70% of House Supports Repealing the Cadillac Tax

Three hundred members of the House of Representatives signed on to legislation to repeal the Cadillac tax. Rep. Frank Guinta (R-NH) introduced H.R. 879, and Rep. Joe Courtney (D-CT) introduced H.R. 2050. The number of cosponsors signifies that nearly 70% of members in the House support the effort to repeal the Cadillac Tax. Congressman Frank Guinta (R-NH) said, “One way or another, the Cadillac Tax will meet its end. Three hundred cosponsors of legislation to permanently ax the tax is a milestone.”

The Cadillac Tax is a 40% tax on the cost of employer-sponsored health coverage that exceeds certain benefit thresholds – initially, $10,800 for self-only coverage and $29,100 for family coverage in 2020. More than just premiums are counted when determining the cost of the plan. The cost of wellness programs, on-site clinics and other plan features designed to reduce plan expenses are also included, so virtually everyone in an employer-sponsored plan would be affected. James Klein, president of the American Benefits Council, said “This tax does not just affect high value plans. It will hit workers, retirees, and families with ordinary coverage who have the misfortune to suffer catastrophic health events or have chronic conditions that are expensive to treat.”

Study Reveals Leading Healthcare Benefit Trends

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The Healthcare Treds Institute issued a massive survey of employee benefit trends. The good news is that employers are looking to insurance brokers and benefit consultants to help them evaluate health benefit designs and distribution models. Forty percent of employers say they will depend on insurance brokers to learn about new health benefit models, such as defined contribution plans and private exchanges, and 31% will depend on benefit consultants. Nearly 40% rely on insurance brokers to learn about health benefit designs and platforms.

“The ACA has created a dynamic marketplace in which brokers have a front row seat navigating in this new era,” according to the study. Human resource professionals have new responsibilities due to the ACA. Thirty percent are looking for help from benefit consultants. However, 30% are researching independently compared to 26% in the previous year. Employers gave the following answers to this question, “What partners would you depend on to help you learn about new health benefit designs and distribution models?”

  • Insurance broker 39.7%
  • Will research independently 30.8%
  • Benefit consultant 30.8%
  • Insurance carrier 24.4%
  • TPA 19.2%
  • None 15.4%
  • Trade Association 11.5%
  • Payroll company 10.3%
  • Other 5.1%

What Benefits Employers Are Offering

About 40% of employers offer three or more health plan options, which are usually a PPO, an HDHP, and an HMO. Employees are choosing HDHPs (39%) over HMOs (35%). The following is a breakdown of benefits that employers offer:

  • PPO 59.5%
  • Flexible spending account (FSA)59.5%
  • Health savings account (HSA) 52.1%
  • High deductible health plan (HDHP) 38.8%
  • HMO 34.7%
  • Self-insured plan 22.3%
  • Health-reimbursement arrangement (HRA) 15.7%
  • Catastrophic insurance 8.3%
  • Dental plan 73.6%
  • Vision plan 67.8%
  • Prescription drug coverage 67.8%
  • Mental health coverage 52.1%

How Healthcare Reform Has Affected Employee Benefit Packages

Forty-nine percent say that healthcare reform will increase employee cost-sharing; 39.6% say it will increase premium contributions, and 3.6% say it will shift their company towards a defined contribution plan. Employee cost-sharing has risen every year for 10 years. Employers and the medical industry have had to deal with other ACA implications, such as the employer mandate and new compliance, which has caused an increase in capital and human resources. Employers have done the following in response to health reform:

  • Increased employee cost sharing 49%
  • Has had no effect 30%
  • Enhanced wellness/preventive health programs 23%
  • Increased employee engagement in their health 19%
  • Increased employee engagement in reducing healthcare costs 18%
  • Adopted new wellness/preventive health programs 17%
  • Reduced covered benefits 15%
  • Added HDHPs/CDHPs 14%
  • Stopped offering healthcare benefits 9%
  • Shifted to a defined-contribution plan

The Cadillac Tax

The impending 2018 Cadillac Tax is a prevalent challenge for employers. The ACA 40% excise tax will be imposed on the portion of group health plan premiums that exceed specified thresholds. The concern may be more regional since it could be triggered in parts of the country where healthcare costs are high and less likely to be triggered in parts of the U.S. with below average healthcare costs. Thirty-five percent of employers are very concerned about the 2018 Cadillac Tax; 25% are somewhat concerned; and 30% are not concerned. Sixty-one percent are making no changes to their benefits in light of the impending Cadillac tax while 18% have changed plans to avoid the Cadillac Tax. Recent news reports along with lobbying efforts may be influencing the 61% of companies who have a wait and see approach about the Cadillac Tax.

