ECONOMIC REPORT OF THE PRESIDENT

provide excessively costly and inefficient health plans. This in turn undermines
the business case for payers to make the plans they offer employers
more efficient, including by adopting new approaches to provider payment
developed in the public sector and making their own investments in better
benefit designs and better approaches to provider payment.
The ACA addressed this problem by including an excise tax on highcost
employer-sponsored coverage. The tax, currently scheduled to take
effect in 2020, will levy a 40-percent tax on employer plan costs in excess
of about $29,000 for family coverage and about $10,700 for single coverage.
Plans with higher costs due to factors such as the age-sex mix of their enrollment
or the industry in which their enrollees work are eligible for higher
thresholds. The tax applies only to the portion of plan costs in excess of the
threshold; for example, a family plan with a cost of $29,100 in 2020 would
pay just $40 in tax. For these very high-cost plans, this structure counteracts
the perverse incentives to offer overly generous coverage that existed under
pre-ACA law, while preserving strong incentives for employers to offer
appropriate coverage. The Treasury Department estimates that 7 percent of
enrollment in employer-sponsored coverage and around 1 percent of plan
costs will be affected when the tax takes effect in 2020.
The most direct effects of the tax will be on enrollees in the high-cost
plans affected by the tax. As their employers take steps to make their plans
more efficient, workers at these firms will see lower premiums and correspondingly
higher wages, which Congressional Budget Office and Joint
Committee on Taxation estimates imply will be around $43 billion in 2026
alone.21 However, the benefits of this reform are likely to be felt throughout
the health care system, not just by enrollees in highly inefficient plans. Just
as improvements in Medicare’s payment systems generate spillover benefits
for the rest of the health care system, payment innovations adopted by inefficient
plans are likely to generate benefits for enrollees in many different
types of coverage. Similarly, the excise tax on high-cost coverage will encourage
plans and employers to engage in more aggressive price negotiation
with medical providers. By weakening the bargaining position of providers
relative to plans, the excise tax will help plans not directly affected by the tax
secure lower prices for their enrollees (Baker, Bundorf, and Kessler 2015).
21 This estimate was derived from an August 2016 estimate by the Congressional Budget Office
(CBO) and Joint Committee on Taxation (JCT) that repealing the excise tax would increase the
deficit by $20 billion in 2026 (CBO 2016a). CBO/JCT assume that roughly three-quarters of the
fiscal effects of the tax arises from the increase in payroll and income tax revenue as workers’
wages rise (CBO 2015a). Calculations based on tables published by the Urban-Brookings Tax
Policy Center imply that the average marginal tax rate on labor income for individuals with
employer coverage is around 35 percent (see Urban-Brookings Tax Policy Center Tables T13-
0253 and T14-0091). Combining these estimates implies an increase in wage and salary income
of $43 billion (=[$21 billion * 0.75]/0.35).
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