In Defense of the Unpopular Health Care 'Cadillac Tax'

SMITH BRAIN TRUST -- Hillary Clinton on Tuesday aligned herself with a growing political movement: People who seek repeal of the Affordable Care Act's "Cadillac Tax," a surcharge on the most generous plans offered by employers. Many businesses have opposed the tax, but so have unions and other advocates for employees — not the usual anti-Obamacare coalition.

The tax is a rare case in which the ACA will lead to people's health insurance coverage being reduced. Starting in 2018, the government will tax, at a hefty rate of 40 percent, plans whose employer-paid premiums and other subsidies total $10,200 for an individual or $27,500 for a family.

The tax is likely to encourage some companies to introduce higher-deductible plans, offer fewer plans that let people choose any doctor they want, and  cut back flexible-spending plans that let people set aside pre-tax money for health care.

Reducing some people's benefits (or making them pay more for the same benefits) seems like a political loser. But Ritu Agarwal, Dean's Chair of Information Systems at the Smith School and senior associate dean for faculty and research at the Robert H. Smith School of Business, explains that the tax was designed to further all three of the ACA's goals: Making health coverage more widely available, improving the quality of care and reining in spending.

First, the tax is projected to raise some $80 billion over 10 years, which helps pay for the provision of insurance to those who can't afford it. But even assuming that that money could be found elsewhere, nudging employers to cut back their high-end plans will make consumers more sensitive to the cost of health care — which, ideally, means they will use services more wisely. "When a consumer is insulated from the costs of health care by a Cadillac insurance plan, then their tendency is to overuse services," says Agarwal, the founding director of the Smith School's Center for Health Information and Decision Systems (CHIDS). She points out that nearly a third of the health-care spending in the United States goes toward unnecessary tests, procedures and other forms of waste.

The tax was framed as targeting unusually generous plans, but opponents of the tax say some plans with premiums at those levels can be quite ordinary — Corollas, not Cadillacs — especially in high-cost areas of the country. Two similar bills that would repeal the tax have attracted the support of some 250 members of the House.

The Kaiser Family Foundation has found that 26 percent of all companies will have at least one plan affected by the tax in its first year. Agarwal, however, points out that the proportion of people who receive employer health care who will be affected by the tax will be far less than that, since most companies offer multiple plans.

Agarwal acknowledges that the Cadillac tax is not without downsides, especially if it steers more employees toward high-deductible plans. "If you bear a lot of the out-of-pocket expenses before health insurance kicks in, that may lead some people to choose not to get health care that is necessary for their conditions," Agarwal says. "That is a side effect that we have to be vigilant about." Letting ailments go untreated is bad for health as well as more costly in the long run.

The tax is also intended to counteract an unusual feature of the U.S. health care system. Because employer-provided health benefits are not taxed, employers have an incentive to substitute health benefits for salary. The Cadillac tax reduces that distortion but does not eliminate it.

In order for consumers to choose sensibly among health care alternatives, there needs to be transparency in the market, and there has been progress on that front, Agarwal says. The "Choosing Wisely" campaign, for instance, sponsored by the ABIM foundation and joined by medical societies and consumer groups, helps patients identify expensive procedures that are often recommended but seldom medically beneficial (like MRI's for back pain). Online "patient portals" will soon offer consumers new ways of communicating with their doctors, personalized information about their health conditions, and information about best practices in care.

"We know from studying the diffusion of change in other sectors that these things take time," Agarwal says. "But it is remarkable how far we have come in health care in the last five years." Census data revealed last month that the proportion of Americans lacking health insurance dropped from 13.3 percent in 2013 to 10.4 percent.  76 percent of US hospitals in 2014 had an electronic health record system in use, as compared with 9.4 percent in 2008.

Many details of the Cadillac tax remain to be worked out. Would only the amount employees donate to Flexible Spending Accounts count, or the full amount they could contribute?  The tax has become a hot-potato issue three years before its implementation in part because it has arisen in negotiations between unions and companies — and now because Hillary Clinton senses vulnerability on the issue.

(The Washington Post editorial board echoes Agarwal's arguments, in more biting fashion, calling Clinton's act "a terrible policy call." And 101 economists signed a letter defending the tax.)

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