Employers Balk at Curbs on Generous Health Plans

The Affordable Care Act’s tax on high-cost employer health plans faced sharp opposition from employers and unions. Now, Republicans are drawing equal fire for ACA replacement proposals that those groups say would have some of the same effects.

The ACA’s so-called Cadillac tax is levied on the value of employer health plans above a certain threshold, in part to discourage what backers argue are overly generous plans and high usage of costly care. It is one of the few aspects of the law that Congress has tweaked, delaying its impact until 2020.

Several Republican plans for replacing the ACA include their own curb on generous health plans: a cap on how much of employer-provided health benefits could be shielded from taxes. Such a cap could force certain workers to start paying income tax on a portion of the cost of their coverage.

“In the end, they both would have similar effects,” including pushing companies toward skinnier health plans, said Steve Wojcik, an official with the National Business Group on Health, which represents employers. “It’s six of one, a half-dozen of the other.”

Currently, when an employee receives health insurance, the value of that benefit isn’t subject to either income or payroll taxes. On average, employer coverage for a single worker last year ran $6,435, while for a family, the tab was $18,142, according to a survey by the Kaiser Family Foundation. Employers bore about 82% of the cost for single plans, and about 70% for family coverage.

A blueprint for a health-care overhaul released last June by Republican House committee chairmen included a limit on how much of that value would be tax-free. If an employer health plan cost more than that limit, the difference could be subject to income tax, just like wages. ACA-replacement plans released by Tom Price, a former congressman and now the new health and human services secretary, and Senate Finance Committee Chairman Orrin Hatch (R., Utah) also included caps.

House Speaker Paul Ryan (R., Wis.) said recently he has long supported a cap on the health-benefits tax exclusion, but that it was an “open question” where Congress would end up on the issue. Mr. Hatch in a statement said, “We must study the open-ended tax preference and its impact on costs for employees and increased spending by employers.”

The tax exclusion for employer health benefits represents a huge pool of potential federal revenue, estimated at $266 billion in 2016, according to the Congressional Budget Office. Capping the exclusion would bring in a small fraction of that total. The Cadillac tax, the CBO said, would raise federal revenue by $2 billion in 2020, growing to $20 billion in 2025—money that could help defray the cost of expanded health coverage under the ACA.

Economists have long said the tax exclusion for health benefits has negative effects, encouraging employers to offer too-generous health coverage. That, they argue, leads to excessive health spending because employees are shielded from the full cost of medical care. Without health benefits’ special tax status, some economists say, workers would see greater increases in their wages. Obama administration officials made similar arguments in advocating for the Cadillac tax.

The existing health-benefits tax exclusion “has been an important factor in promoting the kinds of inefficiencies in the health-care system that we have seen,” said Joseph Antos, an expert at the conservative-leaning American Enterprise Institute, who supports a cap on the employer health-benefits tax exclusion.

Still, the current proposals to limit the tax exclusion are drawing sharp pushback from employers, which say the change could limit their flexibility and add to their costs, and labor groups, which fear their members could end up paying additional taxes. A December letter to members of Congress that criticized both the Cadillac tax and the health-benefits exclusion cap was signed by groups including the U.S. Chamber of Commerce and the National Retail Federation.

The cap is also drawing opposition from the Alliance to Fight the 40, a coalition that lobbies against the Cadillac tax, which would impose a 40% levy on the value of health plans above certain cutoff levels. Last month, the group, which includes employers, unions and health companies, paid to blast an ad at electronic devices in the vicinity of congressional Republicans’ Philadelphia retreat, with the message: “Taxes on employer-sponsored health care are a bad idea.”

Employers are “worried about any changes that would destabilize the employer system,” said Jim Klein, president of the American Benefits Council, an employer group.

Members of unions that have negotiated robust health benefits are among those likely to be hit by taxes tied to high-cost plans. Capping the health-benefits exclusion “would be a huge tax increase on the middle class,” said D. Taylor, president of Unite Here, which represents hospitality workers.

Health-insurance experts say taxing high-cost employer health plans would prod employers to trim the value of their insurance to stay under the threshold, likely accelerating the trend toward bigger out-of-pocket costs for workers. “Policies would have to change, by probably higher deductibles,” said Gary Claxton, a vice president at the Kaiser foundation. Other steps could include limiting health-care provider networks.

Employers also say that a ceiling on the health-benefits tax exclusion could impact a growing number of companies and workers over time—a criticism they long made of the Cadillac tax. The concern is that the level at which taxes kick in wouldn’t rise as fast as the cost of health care in future years, pushing a larger share of health plans over the value of the cap.

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