Caddy Smack: 'Cadillac' tax forcing employers to shift gears
Although it doesn’t kick in until 2018, the so-called “Cadillac” tax on high-cost health plans is already on employers’ radar. It’s not dead center of the screen, but off to the side and gaining speed, even with all the other Affordable Care Act balls in the air and even after employers got some welcome breathing room with the one-year delay of the law’s employer mandate.
The reason employers are beginning to plan for this tax is because in order to avoid it, they will have to reshape the health plans they offer to employees. Some believe the provision was meant to penalize employers that offer generous health insurance plans to highly compensated executives, while others see it as a cost-cutting move. Whatever the motivation, smart companies are beginning to do some number crunching.
Hitting the target?
Under the ACA, an employer or a health insurer that offers an annual health insurance plan that costs more than $10,200 for an individual or more than $27,500 for a family in 2018 will pay a 40% excise tax on the amount exceeding either of those cost thresholds. Under one hypothetical scenario, a 40-year-old woman with $35,000 in family coverage under an employer-sponsored plan would pay a 40% tax on the amount over $27,500. In subsequent years, the thresholds would be adjusted based on medical inflation.
Some believe the label “Cadillac” is a misnomer because the pricey health plans that could be subject to the tax are not the sole province of highly compensated executives, but pertain to any expensive plan. Given the higher utilization of health care associated with an aging workforce, employers who are long on overall staff experience could also meet the triggering thresholds.
There is some disagreement about this point in the provider community, but some believe the Cadillac tax could apply to more plans than its moniker suggests. “It’s not just for the executives,” said Brad Niebuhr, a senior account executive and partner with M3 Insurance Solutions. “A lot of employers, if they continue to have certain increases each year, are going to hit that Cadillac tax.”
To avoid the 40% tax, employers can scale back more generous benefits, or they can ask more in terms of cost sharing from employees, mostly in the form of higher deductibles (which lower the premium), higher co-pays for medical services, and having employees pay a higher percentage of co-insurance after the deductible has been met.
Part of this “skin-in-the-game” theory is that consumers, knowing they will have more out-of-pocket costs, will be more judicious about their health care spending and perhaps adopt better health habits. The flip side of that is that additional cost sharing will create incentives for people not to get an annual checkup or not fill all of their prescriptions, so while they become more cost-conscious health care consumers, they also could become substandard patients.
Niebuhr believes the bulk of the changes will involve cost sharing because ACA coverage mandates could limit what can be done on the benefit side, but he advises employers to look into coverage limits. “We may have even more coverage mandates going forward,” he noted. “I don’t know that for sure, but that is something an employer could look at — taking away some coverage if they are still allowed to do so.”
Lon Sprecher, president and CEO of Dean Health Plan, will approach this issue as both a health plan executive and as an employer with a staff of about 575 people. At the moment, he does not believe the tax would apply to a high percentage of Dean’s group plans. Sprecher said that in today’s dollars, the monthly breakdown for these thresholds is $850 for a single premium and about $2,290 for a family premium. Of Dean’s 1,500 group plans, only 29 would exceed those thresholds today, which is about 2.2% of its total group member population.
Sprecher believes groups of more than 100 generally will have more flexibility on benefit and price design than a group of 50 and fewer. He said that by 2017, groups of 50 and fewer would pretty much have their benefit plans dictated by the federal government. “The majority of these groups that would be hitting the thresholds are groups above 100, and they won’t be as regulated on the benefit side as the small group individuals are,” he stated. “They will have a lot more flexibility to adjust benefit costs between now and 2018.”
With this flexibility, Sprecher believes affected companies will avoid the tax with a combination of cost sharing and coverage changes because there are only so many dollars that can be shifted to employees. “The so-called ‘benefit buy-downs,’ which is shoving more of the cost to the individual employee as opposed to the employer, will only get you so far,” he stated. “We’re reasonably close to that tipping point right now, and over the next couple of years employers are going to have to look at actual benefit changes.”
To control costs and avoid the Cadillac tax, Sprecher also said employer groups, in collaboration with their insurers, would have to be more engaged with respect to prevention, wellness, and disease management. This includes the care management of employees with “co-morbidities” such as high blood pressure and diabetes.