Defined Contribution Plans

Employers continue to learn more about defined contribution plans and private exchanges with about 35% saying they are familiar with them. This is an increase of about 5% over last year. Twenty-eight percent say that exchanges help employees understand the value of their benefits. Twenty-five percent say that a defined-contribution plan would help employees understand the value of their benefits and make more cost-conscious benefit decisions.

Five percent of employers offer defined-contribution plans (not on a private exchange) while same offer defined-contribution plans on a private exchange. Also, 7% are considering offering a defined contribution plans on a private exchange while 53% have not explored defined contribution plans.

Fifty-five percent of employers who are considering a defined-contribution plan, say they would explore the option for 2017 or 2018. This suggests that near-term adoption will be gradual. But the adoption curve may steepen as the benefits of defined-contribution plans become better known.

Private Exchanges

Employers want private exchanges to provide many solutions including health spending accounts (62%), carrier integration (58%), COBRA compliance (56%), automation of premium payments (51%), and payroll integration (50%). Employers choose private exchanges to control costs and increase employee choices, which is why employers say, most often, that they are looking for health spending accounts. Incorporating consumer directed healthcare coverage, such as HDHPs, HSAs and HRAs, helps private exchanges create a competitive marketplace that promotes cost-savings for employees and employers.

To succeed a private exchange needs to provide broad choices and help participants in the selection process. Sixty-two percent of employers say that it is somewhat important to very important to have health-spending accounts in an insurance exchange. Also considered somewhat important to very important are carrier integration (59%), COBRA compliance (56.4%), and premium payment automation (53%). Employers say they would choose the following offerings in an exchange:

  • Plan and cost comparison tools 80%
  • Online capabilities 69%
  • Combined benefit enrollment 47%
  • A help line 47%
  • Transparency solutions for treatment cost comparisons 45%
  • Mobile applications 45%
  • Progressive cost tracking tools 35%
  • Consolidated employer billing 35%
  • Integrated consumer healthcare accounts 30%
  • Financial account options 28%

Employers rank several exchange features as important, such as being a private exchange instead of a public exchange (83%), having a large selection of plan choices at targeted benefit levels (58%), and being provided by their broker or benefit consultant (55%). These findings indicate that broad choice is more important than who runs the exchange (broker versus carrier).

Wellness

Wellness programs continue to gain interest as 35% of employers have initiatives in place compared to 30% last year. Another 22% are considering implementing a program. Sixty-five percent are considering adopting a wellness program in 2017, and 16% are considering adopting one by the end of 2016.

Fifty-five percent of those offering wellness programs, offer an employee-assistance program (EAP); 53% offer flu shots or vaccinations; and 37% offer a smoking cessation program. The disease management tools that most employers offer are for diabetes (30%) and depression or other mental health (30%). Fifty-four percent of employees are not offering disease management tools. But 30% are providing services for diabetes and mental health conditions. To promote positive health outcomes, 44% of employers offer at least one wellness program; 31% offer biometric screening; and 20% offer a disease management program.

Forty-four percent have at least one wellness initiative in their workplace. Employers that are interested in offering wellness plans should consider how it would affect productivity, absenteeism, turnover, retention, and recruitment, according to the survey authors. Including these factors in the ROI discussion can help demonstrate additional savings a company could achieve.

When it comes to wellness incentives, HSA and HRA contributions (18%) and premium reductions (16%) are most popular. Companies are split on whether to offer wellness incentives with 58% not providing rewards to employees and 42% offering some type of incentive in varying monetary amounts to participate. The value of the incentives remains relatively modest. Companies interested in wellness incentives can use the ACA as a guide. Eighteen percent offer $250 or more of incentives to employees for health-related tasks. Common values of incentives are $101 to 250 and $1 to $50. For more information, visit www.HealthcareTrendsInstitute.

