101 Economists Sign Letter Defending Obamacare's 'Cadillac Tax'

Somebody's gotta stand up for it.

The experts who brought you the “Cadillac tax” aren’t about to let it go without a fight.

On Thursday, 101 economists and other health policy experts signed an open letter defending the controversial levy, which takes effect in 2018 as part of the Affordable Care Act.

In the letter, the economists describe the Cadillac tax as an essential, if blunt, tool for controlling health-care costs. They warn that eliminating it could mean higher premiums for people with private insurance and less take-home pay for workers who get benefits from their employers -- unless, somehow, lawmakers find an alternative policy that serves the same purposes. 

The letter appears on the website of the Center on Budget and Policy Priorities. But it does not represent an official position of the Center and the economists signing the letter represent a broad ideological spectrum, including veterans of both Democratic and Republican administrations. 

“We ... hold widely varying views on other provisions of the Affordable Care Act,” the experts write. “But, we unite in urging Congress to take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth.”

Officially, these experts are addressing the heads of congressional committees with jurisdiction over taxes. 

Unofficially, they are also talking to a bipartisan chorus of lawmakers and presidential candidates that want to eliminate the tax -- a group that, as of Tuesday, includes Democratic presidential front-runner Hillary Clinton.  

That position puts Clinton and other politicians at odds with officials in the Obama administration, including the president himself. In 2009 and 2010, the White House fought hard to keep the Cadillac tax in the legislation that eventually became Obamacare. Not surprisingly, several economists who played key roles in shaping the health care overhaul are among those now defending the tax most vigorously.

But they don't have a lot of company.

The purpose of the Cadillac tax is to reduce health care spending by counteracting a decades-old tax break that gives employers (and, indirectly, employees) incentive to spend more money on health insurance. Along the way, the tax will also generate revenue to help offset the cost of the law’s expansion of health insurance. 

The tax will phase in gradually, and some experts hope that, over time, employers will respond by seeking out more efficient insurance carriers who could provide equivalent coverage for lower premiums. 

Critics of the Cadillac tax, so-called because it affects the most expensive plans, take a different view. They fear that some employers would opt for an easier way to avoid the tax: simply shifting more costs onto workers in the form of higher deductibles and co-payments. That could cause real hardship for people with serious medical problems, particularly if those people don’t make a lot of money or have savings with which to pay large out-of-pocket bills.

Among those most spooked by the prospect of employers reacting this way are labor unions that negotiated generous insurance benefits for their members, creating just the sorts of plans likely to incur the tax. Their pressure undoubtedly figured into Clinton’s calculus when she decided on her position, just as it has with other Democratic leaders -- and just as pressure from employers and insurers (not to mention anti-Obamacare animus) has likely persuaded some Republicans to oppose the tax publicly.

One other reason politicians are lining up against the tax is public opinion. Just this week, a poll from the Henry J. Kaiser Family Foundation showed that a majority of Americans were opposed to the tax, although respondents to the survey sometimes changed their minds after hearing arguments for and against the measure.

Economists don’t deny that some employers will respond to the Cadillac tax by raising out-of-pocket expenses -- or that it will penalize firms that happen to have older workers whose significant medical needs lead to higher premiums. But given the need to reduce health care spending over the long term, these economists say, the Cadillac tax does much more good than harm.

“The Cadillac tax was the only feasible way to curb the bad effects of the unlimited exclusion from income and payroll taxes of employer-finance health insurance,” Henry Aaron, the respected Brookings economist who helped organize the letter, told The Huffington Post on Wednesday. “It may not be the best way, but it is the only game in town. Until such time as Congress enacts something better, it would be bad policy to repeal, delay or weaken the Cadillac tax."

Conspicuous among the economists signing Thursday’s letter was Douglas Elmendorf, the Brookings economist who was in charge of the Congressional Budget Office from 2009 to 2015. During the debate over the Affordable Care Act, Elmendorf famously warned Obama that, without a provision like the Cadillac tax, health care legislation was likely to increase the deficit and have little effect on overall health care spending.

That warning likely played a critical role in convincing Obama to embrace the tax. Shortly after Clinton announced her position on Tuesday, Elmendorf made it again, explaining via email that:

The biggest problem with repealing the excise tax on high-premium plans isn't replacing the lost revenue, it's replacing the lost incentive to control health-care spending. Without the excise tax from the ACA, our tax code effectively subsidizes higher premiums, which leads to higher health care spending and lower wages.

Within the Obama administration, the strongest advocates for the Cadillac tax were members of the president’s economic team -- starting with Peter Orszag, who was director of the Office of Management and Budget. Orszag is not among the experts on the letter. But, in an interview with The Huffington Post, he echoed the arguments:

Right when there's a risk of health spending accelerating again, the political pressure to repeal the tax rather than mend it is quite unfortunate. Offsetting the impact of repeal on the deficit is the easy part. Offsetting the adverse effect on health spending is much harder -- and I haven't seen any credible proposals that would do so."

Two other administration veterans who worked on the crafting or implementation of the Affordable Care Act signed the letter: Ezekiel Emanuel, who was at OMB with Orszag and is now a vice provost at the University of Pennsylvania, and Sherry Glied, who was at the Department of Health and Human Services from 2010 through 2012 and is now dean of New York University’s Robert F. Wagner Graduate School of Public Service.  

Among the other experts on the letter are Alice Rivlin and Robert Reischauer, both former CBO directors, and Gail Wilensky, a top health care adviser in the administration of George H.W. Bush.

"Repealing the Cadillac tax will be worse for middle-class Americans," Emanuel said, noting that liberal and conservative experts agree about the importance of the tax. "It will raise health care spending, raise health care premiums, lower wages and raise taxes. None of these is good for people."  

Clinton on Tuesday did acknowledge the importance of the tax and addressed many of the concerns the economists are raising in Thursday’s letter. Specifically, Clinton said she would insist on finding another source of revenue to provide the money that the Cadillac tax would. She also pledged to keep finding ways of making the health care system more efficient, so that costs don’t go up quickly in the absence of the Cadillac tax.  

But measures that would accomplish these goals, like raising new taxes or slapping tougher regulations on the provider of medical goods and services, come with their own trade-offs -- and would face stiff political opposition. Clinton hasn’t yet provided details on what alternatives she has in mind, let alone how she’d pass them.

That, plus Clinton’s own experience working on health care in her husband’s administration, may be why so many observers found her position -- although hardly unusual among politicians -- particularly noteworthy. “It is ironic that Secretary Clinton, who is probably better informed about the drivers of health cost inflation than any candidate in history, is proposing to eliminate a measure that almost all economists agree would actually work to slow health spending,” said Len Burman, director of the Urban-Brookings Tax Policy Center.

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