Dodging the Cadillac Tax

Your presenter is not a lawyer The information presented should not be construed

as legal advice Your presenter does not endorse any of the specific

ideas presented Please consult with appropriate counsel before

adopting a benefits strategy Continue to monitor information from Washington,

DC, that may impact some of these strategies

Defining the Cadillac Tax

• Established through Section 9001 of the Affordable Care Act• “Excise Tax on High Cost Employer-sponsored Health Coverage”

• Goes into effect on renewal in 2018• Applies a 40% excise tax on premiums above the following figures

(in most cases)• $10,200 for individual coverage• $27,500 for family coverage

• Figures subject to certain industry-specific adjustments

Defining the Cadillac Tax• Figures adjusted annually

• 2019: CPI + 1%• 2020 and beyond: CPI

• The figure includes the following• Medical premiums (employer and employee share)• Health Flexible Spending Arrangement elections• Health Reimbursement Arrangements• Employer contributions to Health Savings Accounts (employee?)

• Excluded from the calculation:• Stand-alone dental and vision and other ancillary coverage

Purpose of the Cadillac Tax

• Raise money to offset premium subsidies under the ACA• Help reduce the cost of employer-based health insurance• Reduce negative incentives inherent in the current

employer-based health insurance model• Tax implications that make additional compensation more

attractive as tax-free benefits than taxable cash• Low out-of-pocket member responsibility that encourages

overutilization

Who Will Be Impacted?

• As many as 75% of employers over the next decade – Bradley Herring, health economist at Johns Hopkins

• “The last time that we looked . . [a]lmost half of employers had plans that would hit the excise tax in 2018” – Tracy Watts, Mercer

• 15% of employers in 2018, 28% by 2021, 56% by 2025 and 76% by 2029 – Former Sen. (and surgeon) Bill Frist, R-Tenn.

• Approximately 60% of employers by 2018 – Towers Watson• Many businesses, especially with ACA-fueled premium boosters

and adjustments based on CPI

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000$20,000

6% Increase 8% Increase 10% Increase Tax

Figures based on 2013 average individual premium, per KFF

Impact on “Average” Group

The Case for Acting Now• 2018 is only three or four renewals away• The sooner you act, the later the tax impacts you• The sooner you begin a thoughtful action plan

• the less disruptive your plan may be• the greater the number of options you’ll have• the more you can engage employees in understanding the issue,

options and implications

The Ultimate Formula For Success• The most successful strategy will address twin goals:

•Reset the Premium Base•Bend the Cost Curve

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

8% Increase Reset ‐10% and 5% Increase Tax

The Formula in Action

Reset Base

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000$20,000

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No ‐10% reset Reset 2015 Reset 2018 Tax

The Impact of Timing

Divergent Opinions

• “[M]ost employers are looking forward to this Cadillac tax in 2018 and realizing they’re going to have to get ready for it now. And you can’t just shift costs to avoid it; you have to cut benefits.” – Bob Laszewski, president of Health Policy and Strategy Associates

- “For the most part, very little will change for people getting their insurance through large employers. . . There is nothing in the law that tells you you need to raise copayments or deductibles. In fact, the law limits your ability to shift costs to your workers.” – Jason Furman, President Obama’s chief economic advisor

Three Potential Courses of Action

• Indirect• Change the law

• Direct (account-specific)• Stop offering group health insurance• Continue to offer group insurance with changes that

• Reset the Premium Base

• Bend the Cost Curve

Potential Action: Change the Law

• Repeal the ACA• Retain Republican House and elect Republican Senate by 2016• Elect a Republican president in 2016• Look to Republicans to repeal the ACA

• Modify Section 9001• Doesn’t require Republican control of power• Already taking place (unions)

• This approach neither Resets the Premium Base nor Bends the Cost Curve, but it successfully eliminates the excise tax

Potential Action: Stop Playing• Potentially viable option for employers with 50 (soon 100) or fewer

employees to terminate group coverage• Employer faces no penalties• Employees probably qualify for taxpayer subsidies• Employer can share savings with employees – optional, but may be

necessary in a competitive labor market• Note: Employer contribution through an HRA is fraught with danger!

• Less attractive option for large employers, who face penalties for failure to offer affordable group coverage

• Uses a sledgehammer to eliminate the need to meet our twin goals

Potential Action: Change Group Demographics• Change employee characteristics

• More male• More young• More cultures that are reluctant to seek care

• Risky approach• Discrimination issues• Moral/ethical issues• Tail (insurance costs) may wag the dog (productivity)• Meets our goal of Resetting the Premium Base (with huge potential

negative impact on business), but does little to Bend the Cost Curve

Potential Action: Pass Cost to Employees• Adjust employee contributions to premium to pay the excise tax• Example

• Premium is $30,000 ($1,000 excise tax on $2,500 * 40%)• You typically pay 70% of premium, which you apply to the $27,500• So, you pay $19,250 and employee pays $10,750

• Doesn’t address the issue of overinsurance/overutiliation, but shifts the cost to the employee, which may prompt different plan choice

• Indirectly helps Reset the Premium Base and Bend the Cost Curve through employee buydown

Potential Action: Self-insure• Increasingly viable option for smaller groups• Eliminate/selectively add state-mandated benefits

• Can’t avoid growing number of federal mandates, including ACA• Design plans that promotes high performance providers• Create network incentives or restrictions

