Employers gear up for next fight after Cadillac tax
By Shelby Livingston
March 2, 2017 (Story updated March 3, 2017) - Modern Healthcare
Employer and business groups are shifting their lobbying efforts
from repealing the Affordable Care Act's unpopular gCadillach tax to fighting
GOP proposals to chip away at the tax break on employer-provided health
insurance.
Capping the tax break, they say, would cause employers to
offer skimpier benefits, and some would stop offering coverage altogether. That
would erode the employer-sponsored health insurance market.
But mentions
of tax reform led by a GOP-controlled Congress has opponents gearing up for
their biggest and potentially most expensive battle yet. Last week, a leaked
draft of the House Republican bill to repeal the ACA showed lawmakers plan to
cap the tax breaks on employer-sponsored health insurance to pay for the
replacement healthcare law. It would be the single source of revenue to pay for
the new age-based tax credits that would replace the ACA's subsidies.
Capping the tax break is gnot a policy that's good for workers and not a
policy that's good for employers,h said James Gelfand, senior vice president of
policy for the ERISA Industry Committee, a lobbying group for employee benefit
issues.
Capping the tax break, or even doing away with it entirely, is a
favorite Republican tax reform strategy floated several times since the Reagan
administration. Since World War II, both employers' and employees' contributions
to the cost of health insurance have been excluded from federal income and
payroll taxes. That's a major incentive for employers to provide insurance. But
employers argue that taxing health benefits would require them to scale back on
the benefits they offer, pass more costs onto employees, or even quit providing
insurance altogether.
gWhy would an employer want to pay for the health
benefit if the government is willing to payh with a tax credit? Gelfand
asked.
If employers drop health benefits, the employer-sponsored market
that provides coverage to 178 million Americans could lose its stability,
opponents of the cap say. And while the proposal to cap the exclusion aims to
hit overly generous health plans, plans with older workers or those in states
with more expensive healthcare could exceed the threshold even if their health
plans aren't generous, said James Klein, president of lobbying group American
Benefits Council.
On the other hand, health economists largely support
limiting the tax break. As it stands, the unlimited subsidy gives consumers less
reason to care about the cost of healthcare. Consumers with generous health
benefits spend more and drive up healthcare costs, which leads to higher
insurance costs in the long run, said Martin Gaynor, an economist at Carnegie
Mellon University.
Businesses see health benefits as a form of
compensation. If those benefits are taxed and the value therefore reduced, then
employees should see their wages rise, he said. Taxing something as essential as
health insurance is an unsavory pill to swallow. But gitfs something that would
lead us to ultimately a better healthcare system that is less expensive and
beneficial to everybody,h he said.
Some argue that employersf concerns
over the cap on the tax break are overblown. The House Republicans' leaked draft
of its ACA replacement plan would limit the tax break to the 90th percentile of
current group health insurance premiums. Benefits above that threshold would be
taxed.
A cap set at the 90th percentile would affect few employers, and
so few would stop offering insurance, explained Erin Trish, a health policy
professor at the University of Southern California. More likely, theyfd tweak
their health plans to keep below the tax threshold. A similar situation occurred
when the Cadillac tax was looming over employersf heads. Many observers were
concerned that employers would drop coverage in anticipation of the tax, which
was delayed, but that largely didnft happen. Employers did, however, shift more
workers to high deductible plans.
Responding to the threat to the status
quo, the American Benefits Council's Alliance to Fight the 40, a coalition of
big employers, business groups and unions—including companies such as insurer
Cigna Corp., Exxon Mobil and American Airlines—launched a
campaign to lobby against proposals to limit the tax breaks on
employer-provided insurance. The coalition was initially formed to fight the
ACA's Cadillac tax—a widely loathed 40% excise tax on the value of
employer-based health premiums that exceed specific thresholds.
