Bloomberg News

Health Law’s Cadillac Tax Bite on Companies Drops by $57 Billion

May 16, 2013

The U.S. health-care law’s projected tax bite on businesses with more generous health benefits is dropping as medical spending slows and employers look to rein in the cost of coverage.

The 2010 Affordable Care Act’s so-called Cadillac tax on high-premium health plans was initially projected to bring in $137 billion over the next decade. That estimate has now been trimmed to about $80 billion, a $57 billion decrease, the Congressional Budget Office said in a report this week.

The 2010 Affordable Care Act includes a 40 percent tax on employee benefits exceeding $10,200 for individuals and $27,500 for families, on the theory that overly generous plans boost medical costs. Companies have responded by pressing hospitals for better rates, adding wellness programs and raising deductibles on workers, said Steve Wojcik, a vice president at the National Business Group on Health.

“I don’t think there’s any employer that’s going to pay the tax,” said Wojcik, whose Washington-based trade group represents employers such as Wal-Mart Stores Inc. (WMT:US), American Express Co. (AXP:US) and Target Corp. (TGT:US) “I would be surprised if they even collect” the lower amount.

Largely because of a drop-off in projected tax revenues, the estimated cost of implementing the law through 2023 rose by $40 billion to $1.36 trillion, the budget office said.

The law imposes the “cadillac” tax starting in 2018. Sixty-one percent of employers with 500 workers or more said in a 2011 survey that they expected to trigger the tax unless they took steps, according to Mercer Inc., a Washington-based benefits consultant.

New Projection

CBO analysts said in a May 14 blog post that the projection changed because of “new data on the health insurance premiums paid by employers. As a result, we now expect fewer employment-based plans to be subject to the excise tax.”

A slowdown in U.S. medical costs since the recession that began in 2008 probably contributed to the CBO’s forecast, Wojcik said. Annual health spending climbed by about 3 percent on average from 2009 to 2011, less than half the rate before the recession started, according to the U.S. Centers for Medicare and Medicaid Services.

Lower revenue from the tax would be “good news,” showing the U.S. is making strides against health-care costs that have long outstripped the rest of the world, said Jonathan Gruber, an economist at the Massachusetts Institute of Technology in Cambridge.

Breaking Point

The health law deserves credit, as do employers, Gruber said in a telephone interview. “They basically reached a breaking point in terms of costs and are taking action.”

Employers dispute the idea that their benefits have encouraged more spending, instead blaming “unjustified cost increases” from doctors and hospitals, Wojcik said in a telephone interview.

Nonetheless, the Cadillac tax has spurred efforts to trim insurance costs, he said. In one example, Bentonville, Arkansas-based Wal-Mart, the world’s largest retailer, said last year that it would pay for workers needing certain heart and spine surgeries to travel to hospitals where the company says patient outcomes are better.

“Employers have really rallied around,” said Beth Umland, Mercer’s director for health-care and benefits research. “They feel like they pay enough for health care, they don’t want to pay a tax on top of that.”

To contact the reporter on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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