Why Tax High-Cost Employer Health Plans?

Abstract

The Affordable Care Act’s primary method to control costs in the private health insurance market is an excise tax on high-cost employer plans, often referred to as the “Cadillac Tax.” This article examines the tax on high-cost plans in detail, focusing on whether the tax is likely to remedy the problems of fairness, overinsurance, or revenue cost that are often-cited weaknesses of the existing tax treatment of employer-provided health insurance. It concludes that the excise tax is likely to be a weak policy tool, and is unlikely to meaningfully address the core criticisms of the tax treatment of employer-provided coverage. The article argues that this result is likely driven by political constraints and an underlying ambivalence about the role of employer-provided coverage in a reformed health insurance market. It concludes by examining other potential avenues for more effectively reforming the tax treatment of employer-provided coverage.

Keywords: health care reform, Cadillac Tax, employer-sponsored health insurance

JEL Classification: H25, I13, J32, K34