• Mandatory or incented national or international medical tourism• Mandatory or incented regional or national centers of excellence

Potential Action: Self-insure• Potential issue: Feds may take a dim view of self-insurance

among smaller employers and limit employer ability to shield from risk (reinsurance restrictions)

• Meets our goal of resetting the baseline immediately• Immediately Reset the Premium Base with elimination of ACA

assessments and some or all state mandates• Changes in care delivery determine whether this strategy

Bends the Cost Curve

Potential Action: Wellness Focus• Introduce or enhance a robust wellness program to reduce claims

• Other potential benefits include greater employee productivity and loyalty to company

• Difficult to quantify benefits of a wellness program (ROI)• Not easy to speculate on events that didn’t happen and attribute them

to wellness program• Employers with wellness program experience are moving in the

direction of offering rewards based on outcomes, not activity• Be careful of legal (discrimination) issues

• Little impact on Resetting the Premium Base, but may Bend the Cost Curve

Potential Action: Network Design• Offer a high-performance network

• Cost-quality based on total cost of care, not contracted rates• Highly integrated networks across continuum of care,

including medical home• Under self-insured model, opportunity to negotiate directly

with providers• Create competition• Negotiated package rates? Guarantees?

• Very select admission to providers outside the network

Potential Action: Network Design• Employees in employer-based insurance generally prefer to pay

more to access a broader network (55% to 34%) . . . but when told that they can save up to 25%, support drops to 37% overall and 22% of those uninsured or buying nongroup coverage

• Congress may limit narrow networks after 2014 public exchange experience

• Definitely Resets the Premium Base

• Has positive impact on Bending the Cost Curve with more efficient providers delivering more effective care

Potential Action: Offer an HSA-qualified Plan Health Savings Accounts are a tax-perfect vehicle HSAs have advantages that no other plan can offer

• Immediate tax savings• Flexibility

• Rollover of unused funds• Employee sets timing and amount (up to set limits) on contributions• Employee determines when to reimburse an expense

• Long-term financial asset, including retirement savings Typically the lowest-premium plans offered

Potential Action: Offer an HSA-qualified Plan Broad up-front deductible engages employees in the cost

implications of their diagnostic and treatment decisions• Typically lower cost trend, particularly in early years of adoption

Pass employer premium savings to employees as cash income• Employees then can make employee contributions to their HSAs• Remember, employer contributions are included in premium calculation

• Need clarification on whether employee contributions are included

Achieves our twin goals• Resets the Premium Base

• Bends the Cost Curve with engaged consumers with “skin in the game”

Potential Action: Introduce a Private Exchange Private exchange

• Portfolio of health plans (typically six-12 plans, with 40% spread)• Rich menu of ancillary

• Traditional: Dental, vision, life, STD/LTD, voluntary• Nontraditional: Pet, prepaid legal, telemedicine, wellness, identity protection

• Decision-support tools to help each employee make best choices Employer typically sums all benefit costs and divides into a

defined contribution for each employee Employee mindset shifts from insurance renewal to personal risk

mitigation opportunity

Potential Action: Introduce a Private Exchange Private exchanges are being offered by

• National consultants (AonHewitt, Mercer, Towers Watson, Buck)• National brokers• Regional brokers• Technology companies

Exchanges by themselves don’t eliminate the tax Employer controls which plans are offered to eliminate/minimize

the number of plans subject to excise tax Employer contributes via a defined contribution

Potential Action: Introduce a Private Exchange Employees typically buy down (lower premium) when they are

responsible for 100% of the cost difference among plans• The lower the contribution, the more dramatic the buy-down• Employees buy up on ancillary products (not subject to Cadillac Tax)• Direct any employer contribution savings to employees as higher wages

• Employees can spend money on benefits tax-free through a Section 125 plan

Achieves our twin goals• Employer plan option decisions and employee buydown results in

immediate Resetting of Premium Base employee-by-employee • Consumer-driven products incent employees to Bend the Cost Curve

in their own self-interest

Your Carrier’s Role

• Form new reimbursement arrangements with providers• Pay for performance• Risk-sharing• Integrated delivery system• Specialization

• Create robust performance networks• Provide transparency tools for members• Facilitate self-insurance programs and options

Your Carrier’s Role

• Aggressively identify and manage chronic conditions• Create and cover meaningful alternatives to simple care in high-cost

settings• Offer effective turnkey wellness programs with demonstrable ROI• Manage pharmacy – potential near-term explosion in costs

Transparency in ActionMRI of the Brain Without Dye

Facility Distance Cost Difference

Good Samaritan Hospital ‐Brockton 10.6 miles $660

Brockton Hospital 6.2 miles $759 +$99 (+15%)

Shields MRI – Weymouth 8.9 miles $764 +$105 (+16%)

Shields MRI – Brockton  10.0 miles $764 +$105 (+16%)

South Shore Hospital ‐Weymouth 7.7 miles $1,363 +$703 (+106%)

Conclusion View the Cadillac Tax as a positive development

• Promote meaningful dialogue with employees• Use looming deadline to act thoughtfully and decisively

Get started in the planning process now Evaluate which combination of approaches fit with company

culture and magnitude of change necessary Continue to monitor the environment to see potential new

approaches and restrictions on current ideas And remember our twin goals . . .

Reset the Premium

Base

Bend the Cost Curve