MEMORANDUM FOR HILLARY RODHAM CLINTON

Transcription

1 MEMORANDUM FOR HILLARY RODHAM CLINTON Date: September 25, 2015 From: Ann O Leary, David Kamin, Mike Shapiro (Policy Team) RE: Considerations and Options on the Cadillac Tax Yesterday, Senators Sherrod Brown and Bernie Sanders introduced a bill to repeal the Cadillac Tax with lead co-sponsors Senators Schumer and Shaheen, among others. Senator Reid requested that they introduce this bill as a Democratic alternative to a bill introduced by Senator Dean Heller (R-NV) and Senator Martin Heinrich (R-NM) to repeal the tax with no alternative pay-for. The Brown and Sanders bill does not include an explicit pay for and, instead, simply has a sense of the Senate that it be paid for. Given the now bipartisan support for repeal and the fact that both Senators Schumer and Shaheen have joined in the call for repeal, we believe that YOU will soon be asked to clarify your position. This memo provides the substantive and political landscape on the Cadillac Tax and provides you with three options to consider in making your position clear on whether you would support repeal: 1. Support with repeal combined with aggressive delivery system reform measures 2. Continue the Cadillac Tax But Only for Employees Making over $250,000/ year 3. Reform the Cadillac Tax by Grandfathering in Existing Plans and Revising Indexing While we offer these substantive alternatives, we recognize that this call is just as much a political call as it is a policy call. The unions are making the argument that the Cadillac Tax is putting the burden of health care savings on the backs of middle class workers who are seeing no increases in their wages, and will likely see less generous health benefits if the Cadillac Tax goes into effect in According to the unions, fewer benefits will mean that their out-of-pocket health expenditures will to continue to rise further exacerbating the middle class squeeze. Economists predict that wages will rise to self-correct for the decline in health benefits. Further, the economists believe that this measure which would help offset the current tax code s bias toward purchasing more health insurance is perhaps the most important in the Affordable Care Act for containing health cost! 1

2 growth. However, even as most economists strongly believe that wages will rise as a result based on careful study, it is unsurprisingly hard convince the public and unions of that. In preparing these options, we have had conversations with John Podesta, Neera, Chris Jennings, Peter Orszag, Zeke Emanuel and experts at the Kaiser Family Foundation, and we have been in close coordination and conversation with Nikki Budzinski who has been talking to the unions. Even as they are divided on the substance, collectively, everyone agrees that the Cadillac Tax must at least be fixed, due to the political concerns. If we were to take a vote among our advisors, there would be solid support for the second option that holds on to a Cadillac Tax but applies it only to high-earners. Politically, everyone agrees that this allows you to be consistent with your 2008 position and continue to send a signal that we must contain cost while relieving the burden on the middle class. Substantively, this option would probably eliminate most of the tax and mean that it would not do much for health care cost containment, but it will be a principled position that could be built on later. The economists and true health reformers (like Peter Orszag and Zeke Emanuel) however, believe that the best policy is to reform the Cadillac Tax rather than substantially weaken it. This is because of its importance in controlling health care cost growth and because maintaining a strong Cadillac Tax may be necessary to prevent the Affordable Care Act from adding to the deficit (rather than reducing it) in the years ahead. So they would be most in favor of Option 3. And those most concerned about the unions and the impact on real workers today, believe that it would be cleanest to repeal it particularly given that the $250K cap does not provide much in the way of real revenue or savings. We are happy to discuss this with you, but in the meantime we have laid out the full options below. Overview As YOU know, the ACA imposed a 40% surcharge or so-called Cadillac tax on health insurance plans (the combined premium cost paid by employees and employers/insurance plans) over a certain premium threshold, starting in 2018 and then adjusted based on overall inflation but not health care inflation for future years. As described by the Kaiser Family Foundation, the 2018 thresholds are $10,200 for self-only (single) coverage and $27,500 for other than self-only! 2

