Health Costs and the Excise Tax

Containing rising health care costs is a key policy challenge. As health care costs outpace overall economic growth, they threaten to increase public spending and depress households’ income growth. Yet efforts to contain these costs should follow the hallowed dictum to “first, do no harm.”

Trying to restrain health costs by shifting more of them onto households fails to follow this prescription. American households already have plenty of “skin in the game” when it comes to feeling the economic pinch of rising health costs. Policy efforts to make them feel an even greater squeeze will do more harm than good.

Yet the excise tax on expensive insurance plans contained in the Affordable Care Act (ACA) would do exactly that. While the ACA represents an absolutely crucial step forward in providing universal access to health care, the excise tax provisions (which are set to take effect in 2018) represent a misstep in the otherwise admirable attempt to contain costs.

The policy virtues of the excise tax are often hugely oversold. And while it is often misleadingly labeled the “Cadillac Tax,” it is not well-targeted only toward those fortunate enough to easily bear its costs. Instead, it will eventually increase out-of-pocket costs for tens of millions of American households. These higher out-of-pocket costs are meant to induce less spending on health care, and that may happen. But because the American health system is an extraordinarily opaque and noncompetitive market, households have very little help in making wise decisions about what spending to trim. In essence, the excise tax (and other exercises in cost-shifting) puts sick American households on the front lines of determining where and how to restrain health spending. This is the group least equipped to do this wisely or well.