U.S. Markets closed

Why Are Democrats Undermining Obamacare?

Karl W. Smith
(Bloomberg Opinion) -- The House is widely expected to vote Wednesday to finally kill the so-called Cadillac tax. Whether the Senate will follow is less clear, but the overall sentiment isn’t: The excise tax on high-cost insurance plans has long enjoyed bipartisan lack of support, and the only question is whether Congress will repeal it outright or just continue to delay its implementation.This is a shame. Without the Cadillac tax, health insurance is more expensive — and the individual market less robust — than it otherwise would be. And while it’s easy to explain Republican opposition to the tax as part of their general disdain for Obamacare, it’s hard to understand why Democrats would help undermine their last president’s signature achievement.A bit of background: The employer-based insurance system in the U.S. is supported in large part by the tax exclusion of health insurance. Workers do not have to pay taxes on the insurance premiums paid by their employer, but employers do get to count those premiums as labor costs.Thus employers can offer their employees part of their compensation tax-free by paying in the form of fringe benefits. At the same time, the deduction encourages employers to buy expensive plans and discourages people from joining the individual health insurance market.Both of these effects tend to raise the price of individual health insurance. Before the Affordable Care Act, the high price of individual health insurance created what is known as a “death spiral”: It was so expensive only the very ill would purchase it, which in turn drove up the average cost of insurance, which led insurers to raise premiums, and so on.Obamacare tried to address this problem in several ways. Subsidies would help lower the price of individual health insurance. The individual mandate, by forcing healthy people into the market, would further lower costs. The Cadillac tax, meanwhile, would encourage employers to offer more modest plans, making the individual market a more attractive option.It didn’t quite work out that way. The individual mandate led far fewer people to get insurance than predicted, and 2017’s Tax Cut and Jobs Act eliminated the penalty for not having insurance. The Cadillac tax originally wasn’t set to go into effect until 2018, but Congress twice voted to postpone it, the last time until 2022. One of Obamacare’s most ambitious cost-control measures has never taken effect.The result is that Obamacare has been supported primarily by subsides. With little incentive for risk-sharing or cost-cutting, increases in premiums have accelerated.Now, with their opposition to the Cadillac tax, even Democrats seem ready to give up on Obamacare’s individual market. All the party’s major presidential candidates, except Joe Biden and Amy Klobuchar, have proposed that individual health insurance should be abolished in favor of Medicare-for-All, or that it should be effectively phased out in favor of a public option. (Biden’s plan includes a strong public option that would likely have the same effect.)This is unfortunate. Even if a Democrat wins the presidency, it is unlikely that the party will take the Senate. So any sort of Medicare-for-All or strong public-option proposals have essentially no chance of becoming law until 2022 at the earliest, and even then the politics are uncertain.What’s more, high-premium employer-based plans raise the cost of health care for everyone by encouraging the overconsumption of expensive services. This means that even Medicare and Medicaid face higher prices.Quite aside from its benefits for the health-care market, the Cadillac tax would also have the effect of expanding the tax base and making the tax code more efficient. It would raise revenues by about $15 billion a year.  Most of that increase would be in the form of greater payroll and income tax revenue, because employers would replace their high-premium plans with higher salaries.Rather than killing or delaying the Cadillac tax, Democrats should be trying to make it operational. The tax would raise revenue, lower costs, increase the efficiency of the tax code and give the Obamacare individual market its best chance at success. Instead, Democrats have set up that market for more turmoil.To contact the author of this story: Karl W. Smith at ksmith602@bloomberg.netTo contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.netThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.

(Bloomberg Opinion) -- The House is widely expected to vote Wednesday to finally kill the so-called Cadillac tax. Whether the Senate will follow is less clear, but the overall sentiment isn’t: The excise tax on high-cost insurance plans has long enjoyed bipartisan lack of support, and the only question is whether Congress will repeal it outright or just continue to delay its implementation.

This is a shame. Without the Cadillac tax, health insurance is more expensive — and the individual market less robust — than it otherwise would be. And while it’s easy to explain Republican opposition to the tax as part of their general disdain for Obamacare, it’s hard to understand why Democrats would help undermine their last president’s signature achievement.

A bit of background: The employer-based insurance system in the U.S. is supported in large part by the tax exclusion of health insurance. Workers do not have to pay taxes on the insurance premiums paid by their employer, but employers do get to count those premiums as labor costs.

Thus employers can offer their employees part of their compensation tax-free by paying in the form of fringe benefits. At the same time, the deduction encourages employers to buy expensive plans and discourages people from joining the individual health insurance market.

Both of these effects tend to raise the price of individual health insurance. Before the Affordable Care Act, the high price of individual health insurance created what is known as a “death spiral”: It was so expensive only the very ill would purchase it, which in turn drove up the average cost of insurance, which led insurers to raise premiums, and so on.

Obamacare tried to address this problem in several ways. Subsidies would help lower the price of individual health insurance. The individual mandate, by forcing healthy people into the market, would further lower costs. The Cadillac tax, meanwhile, would encourage employers to offer more modest plans, making the individual market a more attractive option.

It didn’t quite work out that way. The individual mandate led far fewer people to get insurance than predicted, and 2017’s Tax Cut and Jobs Act eliminated the penalty for not having insurance. The Cadillac tax originally wasn’t set to go into effect until 2018, but Congress twice voted to postpone it, the last time until 2022. One of Obamacare’s most ambitious cost-control measures has never taken effect.

The result is that Obamacare has been supported primarily by subsides. With little incentive for risk-sharing or cost-cutting, increases in premiums have accelerated.

Now, with their opposition to the Cadillac tax, even Democrats seem ready to give up on Obamacare’s individual market. All the party’s major presidential candidates, except Joe Biden and Amy Klobuchar, have proposed that individual health insurance should be abolished in favor of Medicare-for-All, or that it should be effectively phased out in favor of a public option. (Biden’s plan includes a strong public option that would likely have the same effect.)

This is unfortunate. Even if a Democrat wins the presidency, it is unlikely that the party will take the Senate. So any sort of Medicare-for-All or strong public-option proposals have essentially no chance of becoming law until 2022 at the earliest, and even then the politics are uncertain.

What’s more, high-premium employer-based plans raise the cost of health care for everyone by encouraging the overconsumption of expensive services. This means that even Medicare and Medicaid face higher prices.

Quite aside from its benefits for the health-care market, the Cadillac tax would also have the effect of expanding the tax base and making the tax code more efficient. It would raise revenues by about $15 billion a year.  Most of that increase would be in the form of greater payroll and income tax revenue, because employers would replace their high-premium plans with higher salaries.

Rather than killing or delaying the Cadillac tax, Democrats should be trying to make it operational. The tax would raise revenue, lower costs, increase the efficiency of the tax code and give the Obamacare individual market its best chance at success. Instead, Democrats have set up that market for more turmoil.

To contact the author of this story: Karl W. Smith at ksmith602@bloomberg.net

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

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

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.

For more articles like this, please visit us at bloomberg.com/opinion

©2019 Bloomberg L.P.