Two related news items caught our attention this week. The first was a statement by Hillary Clinton that she would consider scrapping the ACA Cadillac tax on the most expensive health plans. This tax applies to the value of health insurance packages over a certain limit ($10,700 for individuals and $27,500 for families). Senator Clinton worries that “it [the Cadillac Tax] may create an incentive to substantially lower the value of the benefits package and shift more and more costs to consumers.” Well, that was half (or maybe all) of the point of the tax in the first place, wasn’t it?
There are few things about which health economists are in near total agreement, but we can think of two. First: The tax exempt status of employer sponsored health insurance is regressive, inefficient, and a major contributor to this country’s high health spending. Thanks to the tax exemption, Americans have excessively generous health insurance and do not face the costs of their medical decisions. So yes Ms. Clinton, the whole purpose of the Cadillac tax was to lower the value of benefits and shift costs onto consumers. You are smart enough to realize this, so why are you feigning ignorance? We suspect it has something to do with the second point of agreement: The tax exempt status of employer sponsored health insurance is a middle and upper class giveaway, especially favored by unions whose members tend to have the most generous and expensive health insurance coverage of all.
As a result of its popularity it is almost impossible for politicians to eliminate. And so it was quite the political coup when President Obama inserted the Cadillac tax into the ACA. Over time, as medical spending continues to grow, this tax will incrementally apply to more insurance packages. In this way, it is like a slow phase-out of the tax deductibility of health insurance and represents one of the best means for the ACA to actually do something about health spending. It may only have been a baby step towards eliminating tax deductibility, but it was a step nonetheless.
Of course, unions and other beneficiaries of the regressive tax exemption have been up in arms about the Cadillac tax. Ms. Clinton is sure to pick up a few more votes (and lots more union money) with this politically shrewd, and economically reckless, policy statement. But in the process, she is going to hamstring the ability of the ACA to meaningfully address cost growth.
The second item in the news was a report on the further erosion of employer-sponsored health insurance. According to the federal Agency for Healthcare Research and Quality, just three years ago, 78.2 percent of working Americans were eligible to purchase health insurance from their employer. Last year that figure dropped to 75.4 percent. Almost all the drop occurred in 2014. As we (and others) have predicted, employers are dropping coverage and letting their workers fend for themselves on the exchanges.
The AHRQ report is mercifully devoid of commentary…many are likely to bemoan this decline. (Ms. Clinton, we are thinking of you!) But we view this as an encouraging trend. As we have blogged in the past, it is high time that we decouple health insurance from employment. The exchanges give us our best chance to do this. Of course the ACA still ties the hands of large insurers, who must continue to offer health benefits, but we can be grateful for this little bit of progress.
Though we do note that we must approach this move to a heavier reliance on the ACA exchanges with great caution. Every individual that earns less than 400% of the poverty line is eligible for subsidies from the federal government if they purhcase insurance on the exchange (and don’t have an offer of insurance from their employer). While making subsidies available to these individuals increases the horizontal equity of this tax and transfer program, it also further increases government obligations. Given the relatively generous minimum insurance packages under the ACA, these costs could grow well beyond our capacity to pay them.