Jeff VerVoort, director of human resources for Morgan Murphy Media (WISC-TV), also foresees a balanced approach, with cost sharing as the first option. WISC employs 100 people, and Morgan Murphy employs another 15 to 20 at Madison Magazine who are on the same health insurance plan. According to VerVoort, the way things are trending, the station would come close to meeting the Cadillac tax thresholds in 2018 or 2019. “We’re looking at perhaps some cost-sharing changes, but we’ll also have to look at a reduction of plan design, basically trying to move to more of a consumer-driven, high-deductible type of plan,” he said.
VerVoort agrees that with cost sharing comes a low-utilization risk, especially with younger and healthier employees who don’t get annual physical examinations and other preventive care. He said the potential for low utilization could be mitigated by workforce education and a more intense focus on getting employees to take a more active role in their health, a nod to workplace wellness programs.
Dawn Gorsuch, director of human resources for Royle Printing in Sun Prairie, said her company’s current projections indicate the Cadillac tax will apply in 2020. The company, which employs 200 people, has had preliminary discussions on cost sharing and benefit design, but no definitive strategy is in place.
“I have to believe, or at least I hope, that the government will continue to reassess that because the Cadillac tax is not what it’s turning out to be,” she stated. “The projections are that most employers are going to be faced with that tax.”
Timing is everything
Niebuhr cited four possible scenarios for employers. The first two involve keeping their health plan, but one involves the possibility of waivers and one does not. In options three and four, employers drop their plan but in one case they don’t increase employee salaries in order to compensate and in one case they do increase salaries.
“When we have some clients who look like they are going to hit that, as of now, we are not making any changes, but come 2015 or 2016 at the latest, if they are still going down the road of hitting that tax, that’s where you are going to have to start making those benefit changes,” Niebuhr said. “As of right now, although we’re advising them whether or not they would hit the thresholds, we are not for the most part making any benefit changes for 2014.”
His advice on the timing benefit changes still stands, even though the employer mandate, which pertains to businesses with 50 or more employees, has been pushed back to Jan. 1, 2015. The mandate requires larger employers to either “pay” fines for dropping employer-provided coverage (and dumping their employees onto a health insurance exchange established under the ACA) or “play” by continuing to offer coverage.
Gorsuch said that Royle, if it continues to track toward the Cadillac tax thresholds, would look at changes in the years before the tax applies. “We don’t want to have an abrupt and significant change when the time comes,” she said.
What about 2014?
According to Niebuhr, employers will be looking at benefit changes in 2014 to lower costs, but not necessarily due to the Cadillac tax. There are other ACA fees to consider, including a 3% tax on health insurance premiums that will be assessed for the 2014 plan year. The tax might compel employers to offset their 2014 renewal increases by making benefit design changes.
For WISC, which has already completed its plan renewal, the tax increase was built into the slightly lower rates it just negotiated with a new insurance carrier. The reduction was partially due to the group’s favorable claims experience of the past year. “We were able to negotiate a very favorable rate,” VerVoort said. “Of course, that’s all relative. It’s favorable based on what it could have been.”
Ultimately, said VerVoort, the reform will be judged on three criteria: how much consumers pay for health care, whether patients can see the physician they want to see, and whether they get the treatment they need when they need it. “As we go through this, there is a lot of skepticism out there about whether or not those things are going to happen with health care reform,” VerVoort said. “This is kind of the scary thing.”
According to Gorsuch, the potential impact of the tax will prompt Royle to start its annual renewal process — plan design discussions included — sooner than usual. It’s her understanding that the providers in the Madison market will
either identify the 3% fee as a separate line item or build it into their initial bids.
With both short- and long-term changes to worry about, and a frustrating lack of regulatory guidance, human resource directors feel like they are taking a shot in the dark. “I can learn something new about this act every day,” Gorsuch said. “I know that 2014 is on everybody’s radar, because that is when the marketplace exchanges are going to be implemented and that’s when some of the fees start to hit.
“You really need to consider some of the other, broader sweeping changes that are years out on your radar because the decisions that you’re starting to make now are going to lead into how you address those issues — whether it’s 2018 for other people or 2020 for us.”
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