Explainer: What Is the ‘Cadillac Tax,’ and Why Does It Matter to New Jersey?

Mark J. Magyar | November 4, 2014 | Explainer
Obamacare excise tax would hit New Jersey harder than most states, Christie and his pension/health benefits commission warn

pink cadillac
What It Is: Under the Affordable Care Act, a 40 percent excise tax will be imposed on higher-cost individual and family health insurance policies starting in 2018. The tax, which would be imposed on both government and private-sector employers, is currently scheduled to be levied on all individual insurance policies costing $10,200 or more and on family plans costing $27,500 and up.
Why It Matters: The “Cadillac Tax” would hit New Jersey hard, with Gov. Chris Christie warning that the state could end up paying $261 million in excise taxes in 2018 and $837 million by 2022 — projections that presumably include both public- and private-sector plans.

For state and local governments enrolled in the State Health Benefits Plan, whose most popular plans are already close to the 2018 cost threshold, “it is projected that the ACA will increase the State Health Programs’ costs by an additional $58 million in FY2018, rising to $284 million by 2022,” the New Jersey Pension and Health Benefits Study Commission appointed by Christie stated in its interim report in September.

What Is Its Purpose? The chief purpose of the Cadillac tax was to give both employers and employees an incentive to hold down the cost of health spending by giving them an incentive to shift from expensive traditional plans to lower-cost policies with higher deductibles that would discourage employees from using healthcare services they didn’t really need. But the tax also was intended to help finance the Affordable Care Act by generating an estimated $12 billion in 2018 and $20 billion in 2019 to pay for the cost of providing healthcare for the uninsured, according to Congressional Budget Office estimates.

Is It Fair to New Jersey? No.

“New Jersey is a relatively high-cost state,” as Christie’s pension and health benefits commission noted, and “the ACA excise tax is not adjusted for geographic differences within the United States.” The panel noted that “even a well-designed program in New Jersey is likely to have higher-than-average-costs due to the higher cost of care in the State.”
As the commission’s interim report noted, a back procedure that would cost an average of $22,397 in a New Jersey hospital would cost about $9,558 in the South and $10,482 in the Midwest. Similarly, a spinal procedure that cost $28,428 in New Jersey would run just $14,831 in the South and $11,380 in the Midwest.

The net effect of the Cadillac tax under Obamacare is to shift the cost of caring for the uninsured disproportionately to high-cost states in the Northeast and on the West Coast. The Affordable Care Act is not the only federal program that has this effect: Federal reimbursement rates for Medicaid, the massive federal-state program that provides healthcare to the poor and the disabled, are calculated according to a formula that takes into account the average per capita income for each state. Consequently, New Jersey, New York, California, and Connecticut are among 15 states that get the minimum 50-50 federal reimbursement, while Mississippi, West Virginia, Arkansas, South Carolina, Idaho, and Utah all get the federal government to pick up more than 70 percent of their costs.

What Is the Impact Of the Cadillac Tax Likely to Be In New Jersey? Christie already made the Cadillac tax one of the chief talking points of his “No Pain, No Gain” tour last summer to drum up public support for cuts in state pension and health benefit costs. His commission is likely to recommend measures designed to keep New Jersey’s government health insurance costs below the projected $27,500 threshold for family plans and $10,200 for individual policies before the 2018 deadline.

The most logical way to do this, as the commission telegraphed in its interim report, is to create financial incentives for state and local government employees to choose preferred provider options (PPOs) or health maintenance organizations (HMOs) that restrict the choice of doctors and specialists more than the traditional plans in which most public employees are currently enrolled.

What Do Public Employee Unions Think About The Cadillac Tax? With state and local government employees paying an average of 29 percent of healthcare premium costs for individual plans and about 23 percent for family, couple and parent/child policies, there is a built-in incentive for public employees to figure out a way to keep healthcare premium costs below the Cadillac tax threshold, especially if they are going to be held responsible for paying 40 percent of the excise tax.

However, public employee union experts note that the Cadillac tax threshold is supposed to be adjusted according to a formula yet to be determined that would give credit to employers whose workforces have more women or are older than the national average — both of which are the case for New Jersey state government and school districts, although not for local governments that have a high proportion of police employees who tend to be mostly male and retire young as a result of New Jersey laws encouraging retirement for uniformed employees with 20 to 25 years of service.

Union leaders and health benefits analysts for the New Jersey Education Association and the Communications Workers of America have both urged Christie to focus on negotiating harder with healthcare providers and pharmaceutical companies to lower health premium costs instead of seeking to cut benefits by pushing plans with higher copayments and worse coverage.
Is the Cadillac Tax Definitely Going to Hit In 2018? The Obama administration has pushed back other Affordable Care Act deadlines in the past. The expected Republican takeover of the U.S. Senate in today’s election – along with an expected increase in the GOP majority in the U.S. House of Representatives – is likely to increase pressure on the White House to modify the Affordable Care Act, although Republicans are expected to lack the super-majority of 60 needed in the Senate to prevent filibusters and push through a repeal of Obama’s signature legislative accomplishment.

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