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Cadillac Tax
- 1. Privileged & Confidential For internal use only, do not copy, do not distribute The “Cadillac Tax”
- 2. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Overview The Cadillac tax is: Tax on health coverage provided through employers that is deemed “expensive” – DOES NOT cover insurance purchased directly from insurers by patients – Refers to a Revenue generating provision within title 9 of the Affordable Care Act – Actual Title: Excise Tax on High Priced Employer Sponsored Health Coverage PPACA Enacted Original Launch Date of Cadillac Tax Current Scheduled Launch Of Cadillac Tax 2010 2013 2018 https://www.law.cornell.edu/uscode/text/26/4980I
- 3. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Goals and Implications http://kff.org/health-costs/issue-brief /how-many-employers-could-be-affected-by-the-cadillac-plan-tax/ Raise money to help pay for ACA and reduce national debt Incentivize employers to assess cost effectiveness of insurance plans 2 Decrease utilization of healthcare services by patients 1 3
- 4. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Model of Employer Health Coverage HCPEmployer Insurance Patient Savings Option Premium Out of Pocket Healthcare Wages contribution • Patients and employers (if fully insured) pay regular premiums to insurance provider • Insurance covers part of healthcare cost • The rest is paid out of patients’ pockets • Patient pocket is funded by employer wages and contributions to savings options
- 5. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Goals and Implications HCPEmployer Insurance Patient Savings Option Premium Out of Pocket Healthcare Wages contribution TAX TAX Some employers’ coverage will exceed the ACA limits Employers’ and insurers’ taxes will fund the ACA
- 6. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Goals and Implications Employer Insurance Patient Savings Option Premium Wages contribution To avoid tax on high cost plans, employers will: 1. Constrain Premiums 2. Reduce contributions to savings options 3. May drop savings option altogether 4. Compensation may be shifted to wages Increases in wages will increase income tax TAX http://kff.org/health-costs/issue-brief /how-many-employers-could-be- affected-by-the-cadillac-plan-tax/
- 7. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Goals and Implications Insurance HCPPatient Savings Option Premium Out of Pocket Healthcare contribution In turn, this will cause: 1. Insurance coverage to decrease 2. Patients’ out of pocket expenditures to increase (deductible, copay, etc) http://kff.org/health-costs/issue-brief/how-many- employers-could-be-affected-by-the-cadillac-plan-tax/
- 8. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Goals and Implications Employer Health Plans Insurance HCPPatient Savings Option Premium Out of Pocket Healthcare contribution Ultimately, the result will be: – Decreased utilization of and expenditure on healthcare services http://kff.org/health-costs/issue-brief/how-many- employers-could-be-affected-by-the-cadillac-plan-tax/
- 9. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Meet Bob BOB YOURLAN
- 10. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Key Definitions: “ESHC” Section 9001. Excise Tax on High Cost Employer Sponsored Health Coverage What Is “Employer Sponsored Health Coverage” (ESHC)? Health Plan Tax Preferred Savings Options Qualifying Standalone Health Benefits https://www.law.cornell.edu/uscode/text/26/4980I
