‘Cadillac’ Plans Aren’t Affordable Care

The excise tax on rich health-benefit plans slated to take effect in 2018 could be ruinous for some companies. Is it time to start worrying?
David McCannOctober 21, 2013
‘Cadillac’ Plans Aren’t Affordable Care

Among the costs of complying with the Affordable Care Act, one potentially big-ticket item is far enough in the future that there is perhaps little cause for alarm. But it may not be a good strategy to sit idle for long, some experts say.

Employers that trigger the “Cadillac tax” could suffer severe financial effects. The controversial ACA provision will, starting in 2018, require self-insured companies to pay a 40 percent excise tax on the value of group health benefits — the total cost of coverage including both the employer’s and employees’ shares — that exceeds a threshold amount.

The tax applies to group plans offered by fully insured employers as well, but the law requires insurers to pay it. Those organizations won’t get a free pass, though. Observers agree it’s a forgone conclusion that insurers will pass that cost to their group customers.

A vintage pink Cadillac.

The Cadillac tax is much less pretty than this vintage pink Cadillac.

As the legislation is currently written, plans that cost more than $10,200 for individuals and more than $27,500 for families will be subject to the tax. Those thresholds may be altered before 2018 based on medical-cost inflation, and also may be adjusted for people in high-risk professions or those over a certain age or of a certain gender, according to a United Healthcare fact sheet.

Answering a recent Towers Watson survey of 420 benefits managers at employers with more than 1,000 workers, 44 percent of the managers said they are “very confident” they will trigger the tax if they don’t prepare for it by making changes to their health-care programs. Seventeen percent said they are “somewhat confident.” Thirty-one percent said the Cadillac tax will have a “significant influence” on their health-care strategy by 2015.

Changing plans enough to avoid the tax may be a rigorous exercise that transfers significant additional cost burden to employees. But what will constitute “preparing” to come in under the threshold, given that most employers are already making changes to their plans each year to keep up with rising costs?

“The excise tax provides a specific dollar goal, whereas most companies today don’t have a specific long-term cost goal,” says Tom Billet, a Towers Watson senior consultant. “To use a football analogy, it’s the difference between starting the game with a goal of scoring as many points as possible versus being behind by two touchdowns with three minutes left and knowing you have to score 14 points or you lose the game.”

But is there any need to start making preparations so far in advance? Absolutely, says Ron Fontanetta, the consulting firm’s senior health-care consulting leader. “It takes time to evolve and amend your program,” he says. “Companies don’t want to be in a position where they wake up in 2017 and realize they have to make dramatic changes in one year. They need to anticipate, based on their current cost structure, whether they are they likely to trigger the tax. And if they are, they should make changes over time in a thoughtful, rational, sequential way.”

Keep in mind that, of course, Towers Watson and other human-capital consulting firms — several others are also advising companies to get moving now — get paid to help companies adjust their benefits strategies.

Sheldon Blumling, an attorney with Fisher & Phillips who advises companies on health-care matters, notes that many experts in the field believe that either the Cadillac tax’s thresholds will be raised or it will be removed from the law altogether before 2018.

“All the corporate people I’ve talked to have said they’re waiting to make decisions around this,” says Blumling. “Worrying about an excise tax that’s four-plus years out is alarmist, as is much of what you read about health-care reform. There’s a reason that provision was pushed so far out, which is that it’s not very palatable politically.”

Ed King, CFO of 600-employee Marina del Rey Hospital and a principal at Hardesty LLC, a national executive-services firm focused on the office of the CFO, says the Cadillac tax is nowhere near his radar screen yet. “Things about that provision are likely to change,” he says. “I’m more concerned with what my costs are going to be in the next six to 12 months.”

The reality is, Blumling says, that very few employers are going to pay the tax. “That tax is going to set a standard for the value of group health plans, and employers and carriers are going to make sure their plans come in under the threshold. Nobody’s going to be interested in paying a 40 percent excise tax.”

In a recent address, Jonathan Gruber, an MIT professor who helped write the ACA, provided insight on the Cadillac tax. “Let’s be clear on what this is,” he said. “In America today if you are paid in wages you are taxed; if you’re paid in health insurance you’re not. So if [my employer asked me whether I] wanted a $1,000 raise or $1,000 in orthodontia benefits for my daughter, I would say, ‘if you give me a thousand-dollar raise I’m going to take home $600. I’ll choose the orthodontia.’”

That taxing system, Gruber said, has three fundamental flaws. First, it’s incredibly expensive. “If we taxed health insurance like we tax wages, we would raise $250 billion a year more in tax revenues. That’s twice what it would cost every uninsured American to buy health insurance.”

Second, tax-free benefits are unfair because the richer someone is, the bigger tax break that person gets, by virtue of being in a higher tax bracket.

Finally, and most importantly, it causes excessive health-care consumption. “People are buying health care with 60-cent dollars, so they buy too much of it,” Gruber said.

The Cadillac tax, he points out, is a compromise between taxing all health benefits and taxing none of them. “It’s intended to neutralize the playing field between health insurance and wages. In doing so it’s going to exert enormous downward pressure on the most-expensive health insurance policies and be a key cost-control device.”

Photo credit: Gregory Moine

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