Its never too early for employers to examine ways they can minimize their exposure to the 40% excise tax slated to take effect in 2018 on so-called Cadillac-style health plans under the Affordable Care Act. The recommendation comes courtesy of Sibson Consulting, whose 2014 First Quarter Issue of Trends addressed the issue.
This is going to be a big deal, says David Johnson, a vice president and senior health consultant with Sibson, noting that it could potentially cost employers a lot of money with a 40% excise tax being applied to amounts over the [ACA] thresholds.
An assessment will be made on plans that exceed an annual threshold of $10,200 for individual coverage and $27,500 for family coverage. Those thresholds will increase by $1,650 for individuals and $3,450 for families for a number of individuals. They include retirees over the age of 55, those who work in high-risk careers and a blue-collar workforce that repairs or installs electrical or telecommunications lines. Value is generally measured by the plans COBRA rate, according to the Sibson issue brief.
Mindful of the need for plan design changes, Johnson recommends lowering co-pays and deductibles, removing annual maximums and limits on out-of-pocket expenses, or adopting a more value-based plan design approach for disease management programs.
Otherwise, he notes that the annual penalty for unaffordable coverage will be $3,000 multiplied by the number of employees who qualify for subsidized care. Employers need to make sure they keep the cost of single coverage low so they avoid this penalty, he says.
One way to make the numbers work would be to raise premiums for employee spouses or children, which Johnson considers a loophole because the affordability test ties to the cost of single coverage rather than family coverage. Having said that, he expects more employers will consider raising employee contributions on family coverage or reconsider offering coverage to spouses mindful that dependent children can be covered up to age 26.
Another area thats ripe for re-evaluation in the face of the Cadillac tax is vendor management. Johnson believes employers could become more proactive about securing deeper discounts on prescription drugs or claims administration audits to better manage health plan eligibility.
This effort also could include a closer look at whether it makes more sense to pursue a self-funded or fully insured arrangement. Johnson senses that the latter option might actually be more appealing, despite stepped up federal oversight on fully insured plans and ERISA exemptions under the ACA. If an employer transfers the risk back to the insurance company and says, youre on the hook, now, ultimately its the claim costs that are going to drive the total cost to the employer, whether theyre fully insured or self-insured, he says.
But at least on a fully insured basis, theres some predictability to what those costs are going to be each year, Johnson continues. Once you have the premiums, you know what youre paying for the year. On the self-funded side, you just never know what your costs are going to be, and thats particularly true on a smaller group where you lose the benefit of the law of large numbers.
He believes insurance companies will be careful not to exceed ACA thresholds on their fully insured products and trigger the Cadillac tax. Instead, he predicts they will focus on more aggressive disease management and workplace wellness programs, which offer employers the best opportunity to save money. His sense is that any such success will hinge on more effective communication strategies to improve employee engagement and awareness of what they can do to live healthier, including better adherence to a prescription drug regimen.
The reason thats so key, Johnson explains, is because the Cadillac tax is triggered not so much by the plan design, but by the underlying cost of the plan. So a plan could actually have somewhat sparse benefits, but if that plan covers a really sick population, they would have high costs.
Although its still four years away and the Obama administration has been relaxing compliance with some phased-in requirements under the ACA, his advice to employers is to assume the Cadillac tax will be levied without any changes and do what they can to minimize their exposure.
Bruce Shutan is a Los Angeles freelance writer.
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