Cadillac tax causing firms to shed expensive policies
2018 phase-in carries stiff penalties
Many employers who offer generous health insurance packages are not looking forward to 2018. That’s when the so-called “Cadillac tax” will place a 40% excise tax for premiums paid by insured and self-insured employers exceeding $10,200 for individual premiums or $27,500 for family premiums.
The tax is intended to raise revenue to offset the cost of expanding coverage under the Affordable Care Act (ACA); discourage excessively-generous health plans that are subsidized by federal and state taxpayers; encourage wiser utilization of healthcare resources; and recapture the marginal tax subsidy received for the value of benefits above the “Cadillac” threshold, explains Devon M. Herrick, PhD, senior fellow and health economist, National Center for Policy Analysis, Dallas, Texas.
Some employers are dreading the hefty tax--whose name is derived from the Cadillac automobile because it represents American luxury--as it will require employers to assess if any of their plans exceed the levels set by law in 2018 and then each year thereafter. “Employers will have two decisions: Pay the tax, or change their benefit plans to ensure that they do not trip the 'Cadillac tax,'” says James R. Smith, FACHE, senior vice president, The Camden Group, New York, New York.
Because the tax is meant to steer more employers, both insured and self-funded, into less expensive plans, the end result could be higher deductibles and out-of-pocket costs for employees. That, in turn, could lead to employee discontent both with union and management, Smith continues.
According to a report from the American Health Policy Institute, from 2018 to 2024 the excise tax could cost 12.1 million employees an average of $1,050 in higher payroll and income taxes per year, if employers increase their taxable wages as they reduce the cost of healthcare benefits. Alternatively, these employees could see up to a $6,150 reduction in their healthcare benefits and little or no increase in their pay.
Steve Wojcik, vice president of public policy at the National Business Group on Health in Washington, DC, views the tax as a “built-in revenue generator for the government that entraps more and more plans over time. It doesn’t help the employer, the employee, the customer, or the shareholder.”
The Congressional Budget Office estimates the excise tax will result in approximately $5 billion in new taxes in 2018, $10 billion in 2019, $13 billion in 2020, and a total of $120 billion from 2018 to 2024.
Taking action now
Since the ACA’s passage in 2010, large employers have been using all of the tools in their toolbox to get their cost trends below the Cadillac tax thresholds. That includes improving employee health through stepped-up wellness programs; incentives for healthy lifestyles and rewards for wiser use of care; adding coaches, navigators, and shopping tools to help employees find the most effective providers and sites for care; selective contracting with higher performing providers; and accelerating the movement to account-based plans, Wojcik says.
In addition, employers have been modifying health plans by increasing deductibles, copays, and coinsurance levels, as well as increasing the cap levels of out-of-pocket expenses. “Tools are available on the web, apps, and mobile phones and other very handy ways to inform, influence, and motivate us for better and healthier behaviors both for ourselves and our wallets,” Smith says.
J.D. Piro, senior vice president and national practice leader, Aon Hewitt’s Health and Benefits Practice’s Legal Group, Norwalk, Connecticut, points out that the tax won’t hit all employers in 2018. “Everyone should be doing the calculations as to when the tax will hit,” he says. “Look at the timeline and at your options.”
The other side
Proponents of the "Cadillac tax" argue that excessively-generous health benefits are partly to blame for runaway healthcare spending. “Claims history has shown that people with more generous health benefits tend to have higher expenditures even when controlling for health status,” Herrick says. “There is also the notion that the taxpayer subsidy should not be open-ended; there is a limit to how much health benefits U.S. residents should be able to get tax-free.”
But because of the way the tax was designed, along with escalating healthcare costs, Wojcik points out that it will affect even high-deductible plans at the lowest-tier bronze level in state exchanges.
He notes that, since World War II, the U.S. government has made a conscious social policy decision to encourage employers to offer health coverage and employees to sign up for it by making it less expensive for both through tax rules. “Surveys consistently show that employees highly value their employer-provided coverage,” he says. “Right now, it’s still the best deal in town and changing the tax status could jeopardize it with no stable long-term alternative source of coverage yet on the horizon.”
Legislators weigh in
There is growing concern that most employee health plans will eventually become subject to the tax. “Health benefits have historically grown at rates more than double that of inflation,” Herrick says. “If the 'Cadillac tax' threshold rises at rates adjusted for inflation, then over time more and more plans could be subject to the tax.”
Estimates vary, but within two decades, more than half of plans could be subject to the tax. Herrick has seen estimates that the tax could impact nearly four out of 10 large employers in 2018.
Unions and some of their Democratic supports are keen to repeal the "Cadillac tax." In 2014 a repeal bill was introduced in Congress by Senate Finance Committee Member Pat Roberts (R-Kan.). “With the new Republican majority in Congress, there is talk of repeal and replace,” Herrick says.
But some Republicans support the concept of reducing the taxpayer subsidy on employer-sponsored coverage; at the very least, many Republicans would like to see the tax subsidy equalized for employer and individual coverage, says Herrick. “However,” he notes, “the GOP doesn’t necessarily support the convoluted way the 'Cadillac tax' erodes the employer subsidy over time.”
As it happened during the run-up to passage of the ACA, Wojcik expects efforts to repeal or mitigate the impact of the tax to ramp up as 2018 gets closer. “There is a lot of education of Congress occurring right now about the implications of the tax for employer-sponsored coverage since many members and their staff are new and others haven’t focused on the implications as much as with other ACA provisions,” he says. “Certainly employers, unions, insurers, and others will by lobbying the issue.”
Karen Appold is a freelance writer in Lehigh Valley, Pennsylvania.