How Will the Cadillac Tax Affect Private Insurance Plans?

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DESCRIPTION (provided by applicant): The Affordable Care Act (ACA) significantly changes the United States health care and one of its most major and influential component is the introduction of an excise tax on high premium insurance plans in 2018, commonly referred to as the "Cadillac tax." The tax is designed to increase cost-sharing in health insurance benefit design, decrease medical costs, and act as a primary funding source to counter the insurance expansions in the ACA. Surprisingly, though, the Cadillac tax has received relatively little attention compared to other components of the ACA by researchers. The proposed research aims to fill this gap in the literature by providing both theoretical and empirical research on the implications of the Cadillac tax. A stated purpose of the Cadillac tax is to effectively reduce or even eliminate the tax subsidy for health insurance in the United States tax code. Employers and employees can purchase health insurance in pre-tax dollars, reducing the cost of health insurance and promoting the purchase of overly- generous coverage. The tax subsidy has frequently been blamed for the high use and cost of medical care and economists have attributed annual welfare losses totaling billions of dollars to the tax subsidy. While there is some evidence that the tax subsidy promotes the popularity of "more generous" health insurance, the literature offers little guidance about what "more generous" implies. What would plans look like without the tax subsidy? The proposed project uses a recently-introduced theoretical model which relates the tax subsidy to plan characteristics and cost-sharing generosity. The project will extend this model to account for the Cadillac tax and provide theoretical predictions and guidance for the empirical work and future empirical work in this field The empirical research on the tax subsidy is also limited, focusing on a few select outcomes. The tax subsidy is an especially interesting policy to study because it is similar to the Cadillac tax and there are numerous sources of variation in the tax subsidy which can be exploited for empirical research. This proposed research project will use these sources of variation to understand the implications of the tax subsidy and predict the ramifications of the Cadillac tax in 2018. The project will study the impact on plan characteristics, medical utilization, total medical costs, and insurer payments. We would expect that the Cadillac tax should reduce cost-sharing, reduce insurance generosity, and reduce medical costs. The empirical section of this project will quantify those effects. Using these results, the project will calculate the economic welfare cost of the tax subsidy and potential welfare gains of the Cadillac tax in 2018 and beyond.