Association for Public Policy Analysis & Management

Panel: The Cadillac Tax: Projections, Policy Alternatives, and Second-Order Effects

(Health Policy)

The Affordable Care Act (ACA) establishes a 40 percent excise tax on high-cost employer-sponsored health insurance plans over defined thresholds. This “Cadillac” tax will be implemented in 2020. Its purposes are to limit the growth of health care costs, reduce the incentive for employers to provide excessive health insurance benefits, and raise revenue to fund the ACA. The fate of the Cadillac tax remains unclear; many of the 2016 presidential candidates have proposed altering or eliminating it despite widespread support for the tax among economists. This session will present a nuanced examination of the Cadillac tax’s considerable impact on employers and their employees, as well as potential alterations to the tax. The first paper develops a model to explain employer responses to the Cadillac tax, and simulates employer responses to the tax in terms of health insurance benefits and wages through 2025. This paper analyzes the effects of the Cadillac tax on the distribution of health insurance benefits, and on wage and health insurance growth rates. The second paper compares the Cadillac tax to a revenue-neutral cap on the tax exclusion for employer-sponsored health plans. Several presidential candidates have proposed this alternative. First, this paper identifies a cap that would be revenue-neutral in comparison with the Cadillac tax. Then, it compares the impact of the Cadillac tax and a revenue-neutral cap on families in different income ranges. The third paper analyzes state-level variation in premiums for employer-sponsored plans and the share of workers exposed to the Cadillac tax in future years. It examines whether the Cadillac tax will change the regressive nature of employer-sponsored health insurance benefits. This paper concludes by considering potential alterations to the Cadillac tax, such as President Obama’s recent proposal to allow for regional variation in healthcare costs when setting the Cadillac tax thresholds. The fourth and last paper examines the tax burden of the Cadillac tax (i.e., which employees will pay the tax). Using detailed Medical Expenditure Panel Survey – Insurance Component data, the paper estimates how health plan generosity will change as employers reduce health plan benefits to the thresholds established by the Cadillac tax. This paper also considers whether employers will substitute offers of family health insurance plans for employee-plus-one plans as a response to the Cadillac tax. Collectively, this session will provide attendees with an in-depth understanding of how the Cadillac tax will impact employer-sponsored insurance.