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Obama’s “Cadillac Tax” Changes Deserve Serious Look

The President’s 2017 budget will recommend improvements in the “Cadillac tax” — the excise tax on high-cost health insurance plans.  While some suggest repealing the tax, reforming it to preserve most of its revenues and its ability to slow health care cost growth makes far more sense.  The President’s proposal, which Council of Economic Advisers Chairman Jason Furman and the Council’s Chief Economist, Matthew Fiedler, previewed in this week’s New England Journal of Medicine, represents just such a reform and deserves serious consideration.

Health reform imposes a 40 percent excise tax on the value of employer-sponsored health plans that exceeds about $10,700 for individuals and $29,000 for families starting in 2020.  The tax was originally scheduled to take effect in 2018, but December’s bipartisan tax deal delayed it by two years. 

The tax has a strong policy rationale, as we’ve written.  It raises lots of money — about $95 billion over the next ten years and more than $500 billion in the following decade.  Equally important, it could slow health care cost growth by discouraging firms from buying extremely expensive health coverage that promotes excess use and inefficient delivery of health care.

The tax has some flaws, however, as we’ve also pointed out.  Its dollar thresholds rise each year with the Consumer Price Index, which grows more slowly than health care costs do, so the tax will eventually affect too large a share of health plans.  In addition, the tax may fall on some plans that are expensive because they cover people in high-cost areas — not because they’re overly generous.

The President’s proposal addresses both concerns.  It would not allow the tax’s thresholds in any state to fall below the average premium for a “gold” plan in that state’s health insurance marketplace.  This change would assure that the thresholds eventually grow at the same rate as health insurance premiums and the tax wouldn’t affect an ever-rising share of health plans.  The change also would effectively adjust the tax’s thresholds for geographic differences in health care costs.