Hillary Clinton Calls For Eliminating Obamacare's 'Cadillac Tax'

Economists won't be happy, but unions will be.
Scott Eisen via Getty Images

Hillary Clinton on Tuesday announced she wants to eliminate the “Cadillac tax,” a key feature of the Affordable Care Act that economists love and pretty much everybody else says they hate.

White House officials, who fought to include the tax in their health care overhaul, won’t be happy about the news, first reported by Maggie Haberman of The New York Times. But many interest groups, particularly labor unions, will be ecstatic. And that probably has a lot to do with why Clinton's taking this position.

The tax, set to take effect in 2018, is a levy on the most expensive health insurance plans. It is basically an effort to roll back an existing tax break for health insurance, one that’s been around since the middle of the 20th century and that many experts believe contributes to rising health insurance premiums.

As the thinking goes, the existing tax break on health insurance makes a dollar of health insurance worth more than a dollar of income, giving employers and employees alike artificial incentive to spend extra money on health care. The Cadillac tax is a roundabout way of undoing at least part of that incentive. Once it takes effect, most economists believe, employers will respond by finding ways to spend less on health insurance -- a change employees would see as lower premiums and higher take-home pay.

These arguments weighed heavily on the White House in 2009, when President Barack Obama decided to endorse the Cadillac tax, even though he’d spoken out against similar proposals previously. The Congressional Budget Office made it clear that, without something like the Cadillac tax, the health care law was unlikely to reduce health care spending.

The Cadillac tax will also generate revenue for the federal government. That money will partly offset the cost of the the expansions of Medicaid and health insurance tax credits that are helping so many millions of people to get health insurance.

But the name “Cadillac tax” implies that it applies only to insurance plans of the well-to-do. That’s not true, because not everybody with an expensive insurance plan is rich.

Teachers and autoworkers tend to have expensive plans, for example, because their unions have successfully negotiated for good health benefits. Companies with older, sicker workers can also have unusually expensive policies, since their employees tend to run up the highest medical bills.

Critics worry the tax will have the effect of encouraging companies to skimp on insurance for these people, even though many of them are the very ones who need more comprehensive coverage. Of particular concern is that companies will respond to the tax simply by increasing out-of-pocket costs, in the form of higher co-payments and deductibles. Their premiums might be lower, but people with serious medical conditions will end up owing more. Shifting costs onto the least healthy people in this way would be directly at odds with the goal of health care reform, which is to protect people from punishing medical bills.

An analysis by the Henry J. Kaiser Family Foundation suggested that, by 2018, 1 in 4 employers would be paying the tax unless they adjusted their insurance offerings. And the effect would grow over time, since the tax is formulated so that it would begin to affect less expensive plans later on.

Pressure to reduce or eliminate the tax has been building for a while. Employers don’t like it because it means paying a new tax and insurers don’t like it because it puts pressure on them to lower premiums. But the most intense opposition has come from organized labor. Labor unions reluctantly accepted the tax as the price of securing health care reform, a goal they’ve long pursued, but they always hoped to revisit it (and, depending on whom you ask, had a promise from the White House to do so).

Labor has been prevailing upon Senate Democrats and, more recently, the Democrats running for president, to endorse repeal. Just this week, presidential hopeful Sen. Bernie Sanders (I-Vt.) co-sponsored a bill with Sen. Sherrod Brown (D-Ohio) that would eliminate the tax. Now Clinton has joined their call.

In a carefully worded statement that praised the Affordable Care Act for a historic reduction in the number of uninsured Americans, Clinton on Tuesday said, “I encourage Congress to repeal the so-called Cadillac Tax, which applies to some employer-based health plans, and to fully pay for the cost of repeal.”

That last part is important: The tax is supposed to generate $91 billion over the next decade. The health care law as a whole appears to be coming in much cheaper than projections originally suggested, but that’s still a lot of money for the federal government to give up.

Equally critical is whether Clinton will also propose measures that would restrain health insurance premiums as effectively as the Cadillac tax would. If not, then repealing the tax could mean a return to higher health care inflation in the future.

Democrats aren’t the only ones calling to eliminate the Cadillac tax. Several Republicans have too. In fact, the “Obamacare” repeal bill that the House Ways and Means Committee passed on Tuesday included a provision to get rid of the tax.

Larry Levitt, senior vice president of the Kaiser Family Foundation, summed up the situation this way:

As with so many health care issues, the Cadillac plan tax comes with difficult trade-offs. It raises a substantial amount of revenue to help cover people who are uninsured and has a powerful effect on the health spending trajectory, but all of that comes with cutbacks in health benefits that would anger workers. There is now substantial opposition to the Cadillac plan tax, but before its epitaph gets written there will need to be a consensus around how the replace the revenues it raises and how to constrain health spending in some other way.

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