The Patient Protection and Affordable Care Act, better known as Obamacare, was signed into law in early 2010. Yet even now, more than five years later, not all of the law's provisions have come into effect. In particular, one element of the Obamacare legislation that has drawn attention recently involves what's known as the "Cadillac tax" on high-value health-insurance coverage. The Cadillac tax isn't scheduled to affect anyone until 2018, but already, the provision is drawing debate among politicians and policymakers on both sides of the Obamacare divide. To help give you more information about this tax and how it might affect you, let's take a more in-depth look at the Obamacare Cadillac tax and its provisions.
What the Obamacare Cadillac tax does
The Affordable Care Act's stated purpose was to give more people access to health insurance coverage, but the Cadillac tax focuses on the other end of the spectrum: those workers whose employers provide extremely comprehensive and costly health insurance policies. Under the Cadillac tax, beginning in 2018, employers have to pay a 40% excise tax on the costs of each employee's health insurance to the extent that it exceeds a certain threshold. For individual policies, the starting threshold amount is $10,200. That amount rises to $27,500 for family coverage.
Proponents of the tax argue that those premium levels should affect a relatively small number of people when they take effect, according to current estimates. The average individual plan cost just over $6,000 in 2014, based on figures from the Kaiser Family Foundation, while family plans weighed in at around $16,800. Yet the problem with using averages is that it ignores one of the fundamental economic truths about health-insurance coverage costs: coverage for older workers inevitably costs more than identical coverage for younger workers, because of the higher risks of the older pool of insured workers.
Also favoring the tax are those who want workers to have a closer connection to the costs of the healthcare they use. Economists have noted that when people wrap most of the cost of their healthcare into insurance premiums, they have less incentive to avoid incurring expenses for unnecessary care. When you're responsible for a higher copayment or greater percentage of the overall costs of services, then you're more likely to think carefully about whether you actually need those services.
Why opponents don't like the Obamacare Cadillac tax
On the other end of the debate, the most interesting thing about the Cadillac tax is that from a political standpoint, many of those who have supported Obamacare in general are lukewarm at best about imposing the tax. Some of those most opposed to the tax are labor unions, whose efforts to negotiate high-quality health benefits are encountering resistance from employers facing the added expense of paying the tax. Others note that having borne the costs of providing coverage under Obamacare, it would create a budgetary imbalance to repeal the Cadillac tax and give up an estimated $90 billion in potential revenue to help pay for the program over the next decade.
Moreover, the Cadillac tax doesn't just look at health insurance premiums. It also includes employer contributions to health savings accounts, flexible spending accounts, and some other tax-favored forms of benefits related to healthcare. Many of these features were designed specifically to encourage workers to pay more attention to their healthcare costs, so opponents would argue that penalizing employers for using them seems inconsistent with the purpose of the Affordable Care Act.
Another objection to the Cadillac tax is that its impact could get more pervasive over time. Increases in the premium-cost thresholds are tied to the Consumer Price Index, and over the long run, premium costs have tended to rise at a much higher rate than this general inflation benchmark. The result is that employers could find an increasing number of their employees are generating Cadillac tax liability.
What to expect from your employer
Policymakers believe that the natural response from employers will be to reduce benefits far enough to avoid triggering the excise tax under the Obamacare Cadillac tax provisions. The simplest ways to do so would be to increase deductibles that workers are responsible for paying before coverage kicks in, to boost copays for doctor visits and drug prescriptions, and to remove nonessential benefits from plan coverage entirely or reducing the percentage of costs that the policy will cover.
That said, employers already have an economic incentive to move in the direction of reducing their healthcare costs even without the Cadillac tax. Many have already taken some of the steps listed above to reduce their benefits-related expenses, and more will likely join their ranks more as a broad-based effort to keep costs down rather than specifically seeking to reduce future Cadillac tax liability.
With a couple more years before the tax takes effect, you can expect the Obamacare Cadillac tax to remain a hot-button issue for the foreseeable future. If your employer starts making changes to your healthcare plan, though, you should keep the Cadillac tax in mind -- and assess whether it's really the motivation for the change or merely an excuse to cut costs and boost profits more broadly.