Excise & Healthcare Reform, Part II, or: “What Overall Effect Would the Cadillac Plan Tax Have?”
Posted Feb 02 2010 12:00am
Photo by Tamorlan
Part I of this series provided an overview of the excise on high-cost health insurance plans contained in the Senate’s healthcare reform bill, the Patient Protection and Affordable Care Act (PPACA). This part summarizes the projected general effects of the excise provision. The final part of this series will address the problematic and controversial consequences of the excise and possible alternatives.
Three governmental agencies have been primarily responsible for calculating the effects of healthcare reform legislation for Congress: the Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), and the Center for Medicare and Medicaid Services (CMS). Both the CBO and JCT operate under the auspices of Congress, while CMS operates within the Department of Health and Human Services (HHS).
Additionally, numerous private entities separately analyze legislative language to ascertain its effects. As expected, private entities often issue findings that differ, in varying degrees, from those provided by governmental entities. This post focuses on the government findings regarding the excise provision, upon which the Senate relied (presumably) in passing the PPACA. This post is summarized from information contained in the following documents:
Present tax law allows for the exclusion of employer-provided health benefits from individual income tax and contributions made by employers from FICA (Federal Insurance Contributions Act) tax. The excise would generate approximately $148.9 billion dollars in revenue from 2010-2019. The excise tax itself would not be deductible from Federal income tax.
For each year after 2013, the actual excise tax collected would account for a smaller percentage of the total revenue collected as a result of the excise provision. This would be the result of an increase in wages following shifts away from the high-cost insurance plans. The JCT provided the following explanation:
[T]he Joint Committee on Taxation estimates that the excise tax would be mainly passed along [to consumers] through increases in premiums and that many consumers respond by reducing their demand for insurance above the excise cap. As described above, because health insurance premiums are a component of compensation, which is not likely to fluctuate due to the excise tax, as consumers spend less on tax-excluded benefits, their taxable cash wages will increase. Therefore, as the value of health insurance plans decline, the income tax base will increase in the long run.
The total number of health plans affected by the excise would increase from 2010-2019 due to the compounding difference between the inflation rate applied to the premium threshold and medical cost inflation. The percent of active plans affected by the excise tax would increase during the 2013-2019 period from 14% to 27% and 9% to 22% for single plans and family plans, respectively. The average premium for those affected plans would actually be lowered. How? CBO provides:
For policies whose premiums remained above the threshold, the tax would probably be passed through as a roughly corresponding increase in premiums. However, most employers would probably respond to the tax by offering policies with premiums at or below the threshold; CBO and JCT expect that the majority of the affected workers would enroll in one of those plans with lower premiums. Plans could achieve lower premiums through some combination of greater cost sharing (which would lower premiums directly and also lower them indirectly be leading to less use of medical services), more stringent benefit management, or coverage of fewer services.
The excise certainly generates a significant amount of revenue to fund other aspects of healthcare reform. However, the excise is also expected to decrease the overall national health expenditures (NHE). According to CMS, the excise “…would have an initial, significant impact on the overall level of expenditures.” Furthermore, “In 2019, these impacts would reduce the total NHE by an estimated 0.3 percent.” The current NHE projection for the year 2019 is $4.7 trillion. That puts the savings at $14.1 billion.
The excise generates revenue, reduces affected premiums, and “bends the cost curve.” So, what is the problem?