Democrats in the House unveiled legislation to eliminate the so-called “Cadillac tax” that is a critical piece of the Affordable Care Act’s funding projections.
The tax goes into effect Jan. 1, 2018, and is based on the cost of premiums, which are higher in areas with more expensive health costs. The bill’s sponsors want to repeal the excise tax because they say it unfairly targets expensive areas like the Northeast and West Coast.
Republicans originally blasted the tax because it’s tied to the cost of living index rather than growth in health-care costs.
Let’s look at an example. Say an employer has 100 individuals and 100 families on it’s plan currently paying $600 for individuals (employer and employee) and $1,500 for families. Also, assume 8% medical inflation. In 2018, the first year of the tax, the bill is around $15,000. However, this would grow to almost $1.7 million in 10 years due to the difference between CPI and medical inflation. So, over time, more and more plans will reach “Cadillac” status.
This is confirmed by CBO’s most recent update in March of 2015 which projects $3 billion in revenue in 2018 growing to $21 billion in 2025. The March CBO estimate was a sharp downward revision from the January 2015 report as CBO noted employers efforts to avoid the Excise tax and lower than expected medical inflation.
The tax has already been scaled-down once from what was originally intended. Under the current standards, employers with employees who receive benefits above $10,200 for individual coverage and $27,500 for family coverage will be forced to pay a tax of 40 percent on the difference. In the original figures, individuals with $8,500-a-year plans and families with $23,000-a-year plans would have faced the same tax.
The excise tax was seen as a way to discourage executive-level health plans that generally have no co-payments or deductibles, as well as no limits on doctors or procedures and no restrictions on pre-existing conditions.
If the “Cadillac tax” is not repealed, employers will continue the trend in paring down benefits to avoid the tax.