More like a freight train than a refined sedan, the upcoming Cadillac Tax will affect employer-sponsored health plans, including those that provide rich or premium health benefits to executives and managers as well as super-rich benefits for rank and file employees (common in state and local governments, non-profits, schools and other employers where employee attraction and retention are crucial). Designed to fund a quarter of the Patient Protection and Affordable Care Act (PPACA) exchange infrastructure, grants and subsidies and curb the rising cost of healthcare, the Cadillac Tax will likely not be repealed.
Taking hold in 2020, this non-deductible excise tax will target healthcare plans exceeding $10,200 of coverage for individuals and $27,500 for spouse or family coverage. The 40% Cadillac Tax will be levied on the amounts exceeding these thresholds.
Not sure if it affects your business? Think again. The tax applies to every size company with no complete exemptions for union workers. The government projects that 60% of employers will have some offerings within the thresholds and will have to pay the tax between 2020 and 2022.
While the $10,200 and $27,500 thresholds are scheduled to increase with indexing at a fraction of federal health plan increases, the annual rate of healthcare inflation is currently as high as 7 to 9%. Even companies with plans currently under the Cadillac Tax rate will eventually be caught in the danger zone. And don't think if you are a small employer that you'll never take the Cadillac Tax ride.
Small employers could potentially be hit with the Cadillac Tax even sooner than a middle-market or large corporation because the small market carriers are already increasing their renewal rates due to medical trend and health reform in general. Small group insurance market plans must provide state required coverages, plus all of the new federal essential health benefits. Both large and small employers have a window of opportunity - and huge financial incentive - to avoid the Cadillac Tax with diligent pre-planning that they need to start putting in place now.
Health plan costs subject to the Cadillac Tax include:
- Medical and prescription drug plan premiums
- For self-funded plans, cost will mean premium equilivents inclusive of Administrative Services Only (ASO) fees and reserves for incurred, but not reported claims
- Employee contributions to a health FSA, plus employer reimbursements
- Employer and employee contributions to Health Savings Accounts (HSAs)
- Employer monies flowing through an HRA
If you have to make a change, you don't want to reduce benefits or have to cap or take away FSAs and more from employees immediately and at the last minute, to avoid getting caught by the Cadillac Tax. It's simply bad employee relations. You'll want to establish a process that allows you to confront the impact while still enabling you to offer attractive employee benefits. You need to plan ahead to determine what steps you're going to take when - just like you would do with any other business issue.
The 3-5 year Strategic Plan
HUB suggests working with a benefits consultant now to create a three to five year strategic employee benefits plan that's tailored to your specific business needs to proactively address the Cadillac Tax. Pillars of this strategic plan should include: a financial review of current healthcare programs and plans, the identification and subsequent reduction of associated extraneous costs, population health and wellness management and targeted, multi-media employee communications to make sure workers at all levels understand the new plans/ benefits being rolled out.
This strategic plan should evaluate and model the costs associated with potential consumer engagement strategies. Over time, many employers will begin moving their plan participants to a lower value plan, maybe downgrading from a platinum plan to gold or even bronze. A necessary common denominator to the strategic plan will be employee benefits education - communicating with employees on why benefits are changing and what to expect.
Here's an explanation of a few of the most employable consumer engagement strategies, which can be key to a successful strategic plan:
Self-funding structure - In a self-funded medical structure, the employer takes on the risk, but gets reinsurance protection against high claims for individuals and usually also for the group as a whole. More flexibility exists, as the employer relies on spreading healthcare costs out over the entire workforce, and, ironically, some self-funded employers will embrace automatic enrollment when that part of the law takes effect because younger, healthier participants will reduce average costs across the group. With a focus on reducing costs for the employer and by avoiding state and federal mandated benefits for insured plans, this strategy can help defer collision with the Cadillac Tax. Traditionally, this has only been an option for large companies, but now even small companies are engaging in it, too, as more tools mitigate the employer's risks for a smaller population.
Reference-based pricing - This approach focuses on the most expensive healthcare claims as a self-funded employer, which will typically relate to hospitalization. Designed to lower high costs by paying at the Medicare reimbursement rate, plus 10 to 20%, for example, this strategy holds down costs and makes medical expenses more predictable, with the goal of ultimately reducing the rate of employer expenditure and minimizing the risk of being hit with the Cadillac Tax. Some plans may track Medicare and not even pay a portion over the federal reimbursement.
A more limited network - Instead of having three hospitals or doctor's offices in the network, just offering one or two should allow your business to negotiate a better discount. The bigger the group, the more bargaining power you'll have and the further away you'll stay from Cadillac Tax thresholds.
CDHP - Typically the most affordable option to satisfying the PPACA coverage mandate, CDHPs cost less than traditional PPO and HMO plans. These programs involve consumers directly by transferring some of the healthcare costs to them in the form of higher deductibles and co-pays. Again, by minimizing the employer's portion of the healthcare costs, CDHPs can defer a company's contact with the Cadillac Tax.
On-site or near-site clinics - Building one of your own or partnering with other employers to create an on-site or near-site clinic for your employees will minimize healthcare costs and therefore Cadillac Tax exposure. Staffed by a nurse practitioner or physician that you've hired, you'll ideally only pay for the services your employees need. The fair market value will be assigned to the Cadillac Tax determination, but ideally these will be less than if the same services were provided in an off-site clinic, urgent care or emergency room.
Regardless of the route your business takes to reduce your exposure to the Cadillac Tax - start mapping it out today. Contact your HUB Cadillac Tax expert to learn how your business can plan ahead and put the breaks on the newest business liability presented by the PPACA.
For more information, download HUB International's eBook: Benefits Strategies to Help You Steer Clear of the Cadillac Tax