alone.

"For quite some time, the auto unions have recognized a reality in U.S. economics that not all other workers are as keenly aware of," says Ceci Connolly, managing director of PwC’s Health Research Institute. "And that is that rising health care costs bite into wages."

So the union has agreed to "find areas of opportunity to reduce cost" if that's needed to stay under the tax threshold, even if that means charging higher deductibles for plans subject to the excise.

More importantly, the union proposed an unusual level of labor-management collaboration to tackle rising health costs. The draft agreement calls for labor and the Big Three domestic automakers to pool resources in a co-op "to explore innovative ways of improving the delivery of negotiated health care benefits in a manner that increases quality, lowers cost, produces less waste and provides better patient care."

If the new contract is ratified by Chrysler workers, the UAW will take the same proposal into contract negotiations with Ford and General Motors. Does that mean the Cadillac tax is working as intended? Perhaps.  It's definitely bringing new urgency to efforts to control costs.

Steve Wojcik, vice president for public policy at the National Business Group on Health, an association of large employers, points out that it make sense for all parties to avoid a tax that "doesn't benefit the UAW employees, doesn't benefit the company, doesn't benefit the people that buy the cars or shareholders or anybody."

"The excise tax has gotten companies as well as employees and others who represent them, like unions, thinking, hey, we need to work together," says Wojcik. "The excise tax has brought this to the fore, a focal point for action."

That stands in contrast to the argument on Capitol Hill for repealing the tax. Rep. Joe Courtney (D-Conn.) warned last week, "Having a blunt instrument, which is what this excise tax is, come in and disrupt people's health coverage that they've negotiated long and hard for -- given up wage increases over the years -- built their family planning around is really not good health policy."

But it just may take a blunt instrument to focus the mind on a problem as difficult as escalating health care costs.

Even if it does succeed in driving efforts to control costs, the Cadillac tax is not out of the woods. After 2018, the tax's thresholds are indexed to the consumer price index, which in recent years has run at about half the level of medical inflation. That means that each year, more and more insurance plans will be subject to the tax. Wojcik says members of his organization project that "all of the things that they are doing, including increasing cost sharing for people covered by their plans, only buys them at most two to three years" before the tax will bite hard.

So, in a way, the urgency of repeal efforts will depend on that spread between CPI and medical inflation. Medical inflation has slowed in recent years, and if it moderates further, the Cadillac tax may cause little pain for several years. If medical costs spike, on the other hand, the demands for an adjustment or repeal will increase.

As PwC's Connolly points out, "There's a big difference between public frustration and political posturing and actually changing laws. Changing laws is really hard work." So until the pain is widely felt, repeal efforts are likely to remain on the back burner.

And as with many fiscal issues in Washington, a repeal of the Cadillac tax faces an additional difficult hurdle -- the "pay for" to fill the hole of lost revenue.  "Undoing a law that generates, the latest calculation is $87 billion in revenue, is especially difficult,” says Connolly, "because somebody has to go find that $87 billion somewhere else."

Karl Eisenhower is the editor of RealClearHealth.

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