Cadillac tax on health plans – cost shifting health care costs like never before

2013

If you are a public employee, a union worker or an employee of a large employer (including a pre-65 retiree), you have about 48 months before your out-of-pocket health care costs skyrocket. Your plan is likely among the richest, most costly around.

The limits on tax-advantaged health benefits kick in on January 1, 2018 and plan sponsors will be faced with paying a 40% tax on excess benefit value or reducing benefits to stay under the tax threshold. Which do you see happening? Why would any employer or health plan (except perhaps government plans) pay such a tax when they can avoid the tax and lower benefit costs at the same time? Employers are already trying to estimate when the tax threshold will be reached for their plans. They will also be looking to make cuts in benefits long before the estimated date the tax will hit, “ease the transition” will be a popular phrase.

Reducing benefit value means one thing … your out of pocket costs go up. If you complain about your high deductible and cost sharing now, just wait; you will have more, much more to complain about in 2018. And there is even more good news. If you participate in a high deductible health plan today as a growing number of workers do, and your generous employer contributes to a health savings account (HSA), that contribution is part of the overall limit on plan value.

Where does all this come from? The above provisions are part of Obamacare, but the underlying drivers are twofold. First, there is the belief that overly generous health insurance discourages patient concern for costs thereby driving over-utilization of services. That may have been true in the good old days, but questionable in today’s environment of high out-of-pocket costs.

However, the real driver is tax revenue. The tax-free nature of employer or union sponsored health benefits is the single biggest revenue loser (tax expenditure) for the federal government. The CBO estimates that loss at $248 billion in 2013. Is there any wonder these benefits are a target, especially when you consider these tax benefits are not available to many Americans?

All this keeping your health plan if you like it stuff has many aspects. This is one if them. Based purely on your plan’s cost, you may very well not be able to keep the plan you now have and like.

Following are three separate sources explaining the details of this 40% excise tax.

Office of the Actuary
DATE: April 22, 2010 FROM: Richard S. Foster
Chief Actuary
SUBJECT: Estimated Financial Effects of the “Patient Protection and Affordable Care Act,” as Amended

Section 9001 of the PPACA places an excise tax on employer-sponsored health insurance coverage with a benefit value above specified levels (generally $10,200 for individuals and $27,500 for families in 2018, adjusted in 2019 by growth in the CPI plus 1 percentage point and by growth in the CPI thereafter).15 The tax is 40 percent of the excess benefit value above these thresholds. We estimate that, in aggregate, affected employers will reduce their benefit packages in such a way as to eliminate about three-quarters of the excess benefit value. The resulting higher cost-sharing requirements for employees would have an initial impact on the overall level of health expenditures, reducing total NHE by an estimated 0.1 percent in 2019. Moreover, because health care costs will generally increase faster than the CPI, we anticipate additional, incremental benefit coverage reductions in future years to prevent an increase in the share of employer coverage subject to the excise tax. These further adjustments would contribute to a small reduction in the growth in total health care costs (but an increase in out-of-pocket costs) for affected employees in 2019 and later. As mentioned earlier, the proportion of workers experiencing reductions in their employer-sponsored health coverage as a result of the excise tax is estimated to increase rapidly after 2019.

Critical Issues: US Chamber of Commerce

Excise Tax on High-Cost Plans

The law imposes a 40% excise tax on high-cost health plans, effective in 2018. Health plans for individuals and families with an actuarial value exceeding a dollar threshold ($10,200 for individuals and $27,500 for families) will be subject to a 40% tax on amounts exceeding the threshold. Higher thresholds ($11,850/$30,950) apply to retirees who are age 55 or older but who are not yet entitled to Medicare, or for high-risk professions such as construction, mining, forestry, agriculture, longshoremen, law enforcement, or fire protection. The dollar limits are indexed to inflation plus 1% in 2019. For 2020 and thereafter, the dollar value is increased by inflation. Benefits not counted against the threshold include vision and dental, long-term care, and accident and disability insurance.

The thresholds may be higher due to a little-noticed provision in the reconciliation package that changed the underlying Senate bill. Under that provision, the initial thresholds are adjusted upward if premium increases in the Blue Cross Standard Option plan under the Federal Employee Health Benefits Program are greater than 55% between 2010 and 2018. The thresholds would be adjusted upward to compensate for the excess cost growth. Premium increases in the Standard Option Plan over the last 10 years have been 8.6% for self and 8.7% for families, more than the 5.6% increase implied by the 55% factor. Thus, it is likely the initial dollar limits will be more than the dollar values suggested above.

The fee is paid by the insurance issuer or, in the case of a self-insured plan, by the employer or plan administrator. The tax is calculated on the total insurance premium paid by either the employer or employee, employee contributions to FSAs, and employer contributions to HRAs and HSAs. Because premiums are a reflection of medical costs, plans in high-cost areas may be impacted by the tax due to underlying medical costs, not the richness of a plan’s benefits.

The total amount raised under the provision is estimated to be $32 billion from 2018 to 2019 (estimates not available after 2019).

From the Congressional Budget Office 11-13-13

Current Law. The federal tax system subsidizes employment-based health insurance both by exempting employers’ premium payments from income and payroll taxes and by letting employees at firms that offer “cafeteria plans” (which allow workers to choose between taxable cash wages and nontaxable fringe benefits) pay their share of premiums with pretax earnings. The tax system also subsidizes health care costs not covered by insurance by exempting from income and payroll taxes the contributions made to other types of employee accounts that can be used to pay for those costs. Examples include employers’ contributions to health reimbursement arrangements (HRAs), employees’ contributions to flexible spending arrangements (FSAs), and both employers’ and employees’ contributions to health savings accounts (HSAs).

The favorable tax treatment of employment-based health insurance is the largest single tax expenditure by the federal government. (Tax expenditures are exclusions, deductions, preferential rates, and credits in the tax system that resemble federal spending by providing financial assistance to specific activities, entities, or groups of people.) Excluding employment-based health insurance from both income and payroll taxes will cost the government $248 billion in 2013, CBO estimates. In addition, the federal government incurs a tax expenditure of about $6 billion a year by allowing self-employed people to deduct the costs of health insurance from their taxable income for the individual income tax (though not for payroll taxes).