The White House Targets The Cadillac Tax
The Obama Administration has proposed a significant change to the Cadillac Tax, a portion of the Patient Protection and Affordable Care Act scheduled to take effect in 2020. These changes would weaken the tax and make it less effective in lowering health care costs. However, mounting bipartisan opposition to the tax’s current form have made such changes necessary. While it would make the tax less powerful, the President hopes to avoid losing the tax altogether if the changes are not made.
The Cadillac Tax
The informally named Cadillac Tax, named for so-called unusually expensive Cadillac insurance plans, passed as part of the Patient Protection and Affordable Care Act. The tax will apply to portions of those single insured and family plans that charge the highest premiums. Originally slated to begin in 2018, Congress has moved back the start date to 2020.
The Cadillac Tax instructs the IRS to eventually collect from insurers a 40% excise tax on those plans with an individual annual premium over $10,200 for individuals and over $27,500 for families. The tax only applies to the part of the premium exceeding that maximum.
The President’s Proposal
This provision of the Affordable Care Act has proven particularly controversial, and businesses and politicians from both parties have decried it. The Obama Administration has proposed a solution in an effort to not punish those insurance companies that operate in the most expensive markets. Under the new proposal, the threshold at which the tax kicks in would be raised for many states. In those states where the average premium for “gold” insurance plans is higher than the current threshold, that average premium becomes the new threshold.
This change aims to help alleviate the tax burden in states that have a higher healthcare cost. In many states, the average gold premium falls below $10,200. But in other states, that average premium exceeds that, meaning nearly every insurance company operating in that state puts itself in danger of a high tax and an inability to turn a profit. But under the new plan, if the gold premium averages at $12,000, that becomes the new threshold, making it easier for more insurance companies to operate in that marketplace. This recognizes that the same amount of money spent in the Midwest and the same amount of money spent in California or New England will buy a vastly different amount of healthcare.
This proposal comes after the Obama Administration has faced mounting opposition to the Cadillac Tax. With both Democrat and Republican members of Congress looking for ways to remove the tax entirely, the President hopes to save it by making it more palatable. In the original Affordable Care Act design, the tax was meant to serve as both a deterrent and a revenue generating tax. Without it, the law’s framework may not be as sturdy as it would otherwise be. The White House hopes that these changes, which would reduce costs to companies in expensive insurance markets, will make the tax agreeable enough to quiet some of the opposition and allow the tax to go ahead as planned.