The excise ('Cadillac') tax on high-cost, employer-sponsored health coverage

A new Health Policy Brief from Health Affairs and the Robert Wood Johnson Foundation explains one of the most controversial provisions of the Affordable Care Act: the so-called Cadillac tax on generous employer-sponsored health insurance plans. Beginning in 2018 a 40 percent excise tax will be assessed on the cost of any of these plans exceeding $10,200 for individual coverage and $27,500 for family coverage. Employers, who would be responsible for paying the tax, are preparing for it by scaling back health benefit offerings or increasing workers' deductibles or copays to avoid paying the tax. Although critics of the tax say it unfairly reduces health benefits for subscribers to these plans, particularly those with expensive chronic illnesses, proponents maintain that when consumers pay a larger share of the costs, they will be less likely to overuse care.

Topics covered in this brief include:

• What's the background? When the Obama administration pledged that health reform would save more than $200 billion over 10 years and insure 50 million Americans, it proposed an excise tax on high-cost health plans to both help slow the rate of grown and raise some $32 billion in revenue by 2019 to pay for the newly insured. The brief explains some of the political headwinds that the tax experienced, resulting in delaying its implementation and lowering the size of the tax--also resulting in reducing the revenue expected to be raised.
• What's the debate? In addition to help finance health reform and reduce health costs, the excise tax was designed to address the "unequal tax benefit" of excluding from taxes the value of health insurance, which encourages businesses to continue providing generous employer-based coverage. The brief describes various estimates on the amount of revenue to be raised and details some of the ways employers might shift some of the excise tax costs to employees.
• What's next? Since the excise tax will not take effect until 2018, it will be some time before policy makers determine whether it will work as intended to achieve its dual goals of both raising revenue to fund health coverage expansion nationwide and lowering health care costs. Still, lawmakers from both parties and many policy makers agree that the excise tax should make employers and employees pay much closer attention to their medical spending over the long run.