- Programs & Services
Being Prepared Matters Despite Delays
The high-cost health plan tax – excise or "Cadillac" tax as it is commonly known – is one of the yet-to-be implemented portions of the Affordable Care Act (ACA). The purpose of the excise tax is to slow the rate of growth of health care costs in the private insurance market.
A secondary benefit to the tax would be to help raise revenue to fund the expansion of health care coverage under the ACA.
The law was intended to change the behavior of employers that offer high-cost health plans – sometimes called Cadillac plans – which are said to provide no real incentive for consumers to shop for lower-cost alternatives when seeking care. To discourage this behavior on the part of plan sponsors, the law will levy a 40 percent tax on employer-sponsored health plans, the cost of which – whether paid for by the employer or the employee – exceeds annual thresholds for individual and family plans set by the federal government. The excise tax is due on the portion of the plan cost that exceeds the threshold amount, and is paid by the coverage provider.
The Cadillac Tax
How Is The Cadillac Tax Determined?
The tax for each plan will be calculated based on the total actuarial value of a plan, on a per member per month (PMPM) basis. This includes all employer and employee contributions: premiums, as well as any flexible savings account (FSA), health care reimbursement account (HRA) and/or health care savings account (HSA) contributions.
The tax will not apply to "excepted benefits" – such as coverage for accident-only, disability, liability, long-term care, or any separate dental or vision plans. Retirees and those in high-risk professions will have higher thresholds.
Since ACA Passage
Following the passage of the ACA, the tax has been scrutinized more closely and some unexpected and unintended consequences have been identified.
The excise tax applies to the aggregate cost of a plan over a threshold amount. Thresholds will be adjusted annually by certain cost of living adjustment amounts that are tied solely to the U.S. consumer price index (CPI). Rates of medical inflation are typically higher than the CPI, though, and sometimes considerably so. So long as that is true, the cost of plans will always rise by amounts greater than the annual increases in the thresholds – making even more plans subject to the excise tax.
Plans already above the thresholds would have to pay increasing amounts year after year. Despite the exceptions for retirees and high-risk professions, the impact forecasts for the excise tax were staggering. Early projections indicated that between 70 percent and 90 percent of all plans might exceed the excise tax threshold by 2020. If plans, based on 2015 benefit design, did not make benefit changes, the National Business Group on Health projected that virtually all large employers would experience some degree of excise tax impact by 2030.
Cadillac Tax Effective Date Delayed
Given the complexity of drafting implementation guidance and widespread debate over the objectives and potential reach of the tax, its implementation was delayed by two years when President Barack Obama signed the 2016 Omnibus Funding Bill. The tax is now effective for tax years beginning after December 31, 2019. In most cases, this means that the 2020 plan year would be the first year payors see a potential impact.
Early projections indicated that, under original thresholds, up to 90% of plans could be subject to the tax by 2020.
In addition to the two-year delay, the excise tax is now tax deductible, rather than being an after-tax expense, which is a significant win for plan sponsors and other providers subject to the tax.
More Changes Possible
The annual cost thresholds originally published were for 2018, prior to the two-year delay, and will need to be recast with dollar amounts higher than those previously published. The new thresholds are expected to be published in 2019, prior to the start of the 2020 plan year, and could reflect the market rate of medical inflation up to that point. A revision to the law included in the Administration's 2017 fiscal year budget proposal could potentially regionally anchor the thresholds to the average premium for "gold"-tier coverage in the public exchange – 80 percent actuarial value – but this proposed change has not yet been finalized. While it is still unclear as to whether the revision will be enacted, “regional anchoring” would take into account the fact that health care costs can be significantly higher in major cities than in some rural areas.
Want to know if the Cadillac Tax could affect your plan? Ask Us
Payor Considerations – What You Can Do
While the thresholds for the excise tax – and even the fate of the tax itself – continue to evolve, the best course of action is to continue to focus on lowering your plan’s costs, while improving health outcomes for your members. While there have already been attempts to repeal the excise tax entirely or revise it, and the current two-year delay has led to renewed speculation regarding an eventual repeal, it is currently the law and payors should be assessing its likely impact.
We recommend continuing to prepare for the new 2020 effective date. Implementing a well-designed multi-year plan aimed at increased savings and improved health outcomes – or “glide path” – can help you combat the looming tax burden by seamlessly delivering a series of improvements year over year.
This ultimately allows you to avoid – or at least diminish – your plan’s exposure to the excise tax.
Guidance from the U.S. Department of Health and Human Services allows plans to use reasonable medical management techniques when developing many aspects of your plan’s coverage, such as drug utilization management, for more personalized, less wasteful care. Plans with cost-effective benefits may have more flexibility when setting premiums, and may thereby be able to better control many aspects of the actuarial value that the tax calculation is based upon. Even if the tax is delayed indefinitely, or repealed, your plan’s glide path will provide you future savings, already customized to the needs of your organization and members.
Tools For Payors
At CVS Health, we have developed tools to help our clients project their potential 2020 tax exposure based on published tax thresholds and rates of inflation. We can also provide a forecast through 2024 to project future potential tax exposure.
Not all plans will exceed the annual thresholds in 2020 and many plans will only exceed the thresholds on certain portions of their member population. When projecting your plan’s cost, it is important to remember that the tax will be calculated on a PMPM basis, and the inclusion of FSA, HRA and/or HSA contributions means that how much individual members choose to contribute in pre-tax savings will also impact the actuarial value on a member-by-member basis.
Having a "glide path" offers payors the opportunity for more cost savings and improved health outcomes. As health care reform continues to evolve, we remain committed to not only helping our clients align with current regulatory guidance but also helping them prepare for future changes.
Estimating tax exposure on total cost of coverage for an individual
Controlling costs is most payors’ primary concern. Our market-leading solutions help clients get ahead of trend drivers and achieve lowest net cost.
Our success in helping people on the path to better health depends on how well we engage members and encourage them to take the right steps.
*New thresholds expected to be published in 2019.
Projections are estimates only and actual results may vary. Client-specific modeling available upon request. This information is intended to be general guidance and is not intended as tax or legal advice and cannot be relied upon as such. Clients must consult their own counsel for definitive tax or legal advice.