‘Cadillac’ Plans Aren’t Affordable Care

The excise tax on rich health-benefit plans slated to take effect in 2018 could be ruinous for some companies. Is it time to start worrying?

Among the costs of complying with the Affordable Care Act, one potentially big-ticket item is far enough in the future that there is perhaps little cause for alarm. But it may not be a good strategy to sit idle for long, some experts say.

Employers that trigger the “Cadillac tax” could suffer severe financial effects. The controversial ACA provision will, starting in 2018, require self-insured companies to pay a 40 percent excise tax on the value of group health benefits — the total cost of coverage including both the employer’s and employees’ shares — that exceeds a threshold amount.

The tax applies to group plans offered by fully insured employers as well, but the law requires insurers to pay it. Those organizations won’t get a free pass, though. Observers agree it’s a forgone conclusion that insurers will pass that cost to their group customers.

A vintage pink Cadillac.

The Cadillac tax is much less pretty than this vintage pink Cadillac.

As the legislation is currently written, plans that cost more than $10,200 for individuals and more than $27,500 for families will be subject to the tax. Those thresholds may be altered before 2018 based on medical-cost inflation, and also may be adjusted for people in high-risk professions or those over a certain age or of a certain gender, according to a United Healthcare fact sheet.

Answering a recent Towers Watson survey of 420 benefits managers at employers with more than 1,000 workers, 44 percent of the managers said they are “very confident” they will trigger the tax if they don’t prepare for it by making changes to their health-care programs. Seventeen percent said they are “somewhat confident.” Thirty-one percent said the Cadillac tax will have a “significant influence” on their health-care strategy by 2015.

Changing plans enough to avoid the tax may be a rigorous exercise that transfers significant additional cost burden to employees. But what will constitute “preparing” to come in under the threshold, given that most employers are already making changes to their plans each year to keep up with rising costs?

“The excise tax provides a specific dollar goal, whereas most companies today don’t have a specific long-term cost goal,” says Tom Billet, a Towers Watson senior consultant. “To use a football analogy, it’s the difference between starting the game with a goal of scoring as many points as possible versus being behind by two touchdowns with three minutes left and knowing you have to score 14 points or you lose the game.”

But is there any need to start making preparations so far in advance? Absolutely, says Ron Fontanetta, the consulting firm’s senior health-care consulting leader. “It takes time to evolve and amend your program,” he says. “Companies don’t want to be in a position where they wake up in 2017 and realize they have to make dramatic changes in one year. They need to anticipate, based on their current cost structure, whether they are they likely to trigger the tax. And if they are, they should make changes over time in a thoughtful, rational, sequential way.”

Keep in mind that, of course, Towers Watson and other human-capital consulting firms — several others are also advising companies to get moving now — get paid to help companies adjust their benefits strategies.

Sheldon Blumling, an attorney with Fisher & Phillips who advises companies on health-care matters, notes that many experts in the field believe that either the Cadillac tax’s thresholds will be raised or it will be removed from the law altogether before 2018.

“All the corporate people I’ve talked to have said they’re waiting to make decisions around this,” says Blumling. “Worrying about an excise tax that’s four-plus years out is alarmist, as is much of what you read about health-care reform. There’s a reason that provision was pushed so far out, which is that it’s not very palatable politically.”

Ed King, CFO of 600-employee Marina del Rey Hospital and a principal at Hardesty LLC, a national executive-services firm focused on the office of the CFO, says the Cadillac tax is nowhere near his radar screen yet. “Things about that provision are likely to change,” he says. “I’m more concerned with what my costs are going to be in the next six to 12 months.”

The reality is, Blumling says, that very few employers are going to pay the tax. “That tax is going to set a standard for the value of group health plans, and employers and carriers are going to make sure their plans come in under the threshold. Nobody’s going to be interested in paying a 40 percent excise tax.”

In a recent address, Jonathan Gruber, an MIT professor who helped write the ACA, provided insight on the Cadillac tax. “Let’s be clear on what this is,” he said. “In America today if you are paid in wages you are taxed; if you’re paid in health insurance you’re not. So if [my employer asked me whether I] wanted a $1,000 raise or $1,000 in orthodontia benefits for my daughter, I would say, ‘if you give me a thousand-dollar raise I’m going to take home $600. I’ll choose the orthodontia.’”

That taxing system, Gruber said, has three fundamental flaws. First, it’s incredibly expensive. “If we taxed health insurance like we tax wages, we would raise $250 billion a year more in tax revenues. That’s twice what it would cost every uninsured American to buy health insurance.”

Second, tax-free benefits are unfair because the richer someone is, the bigger tax break that person gets, by virtue of being in a higher tax bracket.

Finally, and most importantly, it causes excessive health-care consumption. “People are buying health care with 60-cent dollars, so they buy too much of it,” Gruber said.

The Cadillac tax, he points out, is a compromise between taxing all health benefits and taxing none of them. “It’s intended to neutralize the playing field between health insurance and wages. In doing so it’s going to exert enormous downward pressure on the most-expensive health insurance policies and be a key cost-control device.”

Photo credit: Gregory Moine

7 thoughts on “‘Cadillac’ Plans Aren’t Affordable Care

  1. Given current costs for plans with the coverages mandated by ACA, isn’t it possible that increases in health care costs could drive the cost of coverage for even today’s basic plans up enough to hit these thresholds?

  2. Yes, I would say that’s quite possible, though I think it’s far more likely that the thresholds will be moved higher or the Cadillac provision of the ACA will be repealed.

  3. I find it amusing/concerning that Gruber would conclude that should someone choose the salary, as opposed to the insurance benefit, somehow we would in buy more of it?? The $ (from the extra salary less taxes) could be used in a variety of ways that we most likely be pumped back into the economy….not a bad idea.

    I do think that a “total compensation package” should be considered by both the employer and the employee in terms of its comparison. This is obviously not the only consideration, but it should be a significant piece of the decision-making process on the part of all sides.

    The underlying issue (the Elephant in the room) is the frequency of hidden disparity in compensation. That issue needs to be addressed. Having been in the corporate world for many decades, I realize that someone will figure out a way to disguise what’s really happening, and figure out a “work-around” to virtually any rule/regulation that is put in place, but unless we continue to monitor, and hack away at this problem, the issue will only procreate with ultimately a bad result.

  4. The writer points out that the Cadillac thresholds may be adjusted for age and gender, however the cost factors have no regional adjustment factors. The differential in healthcare costs and insurance premiums across the United States is significant and utilizing the same rates in Santa Fe, New Mexico and New York, New York is foolish from an underwriting perspective, but will certainly fulfill the administration’s objective of generating revenue to support this legislation.

  5. I find it perplexing that the final and most important point is that the current tax system “causes excessive health care consumption”, yet ACA mandates that young, healthy people who currently don’t consume much health care must purchase health insurance. Isn’t this also considered “excessive health care consumption”? Or are they merely supposed to purchase the insurance, but never utilize the benefits? Flawed argument, but what can be expected — Gruber helped write the flawed law.

  6. Sounds like time to start looking for loopholes.

    Can a company get around the Cadillac plan tax by switching to a high deductible plan thus reducing the cost of the health insurance plan and instead providing a large company contribution to an HSA account for the employee?

  7. Sounds like time to start looking for loopholes.

    Yeap , you are right. This is what companies will do.

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