- 11. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Key Definitions: “Qualifying Standalone” What Additional/Separate Benefits Qualify as ESHC? https://www.law.cornell.edu/uscode/text/26/4980I Qualifying Offered through employer Cost is excludable from income tax Not specifically excluded in language of ACA Specifically Excluded LTC, nursing home, Home health, etc insurance Limited scope dental and vision Independent coverage for specific illness Hospital or fixed indemnity plan
- 12. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Quiz: Is it ESHC? Bob’s employer offers him coverage for health expenditures through contributions to a Flexible Spending Account (FSA) BOB YOURLAN FSA
- 13. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Quiz: Is it ESHC? Bob’s employer offers him a Preferred Provider Organization (PPO) health plan through the insurer Blue Snake/Red Wing BLUE SNAKE/ RED WING YOURLAN BOB
- 14. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Quiz: Is it ESHC? Bob’s employer also offers him separate limited scope dental and vision coverage through another insurer, Red-Cross RED CROSS YOURLAN BOB
- 15. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Key Definitions: “Aggregate Cost” https://www.law.cornell.edu/uscode/text/26/4980I Employer Health Plan Insurer Standalone Health Benefit Insurer Contributions to: MSA, HSA, HRA, FSA* Health Plan Premiums From: Employer + Employee Total Cost of: Qualifying health benefits offered separately from main health plan Aggregate Cost *employee contribution Counts as well for FSAs
- 16. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Quiz: Is it included in “Aggregate Cost” Yourlan contributes $1,000 to Bob’s HSA HSA YOURLAN
- 17. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Quiz: Is it included in “Aggregate Cost” Bob contributes $1,200 to an HSA HSA BOB
- 18. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Quiz: Is it included in “Aggregate Cost” Bob elects to have $1,200 of his pretax salary re-routed into his FSA account FSA BOB
- 19. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Quiz: Is it included in “Aggregate Cost” Bob and his employer, Yourlan, pay premiums to Blue Snake/Red Wing for coverage of Bob’s health care BOB Yourlan Blue Snake/ Red Wing
- 20. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Key Definitions: “Aggregate Cost” https://www.law.cornell.edu/uscode/text/26/4980I Employer Health Plan Insurer Standalone Health Benefit Insurer Contributions to: MSA, HSA, HRA, FSA* Health Plan Premiums From: Employer + Employee Total Cost of: Qualifying health benefits offered separately from main health plan Aggregate Cost *employee contribution Counts as well for FSAs
- 21. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Any employee whose ESHC’s “Aggregate Cost” is: > $10,200 if self-only > $27,500 if Family What Is Taxed? – The amount by which an individual’s coverage cost exceeds ACA limits will be taxed at 40% 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 0 1 2 3 AggregateCostofPlan Self Only Limit Family Limit Self Example Family Example 40 % 40 % http://housedocs.house.gov/energycommerce/ppacacon.pdf How the Tax is Triggered
- 22. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Bob’s Aggregate Cost • The sum of combined contributions to Bob’s FSA and combined premiums for Bob’s health plan equal his “Aggregate Cost” • Standalone Dental/Vision is not ESHC; It is not added to “Aggregate Cost” + + + = $1,200 $1,000 $8,000$1,000 FSA Contributions Health Plan Premiums 11,200 Aggregate Cost
- 23. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Bob’s Tax Fine The aggregate cost of ESHC exceeds ACA limits by $ 1,000 =11,200 Aggregate Cost 10,200 ACA Self-Only Limit - $ 1,000 Taxable Dollars 40 % of the taxable dollars will represent the total Fee for Bob’s health coverage $ 1,000 Taxable Dollars x 0.4 Tax Percent = $ 400 Fee for Bob’s ESHC …So who pays?
