New York City’s unionized municipal employees and retirees enjoy some of the most expansive—and expensive—health-insurance benefits in the country. But in 2018, Obamacare’s tax on such generous plans will finally kick in, and public-sector union plans will be the first hit by the so-called Cadillac Tax. How much the penalty will amount to remains unknown, but one thing’s for sure: New Yorkers will wind up footing the bill.
Last year, as part of a contract deal with the teachers’ union, Mayor Bill de Blasio announced that he and the city’s unions had agreed to cut $3.4 billion in worker health-care costs over four years. Even with these “savings,” though, Gotham’s health-insurance spending is projected to grow 6 percent annually through 2018—totaling a whopping $6.2 billion that year. According to the Citizens Budget Commission, more than 90 percent of city employees are enrolled in plans that require no premium contributions from workers. Most other city governments require employees to pay something toward their health-care costs. In the private sector, such contributions are standard.
The massive cost of paying full freight for nearly half a million employees’ health care is one reason why the city budget will run a $1.4 billion deficit in 2018, according to de Blasio administration projections. Even without the looming Cadillac Tax, the city’s budgetary status quo is unsustainable. Making these expensive benefits even more costly is a recipe for fiscal disaster.
The ACA imposes a 40 percent excise tax on the value of health insurance costing $10,200 or more for individual plans and $27,500 or more for family plans. And because the tax is indexed to the general rate of inflation rather than to faster-growing health-care inflation, it will hit more plans each year. Researchers from the Johns Hopkins School of Public Health estimate that the tax will affect 75 percent of employer-provided plans within a decade of its implementation. It likely won’t take that long for the tax to hit New York’s typical HMO coverage plans for city workers. In 2013, one plan offered to workers cost $6,600 annually for individual coverage. Assuming that these premiums grow at the same rate as overall costs for the city’s health insurance, such a plan would cost over $9,000 annually by 2018. In just a few years, these plans would cross the Cadillac Tax threshold. Who will bear the burden? With no required contributions from city employees, local taxpayers will be on the hook.
In a just released collection of essays, my Manhattan Institute colleague Paul Howard and various other experts offer smart steps that employers—both public and private—can take to avoid this. The first thing that New York City should do is commission a publicly available analysis from a nonpartisan source to put a dollar figure on this looming problem. Whether that figure turns out to be lower or higher than expected, it’s better faced sooner than later. The Cadillac Tax is not going away.