A Kinked Health Insurance Market: Employer-Sponsored Insurance under the Cadillac Tax

Wednesday, June 15, 2016: 10:35 AM
Robertson Hall (Huntsman Hall)

Author(s): Lucas Higuera; Coleman Drake; Fernando Alarid-Escudero; Roger Feldman

Discussant: Mark Pauly

Beginning in 2018, the Affordable Care Act creates a 40% excise tax on high-cost (“Cadillac”) health insurance plans in excess of defined thresholds. The thresholds will increase annually by the CPI, which historically has grown slower than health insurance benefits. Thus, the constraint imposed by the Cadillac is designed to become more severe over time. Using economic theory and microsimulation techniques, we model employers’ responses to the Cadillac tax in terms of wages and health insurance benefits; moreover, we simulate those responses under different policy parameters, and test which parameters have higher incidence in the tax outcomes. We project how the distribution of health insurance benefits and the growth rates of health insurance benefits and wages will change for employees receiving insurance through their employer in response to the Cadillac tax through 2025. We obtained nationally representative data on employee wages and benefits from the 2013 Medical Expenditure Panel Survey – Household Component and the 2015 Kaiser Family Foundation Employer Benefits Survey, respectively. Because the data are not linked, we generated a synthetic population to represent individual and family wage and benefit distributions. To do so, we sampled from different gamma distributions parameterized using a methods of moments approach to represent the means and standard deviations of the sample distributions of wages and benefits. Employers adjust benefits annually from 2018-2025 as a function of projected wage and health insurance benefit growth rates, price and income elasticities of health insurance benefits, income and payroll taxes, and wages. We project that approximately 7% of employer-sponsored plans will exceed the Cadillac tax thresholds in 2018 before wages and benefits adjust. The share of affected plans will grow to roughly 40% by 2025. When the Cadillac tax is implemented, employers will substitute increases in wages for increases in health insurance benefits. Nearly all of the employers affected by the Cadillac tax (~99%) will reduce health insurance benefits to the Cadillac tax thresholds. Health insurance benefits will increase at a substantially slower rate (3% vs. 5%) and wages will increase faster (1.5% vs. 1%) relative to a counterfactual scenario without the Cadillac tax. The Cadillac tax will effectively act as a hard cap on the tax deduction for employer-sponsored insurance. Health insurance benefits will cluster at the tax’s thresholds as the constraint imposed by the tax grows in severity over time. Recent healthcare reform plans released by 2016 presidential candidates have proposed altering the Cadillac tax. Our analysis indicates that employers would respond in a nearly identical manner to a cap on the tax deduction for employer-sponsored insurance as they would to the Cadillac tax, and repealing the Cadillac tax would stunt wage growth.