- 24. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Contributing Entities Each contributor pays “applicable share” of Fee Share of Aggregate Cost Employer Insurance Provider Other Benefit Provider “Applicable Share” is equal to % share of Aggregate ESHC cost https://www.law.cornell.edu/uscode/text/26/4980I Employer Health Plan Insurer Standalone Health Benefit Insurer Contributions to: MSA, HSA, HRA, FSA* Health Plan Premiums From: Employer + Employee Total Cost of: Qualifying health benefits offered separately from main health plan Aggregate Cost
- 25. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Applicable Share Calculation $1,200 $1,000 FSA Contributions $8,000$1,000 Health Plan Premiums 11,200 Aggregate Cost = 19.6% = 80.4% $2,200 $9,000 2,200 / 11,200 11,2009,000 /
- 26. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Applicable Share Calculation 19.6% of $ 400 Fee for Bob’s ESHC $400 $78.40 80.4% of $400 $321.60Total Owed by Each Entity
- 27. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Entity Responsibilities Employer • Calculate Total Excess cost • Calculate applicable shares • Report costs and applicable shares to Gov. and providers • Pay applicable share Insurance Provider • Pay applicable share Other Benefit Provider • Pay applicable share https://www.law.cornell.edu/uscode/text/26/4980I
- 28. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Penalties – Underpayment or no payment is penalized – 30 day grace period – Interest on unpaid portions between 30 days and date of payment is owed by applicable entity as penalty – Penalties are assessed and owed separately for each contributing entity https://www.law.cornell.edu/uscode/text/26/4980I
- 29. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Cost Threshold Adjustments Threshold Adjustments For Specific Employers – Adjusted for workforce gender and age characteristics as follows: • Using Blue Cross/Blue Shield Federal Employee Plan as a standard: • Estimate premiums for every employee given an employer’s workforce demographics • Estimate premiums if work force had national average gender and age distribution • Increase the ACA limit for each employee by the difference in the two premium estimates – If a majority of an employer’s workers perform “high risk” jobs, then • The limit shall be increased by $1,650 for self-only or by $3,450 for family – If an employee is a qualified retiree, then • The limit shall be increased by $1,650 for self-only or by $3,450 for family https://www.law.cornell.edu/uscode/text/26/4980I Threshold Adjustments For Specific Employees
- 30. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Cost Threshold Adjustments Professions considered “high risk” include Law Enforcement Officers Longshore workers Forestry Fishing Telecommunication/el ectrical line installation/repair Out-of-hospital emergency medical care providers (ie. first responders) Agriculture Retiree of a high risk profession, if in that profession for 20 + years Firemen Construction Mining https://www.law.cornell.edu/uscode/text/26/4980I
- 31. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Cost Threshold Adjustments To illustrate these adjustment concepts: lets pretend Bob’s ESHC cost stays the same, but instead of working at Yourlan at a desk, he is now bob the builder at a construction company BOB BROCK ‘N BACH’S CONSTRUCTION
- 32. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Cost Threshold Adjustments Bob’s Individual Limit is increased by 1,650 because of his high risk profession =11,200 Aggregate Cost 11,850 ACA Self-Only Limit (10,200 + 1,650) - $ 0 Taxable Dollars $ 0 Taxable Dollars x 0.4 Tax Percent = $ 0 Fee for Bob’s ESHC No longer a fee because aggregate cost is below limit
- 33. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Cost Threshold Adjustments Baseline/ National Threshold Inflation – Thresholds will be adjusted for health cost inflation in 2018 (HCAP) – Baseline thresholds AND adjustment amounts for retirees and high risk professionals will be indexed to the CPI in similar fashions 2018 20202019 Thresholds adjusted by % increase of premiums for the blue cross blue shield standard federal employee plan less 55% Thresholds and Employee level Adjustments will be increased by Inflation of Consumer Product Index Plus 1 % Thresholds and employee level adjustments will be increased by Inflation of Consumer Product Index alone moving forward http://housedocs.house.gov/energycomm erce/ppacacon.pdf
- 34. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential The Future Trends in Premium Costs 0 10,000 20,000 30,000 40,000 50,000 60,000 1990 2000 2010 2020 2030 2040 2050 Family premium trends thresh Family CPI indexed thresh 4.5 % growth projection BLUE GREEN = ACA cost limits RED PURPLE = Avg premium price Avg premium price inflates faster Than ACA cost limits http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
- 35. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential The Future Trends in Premium Costs More Employers will be affected over time 30 % by 2029 Percent *Model used data from Kaiser health survey http://inq.sagepub.com/content/48/4/322.full.pdf
- 36. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential The Future Trends in Premium Costs http://kff.org/health-costs/issue-brief/how-many-employers-could-be-affected-by-the-cadillac-plan-tax/
