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‘Cadillac Tax' Is Obamacare's Latest Bugaboo

By Melissa Attias, CQ Roll Call

October 16, 2015 -- It’s been five years since the health care overhaul was enacted, but one of the most contentious elements, even for the law’s Democratic supporters, has yet to be sprung on the U.S. medical system.

The so-called Cadillac tax, a 40 percent levy on the cost of employer-sponsored coverage above an annual limit, is due to take effect in 2018 and takes aim at overly generous benefits that supporters contend are driving up national health spending. The tax was intended to help fund the law’s insurance coverage expansion and getting rid of it would cost an estimated $91 billion through fiscal 2025.

With as many as half of large employers sponsoring plans that could potentially be in the tax’s crosshairs, talk of repealing the tax is intensifying. And unlike most other health care law repeal efforts, Democrats are helping stoke the fire, worried that the tax could hit generous union health plans the hardest.

"Very strong defenders of the Affordable Care Act are asking for the White House to change their minds on this," says Tom Leibfried, health care lobbyist for the AFL-CIO.

The tax effectively has become the new Obamacare punching bag, replacing the law’s tax on medical devices that a sizable number of Democrats have long pushed to repeal.

In 2018, the threshold for the Cadillac tax would be $10,200 for single coverage and $27,500 for family plans, levels that critics note are indexed in future years to the consumer price index instead of medical inflation and are likely to affect a growing number of plans.

"The ultimate effect of this tax will be to make it impossible for many employers to continue sponsoring coverage for their workforce," says American Benefits Council President James Klein, whose group is part of a new coalition working to eliminate it.

The repeal effort began in earnest this summer, after the Supreme Court upheld the legality of the law’s insurance subsidies and, in the process, took pressure off Democrats eager to keep the law’s coverage expansion intact. A group of employer organizations, businesses, and unions joined forces in July to launch the coalition focused on scrapping the levy.

The drumbeat intensified in September, when senators from both parties introduced repeal bills building on measures introduced in the House earlier in the year. House Republicans also voted to eliminate the tax as part of a budget package targeting parts of the health care law and Planned Parenthood, and even Democratic presidential candidate Hillary Rodham Clinton weighed in by encouraging Congress to get rid of it with a full offset.

"Really go back to February, and it was just kind of like this didn’t exist in terms of people’s mindsets," says Connecticut Democrat Joe Courtney, the sponsor of a House repeal bill (HR 2050). "Now we’ve sort of hit a tipping point in terms of the fact that people are kind of aware that this is a ticking clock and that it really needs action."

Rep. Frank C. Guinta, a New Hampshire Republican and the sponsor of another House repeal bill (HR 879), adds, "Members of Congress talk about the middle class all the time and what can we do to help the middle class. Well, this 40 percent tax is going to directly impact them one way or the other."

The White House is standing by the tax, aware it would have to find new sources of revenue to replace the $91 billion cost of repealing the levy. A group of 101 health economists and policy experts also came to the defense of the tax in October in a letter to top tax-writers in Congress.

Pros and Cons

Paul Van de Water, one of the signers and a senior fellow at the left-leaning Center on Budget and Policy Priorities, says the levy would not only help pay for a law that provided millions of people with insurance coverage but also limit the tax exclusion for employer health insurance, which economists widely view as a way to slow the growth of health spending.

"This is a first step in that direction, and it does so in a targeted manner," Van de Water says.

The letter itself focused on the merits of the tax rather than wading into the politics of the broader health care law. The signers hold "widely varying views" on other parts of the overhaul, it stated, but they’re united in urging Congress not to weaken the tax unless lawmakers enact an effective alternative to rein in cost growth.

Nonetheless, opponents argue that the tax unfairly penalizes employers with workers who need more care and those located in expensive areas. Companies are already responding by shifting health costs to employees to avoid triggering the tax, they say, while others will drop their plans rather than pay it.

The American Benefits Council’s Klein predicts that the tax will also pressure employers to drop some of the cost controls they’ve put in place, such as flexible spending accounts and certain on-site clinics, because they count toward annual dollar limits that trigger the tax.

Foes of the tax also take issue with supporters’ assertion that employers who curtail health benefits will make up the difference in increased wages. "Labor has people that negotiate wages and benefits," the AFL-CIO’s Leibfried says, "and when you talk to our negotiators they laugh when they hear this."