The Cadillac Tax Gets Delayed Until 2018

Congress passed a $1.5 trillion omnibus spending bill and $680 billion tax-extenders package, which funds the government through September 2016. President Obama signed the legislation on Friday. Included in the bill is a provision that will delay the Cadillac tax. The Affordable Care Act (ACA) imposes a 40% non-deductible excise tax on health plans with values exceeding $10,200 in coverage for singles and $27,500 for families beginning in 2018. The provision is indexed to inflation and will rise automatically over time, potentially affecting all employer-sponsored plans. If the tax goes into effect, employers could shift the cost of the tax to employees by raising deductibles and increasing other out-of-pocket costs. The omnibus bill delays the tax for two years, until 2020.

Sen. Sherrod Brown (D-OH) said, “A delay of the Cadillac tax is welcome relief for middle-class workers who shouldn’t be stuck with higher out-of-pocket costs or lower quality health care. Brown sponsored the American Worker Health Care Tax Relief Act of 2015, which would repeal the tax. The bill demands that repeal is accompanied by a proposal to offset lost tax revenue to prevent an increase in the federal deficit and protect the integrity of the health law. He added, “While I plan to continue working with my colleagues toward a full repeal of this tax, a two-year delay of the implementation date of this harmful tax will temporarily ensure that the cost of care isn’t shifted to workers in the short term.”

Terry O’Sullivan, general president of the Laborers’ International Union of North America (LIUNA) said, “LIUNA is just one of many labor, employer, health policy, and other groups opposed to this indefensible, misguided, and regressive 40% middle-class excise tax. Congressional action, while not the hoped-for outright repeal, is a big step in the right direction, and signals a recognition that the tax is deeply flawed. We hope that in the additional two years provided by this delay, Congress and the next President will, once and for all, repeal the deceptively named ‘Cadillac Tax.’”

Cadillac Tax Implications and SHOP Awareness

Eighty-two percent of employers offer at least one healthcare plan. Companies of all sizes are offering more options for healthcare plans. Forty-five percent say they are at risk for paying a Cadillac Tax for high-end health plans in 2018. Eighty-four percent of those at risk plan to change their health benefits to avoid the tax.

Fifty-five percent of companies with less than 50 employees are aware of the Small Business Health Options Program (SHOP), compared to 50% last year. A third say they know how to access SHOP coverage for their employees.

Other key findings include the following:

  • 84% of employers say the ACA has had a positive or neutral effect on their business, yet 65% say the reporting requirements are burdensome.
  • Twenty-three percent of small businesses (less than 50 employees) say the ACA has had a negative effect on their business compared to 11% of mid-sized businesses and 10% of large businesses. The reporting requirements have hit medium and large companies the hardest.
  • 84% of employers agree that healthcare benefits are important in attracting and retaining employees. Eighty-eight percent of employees agree healthcare benefits are important to job satisfaction.

A Majority Opposes the Cadillac Tax & the Medical Device Tax

Congressional lawmakers have discussed repealing the Cadillac Tax. This provision of the Affordable Care Act helps pay for other provisions of the law. Starting in 2018, the Cadillac Tax imposes a tax on higher cost employer-sponsored health plans. Since the public has a generally unfavorable view of taxes, it’s not surprising that 60% oppose the Cadillac tax, according to a survey by the Kaiser Family Foundation. When those opposed to the tax are told that it could help lower health care costs, 27% change their minds to favor the tax, pushing support to 55%. When those who favor the tax are told that it’s likely to cause employees to face higher deductibles and co-pays, 15% change their minds to oppose the law, pushing opposition to 75%. Arguments about how many employers would be affected by the tax in 2018 and 2028 are less persuasive. Fifty-seven percent of Americans favor repealing the medical device tax, which applies to manufacturers of medical devices, such as artificial joints and pacemakers

Efforts to Repeal the Cadillac Pick Up Steam

Unions, local governments, and representatives on both sides of the aisle are supporting a repeal of the Cadillac tax. A bipartisan majority of the House of Representatives has co-sponsored legislation to repeal the 40% Cadillac Tax on health plans. Two separate measures to repeal the 40% tax, authored by Rep. Frank Guinta (R-NH)  (H.R. 879) and Rep. Joe Courtney (D-CT)  (H.R. 2050), have attracted 224 House cosponsors. The Cadillac tax is a 40% non-deductible tax on the cost of employer-sponsored health coverage that exceeds certain thresholds.

