The president is traveling the country calling for an increase in the national minimum wage. "It is a clear choice," the president stated in Connecticut in early March. "Raise workers' wages, grow our economy, or give workers what amounts to another pay cut."
The very next day, a widely circulated report by Towers Watson and the respected nonprofit National Business Group on Health (NBGH) came out, showing how the president himself has already given millions of American workers at all income levels a pay cut -- to the tune of $100 a month last year.
This pay cut is the unintended consequence of a provision in the president's signature policy achievement, the Affordable Care Act, aka Obamacare: a tax on employers, for what the federal government thinks is too much spending on employee health benefits. It goes by the Orwellian nickname "Cadillac Tax" -- suggesting employers that fund generous health benefits are really just indulging their employees with leather seating and whitewall tires. The Cadillac Tax is a 40 percent excise tax on health benefits exceeding an annual limit ($10,200 for individuals and $27,500 for families). When the tax provision was first introduced, its opponents included an unusual alliance of unions and business leaders. They lost.
Slated to go into effect in 2018, the mere threat of the Cadillac Tax has already decreased the income of millions of American workers, according to the Towers Watson/NBGH report. Anxious to avoid hitting the Cadillac Tax spending threshold, employers are quickly converting their benefits plans into high-deductible health plans (HDHPs). This keeps employer premiums lower while shifting more of the costs onto employees, who typically pay a lower premium, but in exchange pay nearly all their medical care out of pocket until they spend through the deductible of $1000 (or in many cases much more).
The Towers Watson/NBGH report suggests this rapid shift to high-deductible health plans explains the slowdown in employer health cost growth (now 4.1 percent, slower than any year in the past decade). This finding is consistent with another report from the federal agency that runs Medicare and Medicaid, which attributed the relative stability in the growth of U.S. health spending (at 3.8 percent) partly to the rise of HDHPs.
The news for consumers isn't so good. According to the Towers Watson/NBGH report, employees' share of premium costs plus out-of-pocket costs increased by a whopping seven percent between 2013 and 2014.
Proponents of the Cadillac Tax argue that very generous health plans tend to have low or nonexistent employee responsibility for deductibles or copays. Without the prospect of paying a significant copay, employees won't weigh the price, necessity and quality of services before they seek care -- since it's all "free," anyway. That lack of consumer vigilance drives costs up even further, hence the need to impose a tax that ensures people have some incentive to police their use of health care services.
HDHPs do indeed shift more responsibility onto consumers. Unlike a more traditional health plan -- for which you may have a deductible but pay a standard copay every time you visit the doctor or get an x-ray -- with high-deductible plans, you pay the full cost of nearly every service until you exhaust that deductible.
Recognizing that employees often cannot afford to pay $1,000 or more when they suddenly need an MRI or stitches in the emergency room, most HDHPs are coupled with a Health Savings Account, and many employers contribute to it. These accounts allow tax-free savings to pay health costs. If you don't need to spend the money for health care, you can keep saving it over time and build its value. So, employees have an incentive to hang on to their money, but it's available when they need it.
Unfortunately, employer contributions to HSAs count toward the threshold for the Cadillac Tax. That means employers and unions that want to do the right thing by employees -- offer a generous health benefits package while still encouraging employee vigilance in using health services -- are out of luck, too.
The supreme irony is that the Congressional Budget Office has reduced its estimate of the projected tax revenues from the Cadillac Tax, and many observers predict the U.S. Treasury will collect approximately zero dollars once it goes into effect, since employers are successfully evading it by shifting costs to employees.
Policymakers on both sides of the aisle would be wise to focus on these significant, largely unintended consequences of the Cadillac Tax. Our economy cannot afford significant erosion in American incomes, much less a tax that does that damage without even bringing revenues.
The impetus behind the Cadillac Tax is not without merit. It is true that we need Americans to demand the competitive pricing and quality in health care that they expect from other products and services in the free market. Health plans can and should be structured to encourage us to be vigilant consumers.
Like it or not, employers are critical to making that happen. But instead of getting thanks for their contributions and important role, Washington hit them with a big, fat tax. It's no wonder they are scurrying to divest of their health care spend -- something none of us can afford, least of all American workers. We need those employers back, and it's going to take some new thinking from both sides of the aisle to fix this.
A version of this piece first appeared on Forbes.
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