The
Council of Insurance Agents & Brokers, a trade organization representing
commercial insurance and employee benefits brokers, is also urging the Trump
administration to preserve the tax-exempt status. The group spent $330,000 in
the fourth quarter of 2016 to lobby Congress and the federal government on
preserving the tax exclusion and nixing the Cadillac tax. Since last April, the
lobbying group has spent $1 million on the issues, disclosures show.
It's
unclear where health insurers will throw their support. Insurers such as Cigna
and the Blue Cross and Blue Shield Association fought the Cadillac tax, so it's
likely they will support the fight against the cap. The two mechanisms both
encourage employers to offer less generous coverage. The Cadillac tax hits the
self-insured employer or the insurer, while the cap would directly affect
employees enrolled in a health plan, however.
The Alliance of Community
Health Plans, which represents not-for-profit insurers, hasn't taken a side
because it's waiting on specifics. America's Health Insurance Plans, the
insurance industry's largest trade group, did not respond to requests for
comment.
The tax-free status of employer health benefits dates back to
World War II, when the federal government imposed strict wage and price controls
on Americans to control inflation and prevent changes that could disrupt the
workforce.
To get around those wage controls, employers began offering
health benefits to employees as a form of untaxed compensation. The rest is
history. Employer-sponsored health insurance became a standard offering.
Employees now expect to receive health benefits. Businesses rely on good benefit
packages to attract and retain the best talent. Not only that, employers are
able to offer this tax-free benefit in lieu of raising employees' wages.
Today, employer-provided insurance receives the single largest federal
tax break, estimated at more than $250 billion in 2016, according to the Congressional
Budget Office.
Given that lofty figure, it's not hard to see why
there have been many attempts to axe the tax break. President Ronald Reagan in
1983 proposed limiting the value of employee health benefits that could be
considered tax-exempt, but that proposal was dropped when the Tax Reform Act of
1986 was passed. Just like today, the gtax caph proposal was met with fierce
opposition from employer groups and unions that feared any disruption to the
status quo would erode the employer-sponsored benefit system.
President
George W. Bush in 2007 also sought to do away with the unlimited tax exclusion
and provide everybody a standard
deduction for health insurance. He argued that would encourage more people
to join the individual market, which would bring premiums down. The Obama
administration also considered
shaking up the tax exclusion to pay for expanding coverage under his
healthcare law.
Ultimately, that didn't happen and the Affordable Care
Act's gCadillach tax was born as a sort of middle ground. The Cadillac tax was
supposed to go into effect in 2018 but was delayed until 2020 thanks to
opposition from employer and labor groups. Groups such as the Alliance to Fight
the 40 are still fighting to defeat the tax, but observers assume it will go
away with the ACA.
The revenue that would have been raised by the
Cadillac tax could be replaced by capping the tax break on employer-provided
health insurance. There's no shortage of support for a cap within the GOP: In
his June paper, A Better
Way, House Speaker Paul Ryan proposed capping the exclusion gat a level
that would ensure job-based coverage continues unchanged for the vast majority
of health insurance plans.h He argued the unlimited tax break holds down
workers' wages and unfairly benefits the wealthy.
The ACA replacement
plan proposed by HHS Secretary Tom Price when he was a Georgia congressman—the
Empowering Patients First Act—placed a tax exclusion cap at $8,000 for single
coverage and $20,000 for family coverage.
According to the GOPfs leaked
draft of its ACA replacement bill, the cap on the tax exclusion would be the
single source of revenue to fund the replacement plan. Republicans lawmakers say
the draft is now outdated. Still, given the GOP support, it wouldn't be a
surprise to see a change to the tax exclusion in the final plan.
Details
on the cap and how it will be implemented are still needed to assess its impact
on employer-sponsored insurance.
But if employersf response to the leaked
draft is any indication, the Trump administration can be sure that pushing the
cap on the tax break through will be an uphill battle fraught with opposition.
Employers aren't about to trade the Cadillac tax for a cap on the tax break. To
employers, the two mechanisms are one and the same, Gelfand said, adding that
lawmakers should expect gstrong pushback from the employer
community."