Rep. Joe Courtney said, “Actuaries and health care experts agree that the 40% excise tax will unfairly impact a broad swath of American workers and their families, degrading the quality of health insurance coverage, and increasing out-of-pocket costs. The tax undercuts the goals of affordable and accessible health care. It is already affecting workers and employers as they plan for the next several years. With a bipartisan majority in the House already backing repeal of this tax—no small feat in Washington—and business and labor united to fight it, I am optimistic that this important fix is gaining momentum.”

Rep. Frank Guinta said, “I introduced H.R. 879—Ax the Tax on Middle Class Americans’ Health Plans Act—to repeal a harmful provision of the president’s healthcare law that will inflict a 40% tax on middle class Americans’ health plans. I’ve heard from many municipalities in my district that this tax hike will cost in the hundreds of thousands of dollars. In the case of our state’s largest city, Manchester, it will cost $6 million alone.”

Tom Flynn, political and legislative director for the United Brotherhood of Carpenters and Joiners of America said, “We commend Reps. Courtney and Guinta for their work to protect the employer-sponsored health plans of over 150 million Americans. We urge House leadership to move a stand-alone Cadillac Tax repeal bill as quickly as possible.”

Sallie Clark, president of the National Assn. of Counties Representatives said Courtney and Guinta have shown tremendous leadership in the bipartisan effort to protect employer-sponsored health plans. “Not only would the excise tax hinder our efforts to attract and retain quality employees, but it would also have significant impacts on county budgets and place additional burdens on taxpayers,” she added.

The 40% tax applies to plans sponsored by private sector and public sector employers, non-profit organizations, and even self-employed individuals. The tax penalizes employers that have employees with greater health care needs, workforces with higher numbers of older workers and employers based in higher cost areas, according to the Alliance to Fight the 40.

An Argument Against the Cadillac Tax

The Cadillac tax on overly generous health insurance plans seemed fairly reasonable at the time the ACA was enacted, writes Dana Beezley-Smith, Ph.D., in the fall issue of the Journal of American Physicians and Surgeons. A 40% excise tax on insurance plans valued above a dollar threshold, the Cadillac tax takes effect in 2018. Although assessed against insurers, it will be passed along to employers through higher premium costs. The tax will eventually target even the skimpiest policies because the threshold is indexed to ordinary inflation rather than to the higher rate of increase in healthcare costs.

The Congressional Budget Office (CBO) projected that the tax would reap $201 billion from 2013 to 2109, and that receipts would grow by roughly 10% to 15% per year in the following decade. Remarkably, very little of this revenue was expected to result from direct taxation of insurance plans. Companies were expected to devalue or drop coverage to avoid the tax. Instead, most receipts were thought to accrue from payroll and income taxation of worker pay raises. This is how the tax was portrayed as a boon to workers, rather than a financial burden. Beezley-Smith says that there is little evidence to support this theory. Workers might pay for benefits in decreased wages, but cutting benefits does not necessarily result in pay raises.

Many Employers Are Seeing Premium Increases

Despite the Affordable Care Act, 90% of employers face increasing premiums for employee health plans, according to a survey by Arthur J. Gallagher & Co. “By far, the top benefit concern among employers is the rising cost of group medical coverage. Employers are examining all options to rein in medical costs while still offering competitive benefit packages to attract and retain employees in a tightening labor market.

With the Cadillac tax due to take effect in 2018, employers are expected to turn to newer cost-control tactics, said James W. Durkin, Jr., president of Gallagher Benefit Services, Inc. One strategy is to use higher deductibles. This year, in-network family plan deductibles average $3,000 while out-of-network deductibles average $4,500. Annual deductibles for employee-only in-network plans average $1,200, and out-of-network deductibles  average of $2,000.

