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

American Journal of Health Economics, Vol. 3, Issue 4, Forthcoming

44 Pages Posted: 2 Mar 2017  

Coleman Drake

University of Minnesota - Twin Cities - Division of Health Policy and Management

Lucas Higuera

University of Minnesota - Twin Cities

Fernando Alarid-Escudero

University of Minnesota - Twin Cities - Division of Health Policy and Management

Roger Feldman

University of Minnesota - Twin Cities - Department of Economics

Date Written: May 2016

Abstract

The Affordable Care Act imposes a 40 percent excise tax on high-cost “Cadillac” health insurance plans in excess of defined thresholds beginning in 2020. Using economic theory and a microsimulation model, we predict how employers will respond to the Cadillac tax by adjusting wages and health insurance benefits. In its first year, 13.34 percent of individual and 16.73 percent of family employer-sponsored health insurance plan holders will be affected by the Cadillac tax; these percentages will increase to 35.33 and 42.01 percent, respectively, by 2025. Over 99 percent of those affected will reduce their health insurance benefits to the thresholds. Effectively, the Cadillac Tax will impose a hard cap on health insurance benefits, causing a clustering of benefits at the thresholds and a sharp reduction in the variance of benefits. Revenue from the Cadillac tax through 2025 will total $204 billion, all but $42 million of which will stem from “indirect” revenues – health insurance benefits shifted into taxable wages. This shift will increase wage growth and decrease benefit growth for those affected by the Cadillac tax. We simulate a cap on the tax exclusion of employer-sponsored insurance premiums and conduct sensitivity analyses with linear regression metamodeling.

Keywords: Health Insurance, Affordable Care Act, Simulation Modeling

JEL Classification: I18, H30, C63

Suggested Citation

Drake, Coleman and Higuera, Lucas and Alarid-Escudero, Fernando and Feldman, Roger, A Kinked Health Insurance Market: Employer-Sponsored Insurance under the Cadillac Tax (May 2016). American Journal of Health Economics, Vol. 3, Issue 4, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2925303

Coleman Drake (Contact Author)

University of Minnesota - Twin Cities - Division of Health Policy and Management ( email )

516 Delaware St SE
Minneapolis, MN 55455
United States

HOME PAGE: http://https://sites.google.com/a/umn.edu/colemandrake/

Lucas Higuera

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Fernando Alarid Escudero

University of Minnesota - Twin Cities - Division of Health Policy and Management ( email )

516 Delaware St SE
Minneapolis, MN 55455
United States

HOME PAGE: http://sites.google.com/a/umn.edu/fernando-alarid/

Roger Feldman

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
15-205 Phillips-Wangensteen
Minneapolis, MN 55455
United States
612-624-5669 (Phone)

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