Cadillac tax: A huge car wreck for employers?
By now, you’ve probably heard of the Cadillac tax, the piece of the Affordable Care Act that levies a 40% excise tax on the cost of health insurance coverage above a certain threshold.
That’s a big tax, but most employers don’t seem too concerned with it. There are likely a couple reasons for this. One, it goes into effect in 2018, which still seems a long way off. And, two, since it’s called the Cadillac tax, most employers don’t seem to think it could possibly apply to their health insurance plan. They know they don’t have “Cadillac benefits” so they aren’t focused on it.
But I’m here to tell you that you need to start paying attention to this tax, and you need to start paying attention now.
Starting in 2018, employers will have to pay a 40% tax on the cost of health plan coverage exceeding $10,200 for self-only coverage and exceeding $27,500 for other-than-self-only coverage (e.g., “employee plus one” or “family” coverage). If an employer is self-insured, they are responsible for the payment; if they’re fully insured, the carrier is responsible, but this will surely impact the rates the employer pays. The tax cannot be written off corporate taxes, so it’ll sting twice.
According to the Congressional Budget Office (CBO), the tax is expected to generate $5 billion in revenue in 2018, then $34 billion by 2024 as more employers meet that minimum threshold.[i] A 40% penalty is a pretty good incentive to avoid doing something but, at the same time, the CBO is clearly expecting a lot of employers to pay the tax to help fund the ACA. A recent study promoted by the Council of Insurance Agents and Brokers projects that 42% of employers will have to pay the tax for 2018.[ii]
You’re probably wondering whether so many employers really have such rich benefits plans. The short answer is “not really.”
However, the tax is based upon the cost of the insurance an employer offers, not on the quality of the benefits offered. Unfortunately, there are a lot of firms paying Cadillac prices without having Cadillac plans; they’re overpaying. In most of these cases, the employer’s underlying base rates and a relatively high number of claims have caused their rates to jump through the years. Meanwhile, we all know that insurance prices have been steadily increasing for decades. Medical inflation and bad claims experience compounds over time to create a difficult scenario, and it’s a scenario that could cost you an extra 40% — depending on the size of your workforce — and could very quickly turn into millions of dollars you owe the government.
There are two things plan sponsors need to do:
1. Take a closer look at the health benefits you offer and the overall cost of your medical program to determine whether you’re over the threshold.
2. If you are, that means you need to take steps to reduce your exposure by reducing utilization and claims expenses.
Employers have a heavy incentive to avoid the tax. One way to do that is to reduce the coverage you offer your employees, often by raising deductibles. However, just because you raise deductibles doesn’t mean you reduce utilization or claims expense. The smart approach for employers is to keep employees as healthy as possible, and thereby reduce episodic care.
The other option is to manage your claims better to lower your expense by decreasing utilization and managing claims better, i.e., helping your employees to become healthier so that they ultimately don’t use their insurance as often. This is not a change that can occur overnight; you can’t issue a memo ordering your employees to be healthier. What employers have to do — starting now — is to think strategically about how best to make employees healthier.
Wellness and disease management programs create a win-win for the employer and employee. Though many employers have embraced this idea, seeing results takes patience. While the Cadillac tax doesn’t hit for two-and-a-half years, it’ll likely take that long to institute a program that will have a significant positive impact on your workforce. And that means you have to be thinking about it now.
The other piece worth considering is a private exchange. A private exchange, done well, provides freedom of choice for the employee and cost controls for the employer, who can disperse risk across less expensive benefit plans. Again, this strategy will take a couple of years to have a worthwhile impact, and therefore employers should be considering this option now.
There are plenty of employers who seem to think that the smart strategy is to wait for the results of the 2016 presidential election and hope that whoever wins throws out the Cadillac tax or lobbies Congress to revise the current regulations. But hope is not a strategy. Similar to passing a car on a blind curve and wishing for the best, hope can get you into deep trouble.
So let’s start planning for how you’re going to avoid paying this tax.