3 coverage, and after that they generally increase annually with inflation. The amount of the tax is 40 percent of the difference between the total cost of health benefits for an employee in a year and the threshold amount for that year. In other words, the tax does not apply to the entire premium value, only the amounts above the threshold. The Kaiser Family Foundation estimates that up to 26 percent in 2018, 30 percent in 2023 and 42 percent in 2028 of employers will offer at least one plan to some employees that are affected by the tax. However, this does not mean that 30% of employees are affected; that number is far smaller. Substantive case for the Cadillac tax As YOU know, the argument for the Cadillac tax is that it will contain health care cost growth, and as a result, increase wages for workers. Health insurance is already excludable from taxation so the Cadillac tax begins to close this exclusion. By reducing the tax preference for health insurance, the Cadillac tax discourages overly-generous plans that lead to overconsumption of health care and unnecessary private-sector health spending. Economic studies have shown that as workers and employers bargain over wages and benefits, reductions in benefits are eventually passed through into higher wages, maintaining a consistent level of total compensation. The CBO and JCT score the Cadillac tax as reducing the deficit by around $90 billion over the next decade and this is not mainly due to revenue actually collected by the tax, but higher income and payroll tax revenue from the higher wages resulting from the shift from benefit to wage compensation. Supporters of the Cadillac tax, who count among them most health economists and advocates of delivery system reform such as Zeke Emanuel and Peter Orszag, argue that it is arguably the most important policy tool for containing long-term health care cost growth in the private sector. They argue that repeal would increase health spending and premiums over the long run, returning to an era of health cost growth that has put pressure on wages, and budgets in the private and public sector. One argument that supporters of the Cadillac tax make is that repealing it would potentially make the ACA deficit-increasing, rather than deficit-reducing, especially in the second decade after implementation. CBO scores the ACA as reducing the deficit by around $140 billion over the next decade but with rising savings from the Cadillac tax, this could flip toward deficit-increasing in the second decade if the bill were simply repealed. This would arguably confirm the! 3

4 view of critics that contrary to Democratic promises, the plan would not reduce the deficit. Substantive case against the Cadillac tax Opponents of the Cadillac tax (notably, unions, who have repeatedly said that the tax is already starting to impact their negotiations) argue that the predictions of a pass through into higher wages is not coming to pass and that the Cadillac tax is and will continue to reduce benefits and increase cost sharing. Already, they claim that employers currently offering coverage are responding to this policy by trimming benefits in ways that are designed to avoid the tax penalty. They make the case that workers do not necessarily have the bargaining power to demand higher wages in exchange for lower benefits, especially in a post-recession economy that is still gaining strength. And they believe that we should turn to other delivery system reforms to contain costs without passing the burden on to workers in the form of greater cost sharing. Many progressive health care experts (i.e., Chris Jennings) believe that although designed with the legitimate incentive of reducing health care costs and growing wages, the Cadillac tax creates incentives for employers to substantially reduce the value of insurance by increasing cost-sharing for enrollees. Specifically, the tax s tight indexing provision will lead to more and more plans being impacted and lead to greater pressure to reduce employer-based health costs. Some of that pressure might lead to positive reforms in the health care system that produce lower costs of care (and raise wages). But, some of the ways employers could react may be detrimental to workers such as further increasing out-of-pocket costs for consumers, relying on more narrow health care provider networks, or dropping their coverage altogether (and simply paying the ACA s employer penalty fee). The tax also has no sensitivity to regional variation in costs (although the same can be said of much of our tax system). YOUR current position (see appendix) is to express significant concerns about the Cadillac tax, and commit to working on reforms without signaling YOUR intent to repeal. But given the political and policy considerations, we believe it may be appropriate for YOU to get more specific with a repeal or modification proposal. Political update Labor unions particularly the AFL-CIO, AFSCME, NEA, AFT, UAW, Building Trades Unions have been strongly encouraging YOU to come out for repeal of! 4

