The “Cadillac Tax” doesn’t start until 2018, but it’s already causing employers to reduce healthcare costs.
This excise tax on high-cost employer-sponsored health coverage has two purposes within the Affordable Care Act (ACA). Its primary purpose is to offset the cost of coverage expansion by taxing those who provide “generous” health benefits. But it also addresses an area in the tax code that economists believe drives excessive cost growth. Employers with historically “rich” benefit packages will be the first exposed to the tax and are taking action to avoid it. However, due to its design, the tax could quickly affect many other employers if steps aren’t taken to slow cost growth. Providers should understand the implications of the tax for employers in their markets and take steps to mitigate anticipated short- and long-term challenges.
At an estimated $268 billion in 2011, the federal exclusion of health benefits from taxable income provided by an employer is the largest—and therefore most protected—break in the U.S. tax code.a In addition to being a ripe source of funding for coverage, this exclusion is widely regarded among economists on both the right and the left as a major factor driving cost growth.
In theory, both employees (particularly those at higher income levels) and employers should prefer additional compensation in the form of tax-exempt health benefits versus wages, given that health insurance is tax exempt for both employees and employers, whereas the value of a dollar in cash wages is significantly reduced by both income and payroll taxes. It is for this reason that employers have historically provided plans with wide coverage networks and low cost sharing at little cost to employees.
Economists believe this benefit structure encourages overutilization of services. Employees are not only divorced from the cost of buying insurance coverage, but also, with relatively low cost sharing, have little incentive at the point of service to question the value of prescribed services.
A New Model
From the perspective of ACA’s framers, the Cadillac Tax provides both funding for coverage expansion and an opportunity to limit a primary driver of healthcare cost growth.
The Cadillac Tax is slated to begin in 2018 and targets health insurance providers. It assesses a 40 percent excise tax on the cost of health insurance benefits that exceed a benchmark–$10,200 for individuals and $27,500 for families.b After 2018, the benchmark values are indexed to general inflation, as reflected in the consumer price index for urban consumers (CPI-U), not healthcare inflation. Healthcare costs have historically grown two to three percentage points faster than inflation. The Cadillac Tax will likely affect an increasing portion of the workforce over time, with little likelihood that Congress will intervene to counter this trend.
The tax is projected to yield $80 billion in revenue over 10 years (2014-23)—less than previous estimates, which were scaled back due to slower-than-expected cost growth.c The provision is structured to target only rich benefit packages initially, but the pool of “rich” plans will expand over time if the cost of health insurance benefits grows faster than the rate of inflation, giving employers a strong incentive to hold down benefit costs.
Hitting the Brakes
Organizations likely to be subject to the Cadillac Tax initially, due to their historically rich benefit packages, include local governments, school systems, healthcare providers, universities, and companies with highly unionized workforces.
As an example, the University of Minnesota estimates that, unless it takes action to prevent premium growth, the Cadillac Tax will cost the university $48 million. The university therefore is exploring options such as instituting a deductible for the first time, increasing copayments, and offering narrow network plans. Given its two-year bargaining cycle with its unions, the university plans on making health benefit changes in 2014 to ensure premiums are under the benchmark.
It also seems likely that, if employers are unable to attenuate cost growth, the Cadillac Tax might eventually prompt some employers to drop coverage, although there are no actual reports of employers contemplating this option.
The early effects of the Cadillac Tax will be felt by providers whose patient populations are composed of individuals covered by relatively high-cost plans (e.g., smaller employers, employers in the Northeast, college towns, and state capitals).d However, given that CPI-U has historically grown slower than medical inflation, the tax will likely affect all providers at some point in two ways. As employers increase cost sharing, providers will be forced to collect more from patients, potentially driving up the cost to collect while decreasing the yield. Meanwhile, employers and payers will look to narrow, high-value networks to improve overall outcomes and reduce per-member-per-month payment. High-value providers will likely see volume increases, while providers that do not deliver high value will see decreased demand for their services.
Fortunately for providers, the response to the Cadillac Tax aligns with actions they should already be taking to manage both public- and private-sector cost-control efforts. First, health systems should provide patients with up-front estimates of liability. Receiving a large, unexpected bill a month or more after service not only dissatisfies patients, but also reduces the likelihood that they will pay. Beyond being the right thing to do, having up-front conversations with patients about their balances due after insurance can help a hospital identify individuals who qualify for charity care. For those who don’t qualify for charity care, having an estimate of the patient liability can enable financial assistance staff to proactively collaborate with patients to develop game plans for resolving accounts.
Although these service levels are difficult to achieve without collaboration from payers, providers can explore ways to leverage internal systems as a work around. For example, one organization is using clinical data provided by patients during registration to develop estimated charges based on three years of historical charge data for similar services. The clinical data and estimated charge then can be run against the provider’s contract engine to estimate each patient’s liability. As a final step, patients might also be screened for charity care using presumptive eligibility tools.
Providers also will need to take steps to reduce the overall cost of care to purchasers by focusing on patient outcomes. Employers subject to the Cadillac Tax will be open to innovative solutions to manage the cost of care in various ways, depending on their circumstances. Providers that can offer effective solutions will enjoy a significant opportunity.
Chad Mulvany is a technical director in HFMA’s Washington, D.C., office, and a member of HFMA’s Virginia-Washington, D.C., Chapter.
a. Clemans-Cope, L., Zuckerman, S., and Resnick, D., Limitingthe Tax Exclusion of Employer-Sponsored Health Insurance Premiums: Revenue Potential and Distributional Consequences: Timely Analysis of Immediate Health Policy Issues, Urban Institute, May 2013.
b. The benchmark is also adjusted upward based on the age of an organization’s employees or their participation in high-risk occupations.
c. Congressional Budget Office, Updated Budget Projections:Fiscal Years 2013 to 2023, May 2013.
d. Herring, B., and Lentz, L.K., “What Can We Expect from the ‘Cadillac Tax’ in 2018 and Beyond?” Inquiry, Winter 2011-2012.
Publication Date: Tuesday, October 01, 2013