There are always unintended consequences; that's part of life. The so-called "Cadillac tax" is one of those items. By now most know that The Affordable Care Act includes a 40% nondeductible excise tax on the value of health coverage that exceeds certain benefit thresholds (initially, $10,200 for self-only coverage and $27,500 for family coverage), and is set to take effect in 2018.
During the health-care debate, the tax was described as something that would only affect a small minority of "overly generous" plans, and would be a revenue-raiser (offsetting costs of health-care reform), while reducing the cost of health care by addressing overconsumption of medical care, and incenting employers to control costs and seek greater plan efficiencies.
Don't employers already do that? Employers, historically, have been in the best position to manage costs through seeking innovative ways such as offering value-based care, onsite health clinics, reference-based pricing, narrow networks, high-performance networks, direct contracting, wellbeing programs, telehealth, and many other approaches.
The excise tax is designed in a way that penalizes employers for health-care cost factors they cannot control such as higher numbers of disabled workers, unusual cases of high-cost cancer or premature babies, larger families, geographic locations in high-cost areas, employer size, or industry type, such as manufacturing or law enforcement.
The tax is, also, indexed to the consumer price index (CPI), which is historically lower than health-care inflation; over the last 40 years, health-care costs have risen on average at twice the rate of the CPI. Since the excise tax thresholds are indexed to general inflation instead of faster-growing medical inflation, more plans will be hit by the tax every year.
The Congressional Budget Office (CBO) estimates CPI will rise annually by 2.4%, on average, over the next decade, but the Centers for Medicare and Medicaid Services (CMS) projects private health-care spending to rise 5.7% on average each year. This means more and more employers' health benefits packages will trigger the tax over time if health-care costs continue to increase by greater percentages each year than the measure of inflation used to index the Cadillac tax thresholds.
There are many factors affecting companies' tax liability, which will cause plans to hit the tax threshold earlier than expected and ironically includes many of the tools that employers currently use to manage their health-care costs, such as on-site clinics, wellness plans, and account-based health plans. Why? Because the tax applies to the total cost of employer-sponsored coverage, which means it includes both the employer plus employee insurance premium shares, as well as health savings account contributions (HSAs), health reimbursement arrangements (HRAs), flexible spending arrangements (FSAs), on-site medical clinics, certain wellness and employee assistance plans, and other pre-tax health benefits.
The bottom line is, as structured, this tax will significantly impact most workers, employers, and health plans. Even the Federal Employees Health Benefits Program's (FEHB) will be negatively impacted. In a recent study, the FEHBP Blue Cross Blue Shield standard option plan was projected to hit the 40% tax in 2019 for employee-only coverage, and in 2025 for family coverage.
One of the greatest myths about the Cadillac tax is that "EMPLOYERS WILL INCREASE WAGES TO OFFSET BENEFIT REDUCTIONS." Really??? The marketplace and the real world does not work that way. Companies will not automatically, dollar for dollar, increase taxable wages to compensate for cost increases passed on to employees. That doesn't occur now when businesses are forced to pass increased health-care costs to its workforce.
Eventually, the 40% tax will apply to modest plans (not just high-cost coverage, as originally intended), and this hurts the ability of employers to continue to offer quality and affordable employer-sponsored health-care for attraction, retention, and engagement, as part of a broader total rewards value proposition.
Employers are already re-structuring their group health plans. Many organizations are redesigning their benefits packages to delay incurring the tax, but the excise tax provisions will make it all but impossible over time for employers to offer plans that fully comply with the Affordable Care Act while avoiding the tax on employee health benefits.