5 the tax, and have successfully maneuvered bipartisan bills on the Hill calling for repeal that could soon lead to a vote. This issue uniquely impacts public and private sector unions across the labor movement. In Nevada, UNITE HERE has made it their seemingly single defining issue in the primary election. While your support of a repeal is not likely to make the difference in an endorsement process, it would be seen as a major plus factor. We expect legislation on repealing the Cadillac tax to continue to gain support in Congress. As noted above, last week, Sen. Dean Heller (R-NV) and Sen. Martin Heinrich (D-NM) introduced legislation to repeal the Cadillac tax with no pay for. And yesterday, Senators Sherrod Brown and Bernie Sanders introduced legislation to repeal the tax with a sense of the Senate that it should be paid for albeit without including any specifics on a replacement. We expect that his legislation will get the support of many Democrats, and has already garned the support of Democratic leader Senator Schumer. We are not sure if Republican Senators will support the legislation, as they may be disinclined to support legislation that helps unions, even if it repeals a tax and rolls back a piece of the ACA. We have heard that the House leadership is somewhat more concerned with full repeal than the Senate leadership especially the argument that it could make the ACA deficit-increasing over the long run. We believe that the President and his advisors remain committed to retaining the basic structure of the Cadillac tax and believe it is an important measure to contain costs. They are considering options that would adjust the inflation targets of the tax or allow more regional variation (see below), but have not yet taken a public position. We will continue to monitor how the White House reacts to the legislative debate. The White House could face bipartisan pressure to repeal the tax, and it is not yet clear how far (e.g., veto threats) the President would go to protect the tax. Both of YOUR main primary opponents Sen. Sanders and Gov. O Malley have endorsed repealing the tax, and have not specified alternative pay-fors. Although, today, Senator Sanders proposed generating the revenue through a surtax on the wealthiest people in this country. YOUR potential Republican opponents do not appear to have commented on the tax, although they support full repeal of the ACA. Like Republicans in Congress, they may be torn between supporting the repeal of a tax and rolling back part of the ACA, and endorsing legislation that helps unions.! 5

6 Policy options We believe we could put forward one of several alternative options on the Cadillac tax ranging from supporting full repeal and banking on other health delivery system reforms to contain costs, to adjustments short of repeal. Option 1: Repeal, and go hard on delivery system reforms The cleanest way to stand with unions and other progressives who support full repeal would be to advocate for repeal, and at the same time support other non-tax delivery system reforms to contain costs. For example, in YOUR health rollout this week, YOU committed to building on ACA and Obama-administration delivery system reforms such as payment bundling and Accountable Care Organizations. If YOU opposed the Cadillac tax, you could also lay out a more specific agenda on delivery system reform to reduce system-wide health care costs. While this could give you some cover, it would be unlikely to satisfy experts or editorial board who would still see repeal as signaling weakness on containing health costs. And it would likely not offer enough in terms of deficit reduction to offset the lost revenue from repeal, especially over the second decade. If we went down this route, we could also play up the fact that the 28% limit on high-income tax expenditures that YOU proposed to pay for the cost of your higher education plan also includes limiting the health insurance tax exclusion for high-income Americans. We have not amplified this aspect of that policy, in order to not overshadow the college plan but we could play it up in this context. This would certainly be the most politically popular option as it would send the strongest signal that you don t believe we should solve the country s problem of rising health costs on the backs of consumers and workers. Instead, you d be sending a strong signal that delivery system reform is the only way to get at this entrenched problem and that you are going to support workers to have health plans that provide generous benefits, particularly at a time when workers continue to see their wages stagnating. Option 2 Income threshold You could propose that the tax should not affect anyone earning less than $250,000 per year so that the tax is not impinging on the plans of middle-class workers, only the most fortunate. This is consistent with your position in the 2008 campaign, that the tax exclusion for health care should only be limited for high! 6

7 earners (and as described above, which we have already proposed in our broader call to limit high-income tax exclusions). While this would provide some cover to those who oppose repeal, on substance it would significantly reduce the revenue and cost-containment effect of the tax, because it would mean that it would no longer apply to the vast majority of Americans with health coverage (who earn less than $250,000 per year). Preliminarily, we believe it would forgo 80-90% of the revenue. One additional concern is that from an administrative perspective, this would require changes to apply the tax to individuals rather than health plans directly, or somehow rebating the effect of the tax to individuals. This could invite unfavorable pushback and scrutiny that the tax is burdening middle-class families or affecting individuals directly rather than plans. Option 3 Fix it approach - support indexing or grandfathering We could support fixing the Cadillac tax, in one of several ways. One way to fix the tax would be to grandfather in currently available plans. This would mean that for a currently-available employer plan, even if it were over the Cadillac tax threshold in 2018, the Cadillac tax would not apply. And then in subsequent years, the tax would not apply to grandfathered plans as long as their premium cost grew with normal CPI inflation. This would likely have the effect of holding harmless many currently-available plans that unions have negotiated. However, over time, linking the increase to CPI inflation rather than health inflation would still have the effect of preserving the tax s ability to constrain cost growth. This approach would likely forgo much of the revenue available from the Cadillac tax in the first decade (because most affected plans would start out exempt), but preserve the long-term cost containment of the proposal. However, unions and others could argue that future workers would still be subject to cost containment resulting from the tax, because plan cost could only rise at regular inflation, rather than health inflation, which tends to grow faster. In addition, because unions are actively in contract negotiations for health benefits that can range from 1 to 5 years, the real-world implementation of this proposal could be challenging and likely would add a sense of inequity into the system where some union workers would be grandfathered in and others would not. Another possibility would be to exempt collectively bargained health plans from! 7

