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

Coleman Drake (), Lucas Higuera, Fernando Alarid-Escudero and Roger Feldman
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Coleman Drake: Division of Health Policy and Management, University of Minnesota
Lucas Higuera: Division of Health Policy and Management, University of Minnesota, and Medica Research Institute
Fernando Alarid-Escudero: Division of Health Policy and Management, University of Minnesota
Roger Feldman: Division of Health Policy and Management, University of Minnesota

American Journal of Health Economics, 2017, vol. 3, issue 4, 455-476

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 (search for similar items in EconPapers)
JEL-codes: C63 H30 I18 (search for similar items in EconPapers)
Date: 2017
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