From The Beacon, November 2015
Buried deep inside the federal Affordable Care Act is an onerous and controversial new tax that is finally beginning to attract public scrutiny and attention: the Cadillac Tax, a massive 40 percent levy on “high-value” health insurance plans.
Because the federal government has developed a rigid one-size-fits-all mandate, and is intent on placing this burden on public employers – cities, towns and states – the law could become one of the costliest unfunded federal mandates in history.
This provision was sold under the false premise that high-cost plans were rare and overly generous or luxurious (thus the term “Cadillac”), but the law actually sets a threshold that is too low and will harm employees and employers in regions of the nation where health costs are naturally higher. New England (and Massachusetts in particular) is one of those regions.
Here’s a brief summary: beginning on Jan. 1, 2018, the ACA will establish a cap on the allowable cost of family and individual health plans that public and private employers can offer to their employees and retirees without triggering a massive tax penalty. The federal government will impose a 40 percent excise tax on employers for the amount that their health insurance plans exceed $27,500 for families and $10,200 for individual coverage. Over time, the tax burden will become heavier and heavier because the threshold will only be adjusted by about 2 percent per year, but health costs are projected to increase at a far higher rate.
As an illustration, if a city or town has a family plan that costs $29,500 a year in 2018 (the total premium including employee and employer contributions), with 200 workers enrolled, the federal government will levy a $160,000 tax bill on the community. The calculation is simple: 200 health plans would be $2,000 over the threshold, for a total overage of $400,000. Forty percent of $400,000 is $160,000.
In five years, that same municipality could be hit with a $380,000 annual tax, using conservative estimates of only a 5 percent annual increase in the cost of health care and prescription drugs. But if health costs rise at a higher rate, say 10 percent, then the federal tax would hit $1 million in the fifth year. Regardless of the scenario, the math is clear: the Cadillac Tax is unaffordable.
Because the Obama administration and many members of Congress were fearful of directly regulating the cost of health care in the U.S. – hospitals, physicians, medical supply companies, and drug manufacturers are exceedingly powerful and influential on Capitol Hill and in virtually every statehouse, and they have blocked every effective idea to regulate what the industry can charge – the ACA’s authors decided that the politically safe way to address skyrocketing costs would be to hand the hot potato to someone else. Their idea was to impose a tax penalty on employers that would be so severe and unaffordable that it would force employers and insurers to clamor for cost controls and reform – even though employers and insurers lack the authority to regulate or force this reform.
In short, the ACA’s sponsors decided to create a crisis instead of addressing the cost control issue in a straightforward manner. This may have been a politically safer strategy for Beltway operatives, but the result will be very harmful to local taxpayers, employees, retirees, and municipal services.
From the MMA’s perspective, this approach is irresponsible and ignores the world in which Massachusetts cities and towns operate. Because the ACA has a “one-size-misfits-all” dollar threshold, the law will have uneven impacts on different regions of the country. Health plans are more expensive in Massachusetts than elsewhere in the nation because the region’s world-class hospitals charge much higher rates, especially in the Greater Boston area. In our state, this means that the cost of even modest health insurance coverage already comes close to or exceeds the threshold for many, many employers, including a number of cities and towns. Thus, the Cadillac Tax will hit Massachusetts employers, including local governments, harder than those in other regions.
Right now, municipal leaders work closely with their employee unions to manage health insurance costs, through collective bargaining and by using the tools provided in the landmark municipal health insurance reform law passed in 2011, which allows cities and towns to adjust their plans to match the copays and deductibles that are set for state employees. But those tools will be insufficient to avoid the Cadillac Tax.
Unless hospitals and drug companies announce that they will be reducing their prices and reforming their costs (this is known as magical thinking), the ACA will force the following options in our communities: a massive shift to high-deductible, low-coverage plans; deep cuts in municipal and school services to pay the new federal tax; widespread layoffs of public workers to balance budgets; large increases in the regressive property tax; or a combination of all of the above.
The MMA has joined with the National League of Cities, the U.S. Conference of Mayors, the AFL-CIO, and major corporations across the nation in calling for the repeal of the Cadillac Tax. This broad coalition of public and private employers and employees is united in common cause because we know the Cadillac Tax is unfair and would inflict real harm on workers, retirees, taxpayers and businesses across the country.
True cost control is needed, but it will not come through misguided and punishing tariffs on employers and employees. Congress and the president should instead address the issue of cost regulation in a direct and forthright manner. That may be more politically challenging, but it is the only responsible path to take.
Cadillac tax would harm communities, taxpayers and employees
From The Beacon, November 2015