The Cadillac Tax Tight Rope

As Congress works to reconcile the House and Senate health care bills, President Obama is reportedly pressuring House Democrats to accept the Senate’s 40% excise tax on insurance plans worth more than $23,000 per year (for a family of four). The administration believes that the tax could slow the growth of health care spending by pushing employers and employees into less-generous plans. Employers would consequently put the savings into higher wages.

But House Democrats strongly oppose the mechanism. They worry that less-generous plans “could be taxed because they are costly for other reasons” and fear that employers would “lower the cost of plans by increasing deductibles and co-pays,” which “would not necessarily bring down health-care cost.” “It’s not a very popular initiative in the House or in the public. It’s something the president is committed to, and we’ll see how it works out,” House Speaker Pelosi (D-CA) said after a White House meeting this afternoon with Obama. Stopping the excise tax is the “#1 priority” of the House Democrats who claim to have “signatures of 190 Democrats on a letter opposed to the excise tax on high-end “Cadillac” insurance plans.”

Yesterday, the Economic Policy Institute (EPI) released a report that could potentially strengthen the House’s argument. The report questioned the administration’s claim that “health care cost increases have been a major driving force in constraining wage growth and that wages will grow more strongly by curtailing employer health costs via the excise tax.” “There is logic to their argument, but it is only skin-deep and deeper examination will show it to be simply not true”:

1. Health care costs are not large enough to substantially move wages as these proponents claim;

2. Examination of actual wage and benefit trends confirms that changes in the trajectory of health care costs did not materially affect wage trends over the last 20 years; and

3. The wage behavior described—accelerating in the late 1990s and more slowly thereafter—actually best characterizes wage growth for low-wage workers who have minimal access to employer-based health care. Conversely, this pattern of wage-growth over time is least pronounced for higher paid workers with the most health coverage.

It’s unclear to what degree health care costs determine wages. Since the report compares the variation in health care spending to wage growth across the entire business community, it incorporates data for businesses that don’t offer any health care coverage. A more specific analysis of industries with high percentages of insurance offering could have demonstrated a closer correlation between health care costs and wages.

Still, proponents of the excise tax must carefully balance the twin interests of controlling health care costs (by getting rid of very wasteful plans) and ensuring that Americans aren’t pushed into inferior coverage. The current bill offers all kinds of transitions and exemptions for Americans in high-risk categories but, since the tax is not indexed to health care spending, it will hit more families over time. Roughly a quarter would be affected by 2019. Employees won’t experience a dollar-for-dollar increase in wages, and could face higher cost sharing in their new (cheaper) health policies.

Already, “lawmakers are considering several ways to alter the Senate’s controversial proposal to tax high-cost insurance plans offered by employers so as to protect middle-class families from the tax.” According to Inside Health Policy, “One alternative under discussion would assess the tax based on the value of a plan’s benefits rather than its costs, the House aide said; another, the union source said, would be to exempt plans with a predominance of elderly workers.” Making too many exemptions, of course, would undermine the tax’s ability to contain costs and force lawmakers to look for other financing mechanisms.