“Unions (an important part of the Democrat base) and businesses (which lean Republican) both have opposed the tax because it reduces their value proposition to employees and limits their flexibility in offering benefits.”
William G. (Bill) Stuart
Director of Strategy and Compliance
April 4, 2019
I’m in meetings on Capitol Hill today, hearing from Republicans and Democrats on their views on where medical delivery and finance legislation is headed this year. I’m comparing notes from information that I gleaned from visits two weeks ago with some House and Senate Democrat’s legislative assistants for health care. Those discussions focused on two issues: Repeal of the Cadillac Tax and the prospects for passage of a Medicare for All bill in the House of Representatives.
Here are my two key takeaways from my last visit:
We may finally see this tax relegated to the dust bin of history before the government ever collects a dime from it. But that doesn’t mean that it didn’t have an effect.
As you recall, the tax was part of the Affordable Care Act. Its purpose is to discourage employers from offering high-premium coverage by imposing a surtax of 40% on premiums above a certain level. The tax has been delayed repeatedly and under current law doesn’t apply until Jan. 1, 2022.
Actually, the tax wasn’t designed to raise much revenue. Instead, architects of the ACA wanted to cap or repeal the employer exclusion. The thought process: Because wages are taxed and the cost of benefits to the employee isn’t, employees would rather receive a dollar raise in the form of benefits (worth $1.00 in economic terms) rather than wages (worth perhaps $0.70 to $0.75 after taxes).
The tax code gives employees an incentive to demand richer plans that cover more services at lower patient cost-sharing. Thus, patients lack skin in the game – financial incentives to be more prudent when seeking care.
There are sound economic arguments in favor of eliminating or capping the exclusion. At the same time, there are sound practical arguments not to tinker with the system that delivers coverage to about 175 million Americans, particularly with instability in the nongroup market since the passage of the ACA.
Insurers and benefits advisors fought the idea of capping the employer exclusion. They believed that once the concept of a cap was accepted, employer-sponsored coverage was at risk. And if employers dropped coverage in response to the loss of tax benefits, the financial and logistical burden on the federal government to subsidize and provide coverage would increase dramatically.
The architects of the ACA achieved the same result by a different means. Rather than cap the exclusion, they simply placed an excise tax on premiums above a certain level. It was an easy concept to sell since the levy wouldn’t result in a tax increase for working Americans. Instead, insurers would be assessed by the tax.
But of course, businesses rarely absorb the full cost of a tax. In this case, insurers would pass along the cost to employers in the form of higher premiums (creating a perverse tax on a tax), which most employers would absorb by passing along the cost directly to employees, reducing the level of coverage or cutting other benefits.
Most Republicans and Democrats have been united against the Cadillac Tax since it was introduced, which explains the frequent delays that Congress has approved throughout this decade. Unions (an important part of the Democrat base) and businesses (which lean Republican) have both opposed the tax because it reduces their value proposition to employees and limits their flexibility in offering benefits.
However, neither side seemed willing to go all-in on repeal without trying to extract concessions from the other side. Now, this sentiment has shifted, and repeal bills (HR 748 and S 80) are active in both chambers.
During the past three years, I’ve joined colleagues at the Employers Council on Flexible Compensation (ECFC), National Association of Health Underwriters (NAHU), and HSA Council in speaking with members of Congress and their staffs about the Cadillac Tax.
Cadillac Tax Options
We had three asks:
First, repeal the tax.
Second, if you don’t support repeal, at least remove employee FSA elections and HSA contributions from the definition of premiums. It’s illogical to include employee compensation that workers choose to receive as deposits into medical reimbursement accounts along with direct payments to insurers in this expanded definition of premiums.
Third, if you don’t support either of these measures, at least delay implementation.
In past years, we’ve been successful with only our third option. This year, it looks like we may finally see the tax repealed. But we can’t count our chickens before they’re hatched.
Medicare for All
As promised following the 2018 mid-term elections, US Rep. Pramila Jayapal, along with Rep. Debbie Dingell and 104 other co-sponsors, introduced the Medicare for All Act of 2019 in late February.
This is a far-reaching bill. It provides medical coverage for all Americans and forbids private insurers from competing against the government program to cover any services that the taxpayer-financed program covers. The government plan provides not only medical, but also dental, and vision coverage. The plan also includes coverage for long-term care – a provision of the ACA that was killed before the program was implemented because it was deemed unsustainable even after an accounting trick (counting 10 years of premiums received but only five years of claims paid).
