Two-Year Delay for Obamacare’s Cadillac Tax Likely

A proposal to postpone the despised excise tax is an 11th-hour inclusion in the federal budget bill.
David McCannDecember 16, 2015
Two-Year Delay for Obamacare’s Cadillac Tax Likely

Lobbying by corporations has helped win an almost-certain two-year delay in the implementation of the hated “Cadillac Tax” on high-cost, employer-sponsored health benefits plans.

ThinkstockPhotos-188097119The proposed delay, announced at 1:30 Wednesday morning, is a late addition to the omnibus federal spending package for the government’s 2016 fiscal year, which is scheduled for a vote on Thursday in Congress. The proposal would make the tax — a 40% excise tax on the combined value of employer and employee contributions to health plans that exceed certain thresholds — effective in 2020 rather than 2018.

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While the spending bill must pass both houses and be signed by President Obama to become law, there is a “sure certainty” that it will clear those hurdles, according to independent health care attorney Christopher Condeluci, a Washington insider who served as tax counsel to the Senate Finance Committee when the Affordable Care Act (ACA) was being written.

“The spending bill is being presented as a bipartisan deal,” Condeluci says. “And the way it works is that Congress won’t unveil a new proposal near the end of the year unless it’s negotiated with all sides — both houses of Congress, both parties, and the White House.”

The Cadillac tax is a key provision of the ACA, the president’s signature legislative achievement, but he nonetheless has good reasons to sign the spending bill. A lot of provisions that Democrats wanted are in it, and signing it ensures there won’t be a repeat of the 2012 government shutdown, which resulted in massive criticism directed at both major parties.

Regarding the Cadillac tax specifically, Democrats in Congress have been pushing hard for a delay and were able to persuade enough Republicans to that point of view to get it included in the spending bill. The other option was to put it in the separate tax extenders bill, but that faces a tougher fight in Congress, with many Democrats opposing it, Condeluci notes.

A broad-based lobbying coalition opposed to the tax, called Alliance to Fight the 40, was launched in July. Members include the American Benefits Council (an advocacy group with more than 400 employer members), individual companies, insurers, and benefits consulting firms, among others. The National Business Group on Health (NBGH), which represents the views of its 425 employer members on national health policy issues, also opposes the tax, as do the U.S. Chamber of Commerce and the AFL-CIO. There are also several bills in Congress to repeal the tax entirely.

But is the opposition the only reason Democrats are in favor of delaying the Cadillac tax? No, according to Mike Needham, CEO of Heritage Action for America. Needham wrote on Monday in The Daily Signal, a conservative-oriented website operated by The Heritage Foundation, that Democrats are “desperate” to postpone some of the law’s most adverse impacts.

Indeed, if the Cadillac tax eventually does take effect, companies whose health plans triggered the tax would potentially face a big new tax burden. One way they’d likely try to avoid that fate would be to reduce or eliminate such practices as contributing to consumer-driven health plans, which allow plan participants to pay for out-of-pocket health care costs with pre-tax dollars.

“Simply put, Democrats own Obamacare’s outcomes, and they’re looking to postpone the pain for their constituents. They clearly have an interest in limiting, or making more palatable … the law’s adverse effects,” Needham wrote.

Steve Wojcik, vice president of public policy for the NBGH, applauds the delay. “It gives companies two more years to prepare for the tax if it does come on line in 2020,” he says, although he’s holding out hope that it will have been repealed by then.

The Cadillac tax is a “poorly designed provision,” Wojcik contends, because the thresholds over which the tax is assessed are tied to the Consumer Price Index rather than medical-cost inflation. “So, until we get rid of all the perverse incentives for the supply side that drive up health care spending well beyond general inflation, [the tax] will remain a penalty for employers and employees who have relatively little control over plan costs.”

Wojcik goes on to enumerate the “perverse incentives”:

  • “We still have by and large a fee-for-service payment system which provides incentives for hospitals and physicians to drive up utilization in order to increase their revenues.”
  • “There is tremendous supplier consolidation going on, accelerated by the ACA, that in some cases leads to additional leverage for providers to negotiate higher prices.” (Ironically, the way the ACA encourages supplier consolidation is that it provides monetary incentives for hospitals and physicians that join forces in “accountable care organizations” if they’re able to lower their costs.)
  • “The pricing for specialty pharmaceuticals is unsustainable.”

Wojcik says it should be a “no-brainer” for Congress to repeal a tax that penalizes employers and employees for medical cost inflation that is out of their control.

But merely delaying the tax’s onset may not provide much relief, in the long run. Because of the delay, employers may now slow down their efforts to make changes to their plans designed to avoid the Cadillac tax, says Condeluci. But they won’t abandon the efforts entirely, he adds, because the CPI-indexed plan-cost thresholds over which the tax kicks in will continue to rise between now and 2020, despite the delay in the tax’s implementation. “The percentage of companies that are going to be impacted by the tax in 2020 is not going to change, even though the effective date has been pushed back until then,” Condeluci says.

According to NBGH research, 72% of large companies expect that at least one of their plans will trigger the tax in 2020 unless they take further measures to control health care costs, beyond those they’ve been taking for years.

There’s a silver lining to that sobering statistic: the last-minute amendment to the federal spending bill allows companies to deduct the amount of excise tax paid on their federal income tax returns.