- 37. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential Summary • Employers will have to increasingly – Reduce covered health services – Increase deductibles and cost sharing – Decrease out-of-pocket support to employees through savings options • Reluctance to spend on healthcare will increase • HDHP Issues – Less deductibles will be met; less people will have prescription coverage kick in • Prescription affordability issue may become systemic – Prescription coverage may decrease in more traditional plan types – Cost sharing may increase in all forms (deductibles, copays, coinsurance)
- 38. Privileged & Confidential For internal use only, do not copy, do not distributeFor internal use only, do not copy, do not distribute Privileged & Confidential The “Cadillac Tax” Other excluded standalone benefits - separate coverage for accident or disability income - general or auto liability insurance or supplemental liability - worker’s comp or anything of the like - automobile medical coverage - credit only insurance - coverage of on site medical clinics
Editor's Notes
- Not employer sponsored health coverage under the law because it is in the list of specific exclusions
- Only employer contributions to savings options are counted toward aggregate cost, Except FSAs, where employer and employee contributions are counted. Standalone benefits costs are counted similar to health plan costs, IF the standalone benefit is considered employer sponsored health coverage
- Employee contributions to HSAs are not counted toward “aggregate cost” of employer sponsored health coverage
- FSA is the exception to this rule
- Employers are responsible for savings options costs, insurance companies are responsible for the premiums for the benefits that they provide (standalone benefit premiums are the responsibility of the provider of that benefit) Percentage of tax fine owed by each entity is equal to the percentage that said entity’s benefit costs contributed to an employee’s aggregate cost of employer sponsored health coverage
- Gender and age adjustment explanation: The point here is that workforces with more women and high average age are priced higher for premiums. It would be discriminatory to hold all employers to the same cost standard because some employers are disadvantaged by nature of who they employ. The way this works is somewhat complicated: blue cross blue shield standard federal employee plan is used as a standard measure of premium determination. For each employee of an employer, that employee and all his/her benefits are priced as they would be by blue cross blue shield, factoring into the equation the demographics (gender and age) of the employer’s workforce. The same calculations for that employee is done, assuming now that his/her fellow employees have the national average distribution of gender and age. If the first estimate (using the actual workforce demographics) is greater than the second estimate (national average demographics), then the difference between the two will be added to the cost limit (10,200 or 27,500) for that employee. This calculation is done for every employee of the employer. It is unclear how the government expects the employers to be able to make these calculations for the cost of the employee under a blue cross blue shield plan.
- HCAP stands for healthcare cost adjustment percentage. The inflation percentage of blue cross blue shield standard federal employee plan from 2010 to 2018 will be assessed. The amount by which this inflation percentage exceeds 55 % will be translated to the national baseline thresholds. Ie if BC/BS premiums increase 60 %, then baseline thresholds will be increased 5 % (60 – 5)
- CPI inflation is 2.4 % Health care historically inflates 4-7 % per year If health coverage cost limits increase according to CPI inflation, while coverage costs increase by 4-7%, it becomes clear that more and more coverage plans will cross the tax threshold as time goes on.
- Percent refers to employers that will have at least one employee triggering the tax
- One of the alarming issues that the ACA attempts to resolve is the out of control inflation of health care costs. As stated before, premium inflation rate is normally 2 times that of the CPI inflation rate. By implementing the Cadillac tax, Employers and health benefit/plan providers (insurance companies) are tasked with reining in the inflation of healthcare costs. A hard limit is placed on the cost of health benefits that employers and insurers are allowed to provide to their employees. The results of such a tax could fall anywhere between two extremes: one extreme being that employers/insurers do nothing to actually control healthcare cost inflation, and push all of the tax burden onto the patients through high out of pocket costs for health services; the other extreme is that employers/insurers are innovative enough to actually reduce the inflation rate of healthcare costs and patients are able to enjoy the same level of benefits they always have, at the same relative cost. Judging by the statements of many companies, the former is more likely—at least in the short term. The possibility that these statements are a strategy of the employers/insurers to have the tax repealed cannot be ruled out. Look for costs to patient for prescription drugs to increase over the future. More employers will offer HDHPs, current HDHPs will see deductibles rise, other plans will also see reduced coverage for medical services. Patients will become more cost conscious when shopping for prescription drugs in the years to come.