8 being covered at all. This would help the unions, but would not help a broad array of middle class workers who are not covered by a collectively bargained plan. Other ways of fixing the tax would involve linking the thresholds to different regional cost measures (e.g., the cost of a gold plan in a state s exchange), or raising the overall inflation threshold of the tax. These would limit the tax s impact, and reduce the revenue it takes in while likely not fully satisfying unions and other opponents. However, this could be a compromise position, and might be where the White House ends up. Appendix: 2008 Position In 2008, YOU supported a limiting the tax preference for health insurance only for high-income Americans: Making the Employer Tax Exclusion Fairer: The fact that health premiums paid by employers are excluded from workers taxes (i.e., they are not counted as income) has benefited hundreds of millions of Americans and led to employer pooling of high- and low-risk workers. The American Health Choices Plan rejects calls to limit the tax exclusion for middle-class Americans who have negotiated generous coverage or for those whose premiums are high due to health status, age, or high local health care costs. However, at a time of limited resources, it is neither prudent nor fair to allow the portion of a high-end plan that is in excess of the typical Health Choices Menu plan to be tax subsidized for the highest income Americans. A highincome American would still get a tax break for the employer contribution to the cost of a typical plan, like the Congressional plan, and they could still choose to get additional high-end coverage. But given that the highest income American already receives a tax benefit for purchasing a quality plan that is about twice as large as what a typical American taxpayer receives, the choice by such high-income Americans to obtain additional high-end benefits should be at their own and not the taxpayers expense. Appendix: Current Position on Cadillac Tax Q: Would you repeal the Cadillac tax? Let me start by staying that I ve heard, and my team has heard, many of your strong concerns about the so-called Cadillac tax. For my entire career, I ve! 8

9 been committed to making sure that everyday Americans and union workers have affordable health care without excessive out-of-pocket costs. I recognize that many workers, and unions in negotiations decided to give up higher wages for more generous health care benefits. And now, as a result of the Cadillac Tax, you are being asked to give back some of those benefits you ve worked hard for, and bargained for without necessarily seeing the wages increases to make up for it. That is a real problem, and it s unfair. And I have heard concerns from you, as well as many experts, about some of the consequences of how the Cadillac tax is structured. I do have concerns with the Cadillac tax as currently structured. Specifically, I ve heard concerns about how the tax is indexed to account for the growth of costs, about how it might affect different regions or different industries differently, and making sure it encourages plans and employers to drive down costs without shifting all of the burden to workers. So these are some of the issues that I am examining. I am very open to having a real dialogue with you about these issues and others. But the final point I will say is we need to get our health care costs under control. We need cost containment throughout the health care system, because rising costs hit workers paychecks, and they are bad for everyone. But while cost containment is essential, it can t just come on backs of consumers and workers. It needs to come through a variety of policies. We have to crack down on drug companies that charge too much. We have to pursue reforms that reduce costs for families, while maintaining high levels of quality. To the extent the Cadillac Tax leads to cost containment solely through cost-shifting to employees and insured persons, it needs to be changed. Q: So, will you repeal it? As I ve said, I think we need a bold policy or set of policies to reduce the growth of health costs that eats into workers wages, and increases costs for everyday Americans. And we can t pass the full burden of doing this onto the backs of consumers and workers. I am open to a range of options to do this.! 9