While most of the attention on the Obama administration’s health care law has been on health insurance exchanges and Medicaid expansion, employer-sponsored health plans also are beginning to slowly feel the effects.
One change that will affect employer-sponsored plans beginning in 2018 is a tax on high cost, markedly generous plans. These high-end health plans’ premiums are paid for mostly by the employers and they also have low, if any, deductibles and little cost-sharing for employees.
The so-called Cadillac tax, proposed to both slow the rate of growth of health costs and finance the expansion of health coverage, would require both fully insured and self-financed employer health plans to pay a nonrefundable 40 percent excise tax on the dollar amount of any employee premiums that exceed annual limits of $10,200 for individual coverage and $27,500 for family coverage, excluding stand-alone dental and vision plans.
Additionally, the excise tax applies to the overall aggregate cost — including the contributions made to FSA’s (Flexible spending accounts), HSA’s (Health savings accounts), and HRA’s (Health reimbursement arrangements). The law does make adjustments, increasing the threshold for older workers and those in certain high-risk professions.
The average employer-sponsored health plan had a premium of $5,884 for an individual and $16,351 for a family, according to the Kaiser Family Foundation’s 2013 Employer Health Benefits Survey. According to the report, State Trends in Premiums and Deductibles, 2003-10: The Need for Action to Address Rising Costs, by 2010, premiums for employer-sponsored health insurance ranged from $11,379 to $12,409 in Idaho, Arkansas, Hawaii, Montana, and Alabama, the five states with the lowest average costs for private employer-based coverage.
Although the tax does not start until 2018, employers have to start now. According to a new health care trend survey from Towers Watson, 56 percent of employers would hit the Cadillac Tax threshold if it were applied today. The survey further reported that to avoid paying the 40 percent excise tax, 88 percent of employers are working to reduce the costs of their plans.
The 40 percent excise tax could be handled in many different ways. The minority of employers who choose to keep their richest plans, irrespective of the Cadillac tax (12 percent according to the survey), might consider paying the cost of the tax while their employees continue paying the same rate. That option would be financially burdensome for employers. Or employees would pay the cost of the tax on top of their premiums, a significant shifting of costs to the employees. Employers also could share the cost of the tax with employees, a more equitable distribution of the burden.
However, the overwhelming majority of employers, about seven out of every eight, plan to avoid the tax entirely by changing their plan designs.
The proportion of employers redesigning their health plans as a result of the tax has increased to 17 percent this year from 11 percent in 2011, according to a survey of United States Companies released in May by the International Foundation of Employee Benefit Plans.
To achieve these changes, a number of different tactics are being considered, but consumer-driven high-deductible, low-premium health plans linked to health savings accounts or featuring health reimbursement arrangements are receiving the biggest buzz. Some 72 percent of large employers offer at least one high deductible plan. Higher-income employees might value preferred-access or other enhanced-care physician services more than a traditional Cadillac ESI plan. These alternative benefits might be more cost-effective for employers once the Cadillac tax comes into effect, in 2018.
Another option of avoiding the excise tax is by ending employer contributions to tax-free flexible spending and health savings accounts.
Some employers are responding with innovative cost-reduction strategies, such as expanding their disease-management programs to more effectively target and reduce employees’ chronic conditions. Others are experimenting with more unusual strategies, such as paying health-related travel costs to send their employees to hospitals and other providers with better track records for quality care and health outcomes.
Employers must understand, at the micro-segment level, when employees are eligible for subsidies under different scenarios: when an employer provides no coverage at all, provides coverage defined as “unaffordable” for some employees, or provides coverage above the Cadillac-plan threshold. Intermediate options probably would be the most effective way to secure a reasonable return on investment for benefits after 2014, because they enable employers to provide the best possible result for each segment of employees — employer-sponsored insurance for higher-income ones not eligible for subsidies, as well as affordable coverage from a subsidized exchange for lower-income workers.
Either way, employers and insurers need to address the unique challenges posed by this looming excise tax sooner rather than later, as any changes made presently need sufficient time to take effect.
Padma Gadepally is a physician and a public health professional in Boise, Idaho. She can be reached at email@example.com.