October 5, 2015

One feature of the Affordable Care Act (ACA) that has received limited attention is the high-cost plan tax (HCPT), aka the “Cadillac plan” tax.  Beginning in 2018, employer health benefit plans with a value exceeding certain thresholds will be subject to an excise tax of 40 percent on the incremental costs of those benefits.  This tax is likely to affect anesthesia practices in two ways:  (1) in many instances, patients with employer-provided insurance may be responsible for a greater share of their health costs and (2) practices that offer relatively rich health benefits may themselves owe the excise tax.

In 2018, the thresholds for the tax are $10,200 for individual coverage and $27,500 for family coverage.  They will increase annually based on the general rate of inflation.  

The Kaiser Family Foundation (KFF) published a report on August 25, 2015 (How Many Employers Could be Affected by the Cadillac Plan Tax?) in which the authors estimate that about 16 to 26 percent of employers offering health benefits would have at least one health plan that would exceed the $10,200 HCPT self-only threshold in 2018, the first year that plans are subject to the tax.  The percentage would increase to 22/30 percent in 2023 and to 36/42 percent in 2028.  The lower estimates in the third column in the KFF table below are based on premiums for health coverage plus employer contributions for health savings accounts (HSAs) and health reimbursement accounts (HRAs), which the analysts assume will increase by five percent per year.  The higher estimates in the right-hand column reflect the impact of flexible spending accounts (FSAs), to which employees can contribute up to $2,550 in 2015 and an estimated $2,700 in 2018, growing to $3,600 in 2028.  The employees’ cost-sharing and their FSA contributions are added to the employer-paid premiums and HSA/HRA payments to determine the total value of the health benefits.

The KFF analysts did not attempt to extrapolate from self-only plans to family plans; they used only data from the former in order to make their sources of information equivalent to each other.  Still, we can assume that comparable percentages of family health plans will exceed the HCPT threshold.  This is particularly true because the healthcare inflation rate and the resulting insurance costs are expected to continue outrunning the general rate of inflation.  

We also assume that a certain number of anesthesia and pain management practices, whose members are relatively highly compensated, will at some point find themselves among the 16 to 42 percent of employers with Cadillac plans.  Like many other such employers, they may seek to reduce the value of their health benefit programs accordingly.

In order to avoid paying the 40 percent tax, employers have begun to reduce costs by redesigning the health benefits offered to employees, as predicted by several analyses published in the last few years.  A May 12, 2015 Health Affairs blog post  (As Employers Try To Avoid The Cadillac Tax, Treasury And The IRS Need To Act) summarized several of these analyses.  A 2014 study by the National Business Group on Health showed that 42 percent of employers surveyed will increase employee cost sharing and 37 percent will reduce spousal subsidies or implement a spousal surcharge.  Another survey from late 2014, this one by Aon Hewitt, found that 33 percent of employers are reducing the value of their plan designs through higher out-of-pocket costs for their employees and that 14 percent are reducing spousal eligibility or subsidies.  

Other measures that employers can take to reduce costs include eliminating covered services, eliminating higher-cost health insurance options, offering benefits through a private exchange and capping or doing away with FSAs, HSAs or HRAs.  Since those tax-preferred savings accounts can increase the value of an individual employee’s health benefits by several thousand dollars, they may become casualties of HCPT benefit redesign, as will some employers’ on-site medical clinics and wellness programs.  According to a November 2014 report by the American Health Policy Institute, employees could see up to a $6,150 reduction in the value of their health benefits.  Some employers may compensate their workforce by increasing salaries and wages, but many others will not. 

Higher out-of-pocket costs for employees generally mean greater difficulties in collecting patient balances for medical practices.  Anesthesia groups will need to hone the strategies used to obtain payments from patients with high deductibles such as up-front communications about fees and extended payment plans.  The best answer for many groups will be to maintain relationships with their hospitals’ collection departments so that they are able to participate in patient payment programs. 

With some businesses—including some anesthesia practices—already slimming down the health benefits offered to employees, the HCPT is beginning to produce its intended effects, i.e., discouraging employers from offering overly-generous benefit plans and helping to contain health care spending. As explained in the KFF article cited above,

Health benefits offered through work are not taxed like other compensation, with the result that employees may receive tax benefits worth thousands of dollars if they get their health insurance at work.  Economists have long argued that providing such tax benefits without a limit encourages employers to offer more generous benefit plans than they otherwise would because employees prefer to receive additional benefits (which are not taxed) in lieu of wages (which are).  Employees with generous plans use more health care because they face fewer out-of-pocket costs, and that contributes to the growth in health care costs.

Not surprisingly, efforts are underway to repeal the tax provision.  Among the proponents of repeal are insurers, who benefit from selling Cadillac plans, the U.S. Chamber of Commerce, which argues that keeping the tax will present higher costs to businesses and labor unions, which have survived in large part through their ability to negotiate generous health plans.  Democratic Presidential candidates Hillary Clinton, Bernie Sanders and Martin O’Malley have all joined a number of Republican legislators in calling for repeal. 

The Congressional Budget Office projects that the tax will raise $87 billion in revenues between 2018 and 2025, however, helping to fund subsidies for lower-cost health plans purchased through the ACA health insurance exchanges and to provide coverage to adults under expanded Medicaid benefits.  The author of an article (Few ideas on filling 'Cadillac'-sized hole if excise tax is repealed) appearing in Modern Healthcare online on October 1st noted that “About 100 economists and health policy experts of various political backgrounds signed on to a letter released Thursday that urges Congress to keep the tax without weakening or delaying it unless they implement another tax change that would curb the growth of healthcare costs.”  Observers have stated that if Congress were to pass legislation eliminating the tax, a veto by President Obama would be likely.  Anesthesia groups may want to prepare for changes accordingly.

With best wishes,

Tony Mira
President and CEO