How employers are preparing for the Cadillac tax
Although the Cadillac tax isn’t set to go into effect until 2020, employers are already adjusting their health plans in an effort to avoid the added expense.
The 40% excise tax on high-cost healthcare, which was created to help fund parts of the Affordable Care Act, has long been one of the most controversial aspects of the law for employers, because it could ultimately impose significant costs.
Lawmakers discussed delaying the tax to 2025 or 2026 as part of the healthcare debate in Congress over the summer, but for now, the tax remains slated to go into effect just over two years from now.
“The timeframe for plan changes at big companies is easily 18 months — and we’re not that far away,” says Jim Klein, president of the American Benefits Council.
A survey published last month by the National Business Group on Health found that uncertainty surrounding the surcharge is influencing efforts to control healthcare costs for about 8% of large employers surveyed, looking out over the coming year.
Still, while the majority of employers said they are maintaining their strategies to rein in costs regardless of the tax, Steve Wojcik, vice president of public policy for NBGH, says that the issue remains a “top priority” for many employers.
“Although our data show that the uncertainty about it isn’t having a huge influence on healthcare strategy, it’s definitely top of mind,” he says.
Kim Flett, compensation and benefits services managing director at accounting firm BDO, says that she advises clients to form internal committees of benefits experts to discuss employer options for tweaking healthcare offerings, in light of the upcoming tax, in addition to consulting with health insurance providers and accountants.
As part of that process, employers are considering certain tradeoffs across their benefits package — for example, whether cuts in retirement contributions might be required to maintain high-priced plans that could trigger the tax.
“Now that it’s looming, we’re seeing a lot more concern from employers,” she says.
Observers say there are a number of changes employers can make to their health plans to help reduce the cost of coverage and avert the tax, at least temporarily. Those include efforts to shift healthcare costs onto employees, through raising deductibles and increasing co-payments or co-insurance rates. Such changes face some statutory limits, however, as the ACA requires all out-of-pocket expenses to be capped at $7,150 for individuals and $14,300 for families in 2017.
More employers also are considering the move to high-deductible plans. The NBGH survey found that the vast majority (90%) of large employers are likely to offer consumer-driven healthcare plans by 2018, with 39% of employers offering only higher deductible plans by that time. Consumer-driven healthcare plans are most commonly designed as high-deductible plans paired with a tax exempt health savings account, and the plans have been shown to help reduce healthcare costs.
While many employers were already moving toward offering high-deductible plans, the threat of the tax has “really turbo-charged the growth” of the plans, says Christopher Beinecke, a Dallas-based lawyer at law firm Haynes and Boone, who specializes in employee benefits issues.
NBGH’s Wojcik says that employers also are exploring improvements to their healthcare offerings in an effort to reduce coverage costs. Some are looking to provide tele-health options and worksite or nearby clinics to manage primary and preventative care. Other employers are partnering with accountable care organizations, which are networks of doctors and hospitals that provide coordinated care to patients.
“You’re paying for better delivered care that costs less,” Wojcik says of the efforts.
Experts said that the pacing of any changes to reduce healthcare costs is likely to be spread out based on an employer’s specific needs. Some companies already began making plan adjustments in the years following passage of the ACA in 2010, because the tax was initially designed to go into effect in 2018. (It was delayed for two years in December 2015.)
Other employers are likely to make changes based on when their plans are expected become subject to the tax. The tax is projected to go into effect for plans in excess of $10,800 for individual coverage and $29,050 for family coverage in 2020. Those figures will adjust each year with inflation.
“Employers by and large, if they haven’t already, will probably begin to make their gradual changes two or three years out from hitting the excise tax,” Beinecke says.
NBGH found last year that 53% of large employers expected at least one of their health plans will exceed the tax threshold in 2020, while 56% estimated that their most popular health plan will hit the threshold by 2022. By 2030, 95% of employers estimated that their highest enrollment health plan will be subject to the tax.
That’s why many employers are starting to make changes gradually over time in advance of those dates.
“The fact of the matter is you cannot make drastic changes to benefits overnight without causing a fiasco,” says James Gelfand, senior vice president of health policy at the ERISA Industry Committee.