The assumption is particularly contentious because it contributes to the provision’s score. A January estimate from the Congressional Budget Office projected that only about a quarter of the anticipated revenue would come from receipts from the tax itself, with the rest stemming from changes in employees’ taxable income.

Although employers and insurers are responsible for actually paying the tax, Leibfried maintains it is passed through to consumers because it forces cuts in benefits and increases cost-sharing that will ultimately result in people forgoing care.

Van de Water says the fight over the tax has to remain on the big picture: "The rationale here is to provide an incentive for more economical use of health care and just paring back slightly the generosity of benefits is an expected and appropriate response."

The momentum for scrapping the tax puts Democrats in a bind, though many in Congress appear to be concluding it’s better to be on the side of repeal.

"It’s clear the Democrats in general are very supportive of the Affordable Care Act and proud of its effectiveness," says Jared Bernstein, a former adviser to Vice President Joseph R. Biden Jr. who is now at the Center on Budget and Policy Priorities. "Since that effectiveness is in part a function of pay-fors, some of the Democratic opposition has surprised me a bit."

House Democrats largely opposed the Cadillac tax during the debate over the law, and powerful labor interests that helped many of them into office are part of the campaign to nix it.

The tax also doesn’t fare well with the public: A recent Kaiser Health Tracking Poll found 60 percent opposed to the Cadillac tax, just above the 57 percent that favored eliminating the medical device tax.

But Democrats are still wary of opening up the health care law for changes as long as Republicans control both chambers of Congress and continue to campaign for a full repeal of the law. They’re also mindful of the toes they would have to step on to cobble together enough revenue sources to make up for the $91 billion price tag.

While the Obama administration has been relatively quiet about the tax, it’s still voicing support for the provision when asked. A White House spokesperson says the administration opposes repeal because it "would hurt our economy by increasing the deficit, raising health care cost growth and cutting workers’ paychecks."

Democrats who have signed on to the repeal effort—more than 140 are co-sponsors of Courtney’s House bill—have been quick to emphasize their loyalty to the broader health care overhaul. Republicans have given them some leeway by largely avoiding painting it as an attack against the law itself.

"We’re not talking about Obamacare here," Republican Sen. Dean Heller of Nevada said at a news conference introducing a Senate repeal bill (S 2045). "That thing has been argued for five years—for five years—and I don’t see it going anywhere for the next couple of years at a minimum. So, we want to talk about an onerous tax."

Many top Democratic lawmakers, aware the tax won’t be felt for more than two years, have ducked taking a public stand. Rep. Sander M. Levin of Michigan, ranking Democrat on the House Ways and Means Committee, says he’s always worried about opening the law back up but that Democrats are "taking a hard look" at the Cadillac tax and the implications of its regulations.

Offset Issues

Insisting on an offset could turn into an uphill battle at a time when Congress is already scouring for funding for pressing matters like a budget deal, though it could also give Democrats a pass for voting against a repeal bill that lacks one. Ohio Democrat Sherrod Brown introduced Senate repeal legislation (S 2075) with "sense of the Senate" language that the lost revenue should be offset without proposing a source for that money. Democratic presidential candidate Bernard Sanders of Vermont was among the cosponsors.

Republicans, meanwhile, are also being warned away from targeting the Cadillac tax without replacing it with a better alternative.

James C. Capretta, senior fellow at the conservative Ethics and Public Policy Center, says simply scrapping the tax now would further entrench the health care law by eliminating one of its least popular provisions. And it would make it much more difficult to come back and cap the tax break for employer coverage, he says, which is likely to be a part of GOP plans to replace the health

"It would make absolutely no sense to get rid of it and refight the fight," says Capretta. "I don’t think there’s any chance they would replace it in the current environment."

While some observers think the tax could be in the mix as part of a year-end fiscal deal, which would save Democrats from having to take a separate vote on the issue, the toxic nature of a debate over another health care law repeal may not provide either party with enough incentives.

Advocates are lobbying for quick action, however, emphasizing that employers are already curtailing benefits and that labor contracts sure to be affected by the tax are being negotiated. At this point, they appear unwilling to settle for anything less than a full repeal, including finding a way to provide relief through the regulatory process.

Defenders of the tax, meanwhile, are banking on the ability to make changes later if it ends up conflicting with the overhaul’s mission of providing affordable care.

"If the Cadillac tax really gets in the way of that goal, it’s going to need to be adjusted," Bernstein says. "Sometimes when you’re making major policy changes like this you do have to get under the hood and do tweaking."

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