The Cadillac-Tax Blues
Even though employers are doing nearly all they can to avoid the Affordable Care Act's looming excise tax, most will eventually be snared by it. There has been a silver lining, however.
By Andrew R. McIlvaine
Many companies have made substantial progress in lowering their healthcare costs and making their healthcare plans more efficient. Even so, most will eventually be hit by the Affordable Care Act's 40-percent excise tax, currently scheduled to go into effect in 2018 (although a just-announced budget agreement by the U.S. House of Representatives would delay the tax by two years).
"The way in which the tax is structured means there's not much you can do to stave it off permanently," says Steve Wojcik, vice president of public policy at the National Business Group on Health. "Tinkering only buys you a certain amount of time."
The Cadillac tax, which will apply to healthcare benefits worth more than $10,200 for individuals and $27,500 for families, is indexed to the consumer price index rather than medical inflation. Given that medical inflation tends to rise much faster than the general CPI, this means that most healthcare-plan costs will end up surpassing the excise-tax thresholds, says Wojcik.
Indeed, a recent Mercer study predicts that, while only 23 percent of large employers (those with 500 or more employees) have plans that are at risk of hitting the excise tax's thresholds in 2018 (based on their current healthcare premiums), that number will grow to 45 percent by 2022.
Mercer's study, the 2015 National Survey of Employer-Sponsored Health Plans, also finds that employers have continued to hold the line on healthcare-cost increases, which grew by 3.8 percent in 2015 -- the third year in a row in which they've stayed below 4 percent. However, unless employers make further changes to their health benefits, more of them will risk exposure to the excise tax in 2018 and thereafter as medical inflation continues to exceed the general CPI, according to Mercer.
"The bottom line is, most of our members have said that, even with the changes they've made, they've only bought about two or three years before they trigger the tax," says Wojcik, whose organization represents large U.S. employers.
The best possible solution is to simply abolish the tax rather than delaying it, says Wojcik.
"Support for repeal exists on both sides of the political aisle," he says. Bills to repeal the excise tax have been introduced by Democrats and Republicans alike in the House of Representatives, and Hillary Clinton -- currently the front-runner for the Democratic presidential nomination -- has also called for abolishing the tax, pledging to fill the estimated $91 billion shortfall in the federal budget caused by a repeal with revenue from other sources.
Regardless of whether it stays or goes, however, the prospect of the Cadillac tax has proven useful in spurring companies to make some much-needed changes to their health plans, says Wojcik.
"Many employers have been using the Cadillac tax as a lever to make changes they've wanted to make since well before the ACA," he says.
Those changes have included greater cost-sharing with employees, eliminating high-cost health plans and cutting back subsidies for spousal and family coverage. Among large employers, 28 percent of covered employees are now enrolled in high-deductible consumer-driven plans, according to Mercer's survey, compared to 15 percent three years ago. Twelve percent of large employers now have spousal surcharges for coverage in place, it finds, while 8 percent exclude spouses who are eligible for coverage elsewhere.
Many companies are rolling out new tools and services designed to make CDHPs more appealing, says Mercer's Beth Umland, director of research for health and benefits.
"They're cognizant that these plans put more of a burden on employees, in terms of their cost-sharing features, so they're adding tools to help employees better manage that burden," she says.
Umland cites an "eye-popping" increase in the number of employers in the survey that offer telemedicine services, which provide remote access to medical services for the purpose of making them cheaper and more convenient. Thirty percent of large employers now offer these services, compared to 18 percent in last year's survey.
More employers are also offering "transparency" tools designed to make it easier for employees to shop and compare prices and quality ratings for medical providers, says Umland. Among "jumbo-size" companies (those with 20,000 or more employees), 24 percent now provide transparency tools, compared to just 15 percent in last year's survey. Vendors that sell transparency tools include Castlight, HealthSparq and Medlio.
Other vendors, including Best Doctors, Advance Medical and Grand Rounds, offer services designed to help employees have their diagnoses and treatment plans reviewed by some of the nation's top medical experts, in the interest of better outcomes. The arrangement is somewhat similar to that of the "centers of excellence" model used by large employers such as Wal-Mart and Lowes, in which employees can receive treatment and surgery at top-rated hospitals.
"Many employers understand that better care is cheaper care," says David Thompson, Grand Rounds' vice president of strategy. Employers concerned about regional variations in the quality of care -- particularly large multi-state employers -- are among Grand Rounds' top clients, he adds.
Clients (typically employers with at least 500 employees) offer the service free of charge to employees; in some cases they have cost-sharing agreements with Grand Rounds.
Wojcik points to accountable-care organizations as another innovative model that can limit costs without mandating increased cost-sharing by employees. ACOs are networks of hospitals, physicians and other providers that work in a coordinated fashion to keep patients healthy while keeping costs low.
ACOs have been used within Medicare and have shown some promise in improved outcomes and lowered costs, says Wojcik. Companies such as Intel, Boeing and Cummins Inc. have had some success in building ACO networks in areas where they have large groups of employees, and large health insurers such as Aetna have begun building ACOs in parts of the country as well, he says.
Wojcik says the ACO model needs to be adopted much more quickly throughout the country. "It's not just about treating people when they're sick but working in a coordinated fashion to keep them healthy -- that's much better than the piecemeal approach we have now."
The drawbacks to ACOs are that few employers have begun using them yet and they are geographically specific, says Rebecca Feldman, senior vice president in Aon Hewitt's health and benefits actuarial practice.
"Organizations that are geographically dispersed might be able to offer an ACO in one part of the country, but in general we're not seeing employers broadly adopt the concept just yet," she says. "At this point, the most popular approach is getting people to make smarter use of their healthcare benefits -- this way, the plans can stay rich but premiums will go down, and that will delay or postpone triggering the Cadillac tax."
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