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Obamacare's Cadillac Tax Will Not Survive

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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The Cadillac tax may not be quite dead yet. But at best, it certainly stuns easily. I'm not optimistic.

The Cadillac tax, you may remember, was an excise tax on especially expensive employer-sponsored health insurance plans. It was a substitute for two things the administration wanted to do, but didn’t quite dare: get rid of the tax deduction for employer-sponsored insurance, and institute serious cost control measures. Doing either of those things would have made an already-embattled Obamacare bill impossible to pass into law.

So instead, the administration came up with a Rube Goldberg mechanism that sort of capped the tax deduction, and sort of encouraged private insurers to control costs -- and, not incidentally, raised a substantial amount of money, helping the administration toward the politically necessary claim that the law would reduce the deficit.

There was one small problem with this, as many of us noted at the time: The Cadillac tax was apt to be politically unpopular. It was particularly apt to be unpopular with politically active groups, such as unions. It therefore seemed somewhat unlikely to us that the Cadillac tax would ever be actually allowed to take effect. Don’t be alarmist, we were told; the administration knows that all the parts of this law hang together. It will not start disassembling the complicated structure it spent so much time and political capital putting together.

And to be sure, the administration has not capitulated in the face of considerable political pressure. Well, it has not capitulated much. The White House did agree to push the implementation date back to 2020 from 2018. That Obamacare’s principle architects want to be safely away from 1600 Pennsylvania Avenue before the Cadillac tax is implemented gives you a pretty good idea of how politically viable it is.

But apparently, Obama is still nervous, even with an implementation date of "How about never? Does never work for you?” Now the administration is floating a plan to scale back the tax in high-cost areas. Basically, it would peg the tax to the cost of the second-highest level of coverage available through the Obamacare exchange in each area. Any employer-sponsored plan whose cost was below that would be exempt from the Cadillac tax.

The administration is pushing this as a more “targeted” tax, which is correctly pronounced “weak.” If you want to control costs, the areas you want to target are the ones with higher average costs. Instead, the administration is perversely giving those areas a special exemption from the tax. Since the Cadillac tax was likely to disproportionately raise its money from those areas, this change will also, of course, mean less revenue.

The backtracking on the Cadillac tax illustrates a few things. First of all, as many of us said at the time, the bill was crammed with unrealistic "pay-fors," which created the illusion of reducing the budget deficit, but which could never be politically sustained. This is exactly what has come to pass, and I think that in the future, we are going to see more such pressure -- for example on the subsidy caps which are supposed to hold them around 0.5 percent of GDP.

And second, any new health-care plan had better be very careful about promising cuts to either the health-care benefits enjoyed by the affluent, or provider incomes. You may be able to say those things in the heat of the moment. If the stars line up just right, you may be able to get them passed. But when the spotlight’s off, and the lobbyists creep back to Capitol Hill, all those tough choices will end up undone, and that intricate budget math will crumble.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net