Among all employer respondents, 42% have at least one wellness program in place. This figure rises to 70% for employers with at least 1,000 employees. But employee participation remains a concern according to 72% of employers that offer wellness programs. The survey uncovered gaps in financial protection benefits.

Will the Typical Family Soon Trigger the Cadillac Tax?

Will the typical family soon trigger the Cadillac tax?
A typical family’s health plan is a gold plan in terms of actuarial value. So it may trigger the Cadillac tax that goes into effect on high-cost health plans in 2018, according to the Milliman Medical Index. In 2015, costs will increase 6.3% ($1,456) for a typical American family of four with an employer-sponsored PPO. Their total cost will be $24,671, according to the latest Milliman Medical Index. The employer pays $14,198 and the employee pays $10,473 through payroll deductions and cost sharing at the time of service.

Whether the typical family is affected by the Cadillac tax will depend on whether future trends exceed recent levels, with people insured through smaller employer-sponsored plans potentially being more susceptible. This year’s 6.3% cost increase follows last year’s all-time low of 5.4%. Most of the components of care analyzed by the index (physician, outpatient, inpatient, other) experienced trends in line with recent years, but the sharp increase in prescription drug costs heightened the rate of increase.

Scott Weltz, co-author of the index said, “The rate at which prescription drug costs increased this year doubled over the average increase of the prior five years. This was driven by a combination of factors, including the introduction of new specialty drugs, a continued increase in compound drugs, and price increases for brand name and generic drugs.”

Nearly Half of Employers Will Hit the Cadillac Tax in 2018

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Despite efforts to rein in health care costs, roughly half of large U.S. employers will face the excise tax in 2018; and the percentage is expected to rise significantly in subsequent years, according to an analysis by Towers Watson. The Congressional Budget Office  expects a $79 billion excise tax burden from 2018 to 2023.

As part of the Affordable Care Act (ACA), the excise or Cadillac tax is a 40% tax on the value of all affected health care programs a participant elects that exceed certain dollar thresholds in 2018 and beyond. This non-deductible excise tax must be paid by the employer although some employers are considering shifting the costs to plan participants. Seventy-three percent of employers are concerned about triggering the tax, and 62% say it will have at least a moderate effect on their health care strategy in 2015 and 2016. The survey revealed that 48% are likely to trigger the tax in 2018; and 82% could cross the threshold by 2023.

Trevis Parson, chief health actuary for Towers Watson said, “Even with conservative projections, the impact of the excise tax on employers is substantial, yet it is often not fully understood. Each company will need to look at the tax carefully based on its own programs, and we expect a great deal of variation by industry.”

Randall Abbott, a senior health strategist at Towers Watson said, “Even a Chevy may be affected by the Cadillac Tax. For most employers, the excise tax will be a question of when, not if, unless action is taken. The ACA has put a timer on cost management for many employers and unless one cuts benefits or improves program performance there’s a real risk of triggering it.” Abbott says that these three key factors are not well known about the tax:
1. The excise tax is based on employer and employee premium contributions, not just what the employer pays for coverage.
2. The definition of what’s included for calculating the tax extends to tax-advantaged health care accounts, such as health flexible spending accounts, health reimbursement accounts, and pretax contributions to a health savings account.
3. The tax is not determined by the value of the medical plan, but rather the value of all affected health benefits elected by an employee or family. The tax is based on the aggregate value of the programs an employee elects, not just the medical plan value itself.

Annual increases in excise tax thresholds are not based on health care cost inflation, but on the Consumer Price Index, which was 1.5% for 2013. That is far less than medical cost trend and considerably less than the 4% annual health care cost increases that better performing employer health plans are expected to achieve after plan changes in 2015 .

Abbott said, “With so much at stake, it is critical that companies take a close…look at their health programs and understand their projected costs…It also highlights the need for companies to improve their health program performance…The good news is that many have already taken steps, and with proper plan management, the impact of the tax can be significantly mitigated. In fact, Towers Watson estimates that the number of companies expected to trigger the tax would be considerably higher if not for the variety of actions that employers have already taken or are likely to take as they better understand the challenge. “For more information, visit www.towerswatson.com.

Last Updated 10/20/2021

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