Opinion: Preparing For the Cadillac Tax

steve_honig_0514.jpgCould this tax destroy employer sponsored health care?

The so-called Cadillac tax, which takes effect in 2018, will impact employers who provide “rich” coverage with single premiums exceeding $10,200 or family premiums in excess of $27,500. 

Employers with any premium in excess of the limits will be taxed at a rate of 40 percent on the differential. The tax is an excise tax, so it’s not deductible as an expense and it does apply to both fully insured and self funded programs.

Some believe the tax was designed to dissuade employers from offering overly generous health benefits on a tax-favored basis. Others believe the tax was simply tacked onto the end of the bill as a means to provide a way to reconcile the cost of the PPACA as a revenue neutral bill.

Fundamentally, there are many in Congress who have wanted to rid our system of the tax deductible benefits of employer provided benefits that have existed since World War II. Many may recall the attack on FSAs and POP plans during the Clinton Administration.

Initial estimates by consulting firm Mercer place roughly one third of employers above the threshold by 2018 and suggest that number would increase to almost 60 percent by 2022. This growth in the excise tax is a direct result of the way the numbers are indexed each year.

PPACA requires that the base numbers of $10,200 and $27,500 use the general CPI inflation index + 1% added (+ 1% ends in 2020),estimated to run at 2-3% per year over the next five years and not the health care inflation index which has historically run at 9.5%. Assuming the base numbers index at a lower rate than the health care trend, eventually every employer would be subject to the tax.

This is not a popular tax with either party, but especially for the Democrats, with labor unions comprising a substantial part of their constituents. Government employees, teachers, and labor unions would all be impacted with a significant reduction in benefits as plan sponsors make benefit cuts to keep premiums below the tax threshold levels.

According to NJ Spotlight, it is estimated that county, municipal and school budgets would pay an extra $177 million in fees in 2018 and $258 million in fees by 2022. Of course, there is always the possibility of waivers as special interest groups continue to lobby.

Some could argue this tax will have a sweeping effect in the Northeast and West Coast, where health care costs and premiums are higher. Others say employers might intentionally avoid hiring older employees to reduce premiums.

It’s a big reason why independent budget scorekeepers think Obamacare won’t add to the deficit, and why the tax will be tough to repeal. The charge, which is projected to generate $87 billion over a decade, ramps up slowly, but is estimated to generate so much money that it cover the cost of providing insurance subsidies through the program’s exchanges. With the CLASS Act revenue eliminated along with the Medicare “Doc Fix,” this is going to be a difficult fight to get Congress to eliminate a tax that brings in so much revenue.

The tax goes beyond the basic cost of the traditional health plan. It includes dental, vision, certain supplemental insurance plans as well as the COBRA equivalent rate for HRAs, and employee and employer contributions for FSAs, and HSAs.

These supplements to high deductible coverage with lower premiums seem to be one of the few examples of controlling health care spending, yet they are included in the tax calculation as the bill is currently structured.

New Jersey, with the fourth highest health care costs in the country, is seeing carriers take a leadership role as they release alternative health plans that reward providers based upon outcomes and not simply based upon the amount of care provided.

At some point, when will employers say: “We can no longer afford to provide employer sponsored benefits. Here’s $5,000. Here’s the web site for the federal or state marketplace. Good luck.”

If the soothsayers predicted that this administration’s ultimate goal was to move to a single payer system, they probably looked at 2018 and saw the handwriting on the wall.

It’s not too late for us to demand our lawmakers resolve this issue, but the clock is ticking. It’s also perhaps the best incentive to have employer groups look at implementing a wellness program to drive down health care spending when the group is large enough to be experienced rated.

When consumers begin to understand the relationship between costs associated with bad behavior (25-75% of what we spend on healthcare is related to what we eat drink, and smoke) perhaps we can finally focus on a long-term solution to controlling costs.

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