The bill calls for no patient cost-sharing, which seems to reinforce the worst aspect of a third-party payer structure – the absence of any consumer “skin in the game.”
The debate on this bill hasn’t yet begun in the House, although it has garnered a lot of publicity and is energizing those who’ve been advocating for the federal government to assume responsibility for designing, delivering, and paying for medical (and in the case of this bill, a lot more) care for more than half a century.
The Politics of the Issue
There will be plenty of time to debate the merits of this approach going forward. But let’s look at the politics.
Like Paul Ryan, her predecessor as leader of the House, Speaker Pelosi doesn’t have a true majority. Just as House Republicans in the 115th Congress split into traditional Republicans and members of the more conservative Freedom Caucus, Speaker Pelosi’s party breaks nearly evenly between more traditional Democrats (including her largely octogenarian leadership team) and a wing of the party composed primarily of younger members who want more government direction of the economy.
Although the latter group increased its ranks during the 2018 mid-term elections, it still represents only about half of all new Democrats in the House. The firebrands won elections in traditionally overwhelming Democrat districts. The remainder of the class is composed of more moderate military veterans and business leaders who campaigned closer to the center of the political spectrum in districts that then-candidate Trump carried in 2016.
With a Senate controlled by Republicans and a Republican president, a Medicare for All bill has no chance to become law during the 116th Congress.
But can Democrats pass the bill in the House and use the vote as a line of delineation between the two parties heading into the 2020 election? Even that will be a challenge.
First, Speaker Pelosi has stated her preference that no single-payer bill be brought to the floor of the House for a vote during this session of Congress. Bills that the speaker doesn’t want to reach the floor rarely get there.
Second, the bill was referred to two committees that don’t have primary jurisdiction over medical coverage and finance. That’s because the chairs of the two committees that do have jurisdiction, Rep. Richard Neal (D-MA) of Ways and Means and Rep. Frank Pallone (D-NJ) of Energy and Commerce, have not endorsed the concept and have expressed skepticism in the past.
Third, the math is daunting. The 106 co-sponsors are very likely to support the bill. That figure is a little less than half the 218 votes needed for passage. Assuming that no Republican will support the bill (the last two pieces of major medical coverage legislation to pass the House, in 2010 and again in 2017, failed to attract a single vote from the minority party), Democrats need another 112 votes to pass the bill.
That’s 112 votes from the remaining 129 Democrats in the House or about 87% of the remaining members. That’s a very difficult task in a caucus that’s divided in approach between single-payer proposals and strengthening the ACA.
Very difficult, but not impossible. Recall that then-President Obama convinced a group of hold-out Democrats, led by the since-retired Rep. Bart Stupek (D-MI), by promising an executive order to allay their concerns about federal funding of abortion. (The president secured their support but never issued the order.)
A Pesky Issue
That history lesson illustrates two points.
First, it’s difficult to pass legislation when the minority party is united in opposition. Sometimes you need a president who can deliver special financial favors. Recall then-President Obama’s promising more favorable Medicaid reimbursement to the states of Nebraska and Louisiana in what became known as the Cornhusker Kickback and the Louisiana Purchase to secure the states’ senators votes for the ACA. President Trump won’t be dangling give-aways to members of the House to consolidate government control over the half of the medical market whose claims it doesn’t reimburse already through Medicare and Medicaid, as well as the VA and Indian Health Services delivery systems.
Second, abortion continues to – and seemingly always will – be a line of delineation in every debate about government financing of medical care. A law known as the Hyde Amendment, which traces its roots to the 1970s, restricts taxpayer reimbursement of abortion services. Though there are a number of situations in which federal funds reimburse this service, it remains an emotional issue between the two parties and, to an extent, within each caucus in the House.
Abortion is bound to be a contentious issue in this debate, at least as an emotional lever that each side can use to move its base. It stalled passage of the ACA, and it’s likely to affect prospects for reform in the future.
What We’re Reading
We’re reading my new book, HSAs: The Tax-Perfect Retirement Account. It’s a ground-breaking look at the intersection of HSAs, Medicare, and retirement planning. And you can read it too. Just click here to order a pre-publication copy. And use the code HSA20B to receive a 20% discount (similar to the discount that you receive on all qualified expenses reimbursed from your HSA). But hurry – the discount expires in a few weeks. So order your copy today.
It’s difficult to gather good information on the HSA industry. An effective approach is to look at multiple surveys and identify common trends. Paul Fronstin, whose research always winds up on my “must-read” list, does exactly that in this Employee Benefit Research Institute survey.