THE EXCISE TAX ON HIGH-COST HEALTH PLANS: POTENTIAL ADJUSTMENTS BY POLICYMAKERS, EMPLOYERS, AND EMPLOYEES

This paper examines the Affordable Care Act s (ACA's) excise tax on high-cost health plans and simulates how tax threshold adjustments and potential behavioral responses by employers and enrollees may affect the prevalence of the tax. Our results show that threshold adjustments that account for high premiums for reasons other than the generosity of benefits, such as adjustments for the age sex composition of the workforce and geographic variation in health care costs, make a difference in the simulated prevalence of the excise tax and may help target the tax more precisely at plans at the high end of the distribution of health benefits. Keywords: employer-sponsored health insurance, premiums, excise tax, Cadillac tax JEL Codes: I13, J32, H22 In 2022, employer-sponsored health insurance (ESI) benefits will be subject to an excise tax of 40 percent on amounts above specific premium thresholds. In this paper, we use data on plan premiums, ESI enrollment, and employer and employee characteristics from the 2015 Medical Expenditure Panel Survey-Insurance Component (MEPS-IC) to examine the impact of premium thresholds and their adjustments on the projected prevalence of the tax. We begin by examining different assumptions about future premium growth rates. Next, we examine the impact of threshold adjustments already specified in the current law or in Internal Revenue Service guidance. Specifically, we examine the implications of threshold adjustments for the age/sex composition of the employer's workforce and 'permissive aggregation,' which provides flexibility in assessing tax liability for employers who offer more than one type of non-single coverage. Next, we examine threshold adjustments that have not yet been specified but which address issues related to the accurate targeting of overly generous plans. These include adjustments for geographic differences in health care costs and adjustments to equalize the prevalence of the tax across single and non-single policies. Analyzing specific provisions of the excise tax highlights important considerations for policymakers if the excise tax is implemented in 2022 in its current form or if alternative policies are proposed that limit the ESI tax subsidy. A wide range of policies designed to limit the ESI tax exclusion would need to specify premium thresholds, regardless of whether they use excise taxes or caps on the ESI tax exclusion. The details in the current law, therefore, provide an opportunity to examine the general issue of premium thresholds in the context of specific legislation. Finally, to examine potential behavioral responses by employees and employers to limit, or eliminate, their exposure to the excise tax, we utilize unique information available in the MEPS-IC on the range of plans available to employees to examine the potential impact of employees switching to the lowest cost plan offered by their employer and employers and employees discontinuing contributions to tax-preferred accounts. While there are many potential behavioral responses to the excise tax, these data allow us to examine one possible response using data on plans that employers currently offer. Similar to other researchers, we find that the projected prevalence of the tax grows over time and this growth is highly dependent on assumptions about premium growth rates and the extent to which they exceed general inflation. Our results also raise a number of issues related to how effectively the tax targets overly generous plans and the extent to which the tax affects enrollees in plans that have high premiums for reasons other than plan generosity. Our results also demonstrate a possible pathway for employers and employees to achieve reductions in the prevalence of the tax given existing plan benefit structures and other mechanisms. However, as shown in our analysis, these shifts likely come at the expense of higher forms of cost sharing and other reductions in benefits.
I. INTRODUCTION In 2022, employer-sponsored health insurance (ESI) benefits will be subject to an excise tax of 40 percent on amounts above specific premium thresholds. (1) The Affordable Care Act's [...]