The document discusses the Cadillac tax provision of the Affordable Care Act. It will impose a 40% excise tax on employer-sponsored health plans with premiums above $10,200 for individual coverage and $27,500 for family coverage beginning in 2018. Many provisions of the ACA will contribute to rising health care costs and make it challenging for employers to avoid this tax. Employers are encouraged to continuously monitor health care costs, consider plan design changes, and weigh options like self-funding to manage costs and delay impacts of the Cadillac tax.

1. Presented to SALGBA Jurisdictional Members May 27, 2010 By Healthcare Data Management, Inc. (HDM)

2. Presented by David McSweeney, COO, Healthcare Data Management, Inc. (HDM) David Ermer, Ermer & Brownell, PLLC Barbara Niehus, FSA MAAA, Niehus Actuarial Services, Inc.

5. The tax expressly applies to governmental plans.

6. Special rules apply to multi-employer (Taft-Hartley) plans.3

8. What is the Cadillac Tax? Annual Adjustments • Beginning in 2018, an adjustment is made for employer’s age/gender composition (versus national average). •In 2019, thresholds are adjusted by CPI-U plus 1 and thereafter by the CPI-U. No Adjustment •For geographical variations – e.g. New York City is the same as West Virginia. 5

11. Rate determination is to be performed annually.

12. Tax calculation is performed monthly at the employee level.7

14. The illustrations show that even plans of average cost will find it challenging to meet 2018 Cadillac premium thresholds.Note: Assumes 7.5% annual trend. This illustration does not factor in any of the cost escalators created by healthcare reform. Source: Kaiser Family Foundation website – Agency for Healthcare Research and Quality, Center for Financing, Access and Cost Trends. 2008 Medical Expenditure Panel Survey (MEPS) – Insurance Component Tables II.D.1, II.D.2, II.D.3. The Medical Expenditure Panel Survey IC is an annual survey of establishments that collects information about employer-sponsored health insurance offerings in the United States. 8

16. Towers Watson projects that 60% of large employer plans will be impacted by the Cadillac tax in 2018.*

17. What’s your average annual per employee spend today?

18. Every premium dollar you spend over $10,200 or $27,500 starting in 2018 will be taxed at the rate of a non-deductible 40%!The Cadillac tax will cause the biggest problem for rich plans in high-cost areas. *Source: Towers Watson projects that 60% of large employer plans will be impacted by the Cadillac tax in 2018. (Source: http://www.towerswatson.com/press/1895) 9

20. True, grandfathering protects against some provisions of healthcare reform, and it gives state and local governments more control over their plans.

21. For example, grandfathering exempts a plan from extending coverage to children up to age 26 who are covered by other plans.

22. Special rules also apply for grandfathered, multi-employer plans.10

27. Restrictions on annual limits – effective 2011*

28. Elimination of annual limits – effective 2014

31. These “children” can be a son, daughter, adopted child, stepchild, or eligible foster child of a health plan member.For self-funded plans, all of this will translate to higher costs. For fully funded plans, premiums will definitely rise. *Source: U. S. Department of Labor estimate. 15

33. Although the Act still does not require an employer to offer mental health benefits, it does require complete parity with medical benefits, if the employer chooses to offer mental health benefits.

36. Uniform operating rules that require certifying compliance with HIPAA begin in 2013.

37. Electronic funds transfers required under PPACA.

38. To the extent that administrative fees increase to cover these costs, they add to the total plan costs measured for the Cadillac tax. 17

40. Reform established an Independent Payment Advisory Board that, beginning in 2014, is to submit legislative proposals to reduce the per capita growth rate in Medicare spending beyond established targets.18

42. The pace of the increase in Medicaid enrollees will quicken in 2014, when Medicaid becomes available to all non-Medicare eligible individuals under age 65 with incomes up to 133 percent of the Federal Poverty Line (FPL) – $14,400 in 2010.

43. Cost shifting currently caused by decreasing Medicaid reimbursements to providers will increase dramatically because of the huge expansion of the Medicaid population.19

45. Self-funded employer and Taft-Hartley plans are exempt from the tax.20

47. This sweeping change expands the number of diagnosis and procedure codes used by healthcare providers and facilities from 24,000 to 155,000.

48. Providers and health plans must comply with ICD-10 by October 2013 – just about the time the biggest of the health reform Catch 22s take effect.

49. ICD-10 – and the related upgrade to version X12 5010 – will prompt…•Increases in administrative expenses •Increases in payment errors •Greater need for auditing. 21

50. 22

53. Get sound actuarial advice from an actuary who has a solid understanding of your plan, your workforce, and your objectives.24

55. Unlike retrospective auditing, which identifies claims errors and abuse going back one or two years, continuous monitoring scrutinizes claims practically as they are paid, preventing the accumulation of wasted expense.25

57. Continuous monitoring combined with 100-percent-of-claims analysis is the state-of-the-art tool for controlling health plan expense in the era of healthcare reform.

58. Continuous monitoring allows you to focus on health improvement, wellness, chronic condition management, and communicating the prudent use of health care goods and services to plan members.

59. According to Towers Watson, employers who manage their health benefit strategies the best and concentrate on wellness and chronic condition management can…• Contain the annual increase in their health plan expense to about six percent. • Prolong the impact of the Cadillac tax by as much as five years. 26

61. Many of the rules are changing. Some of the cost management tools you have used in the past may no longer be available. And new ones will be developed.

62. Continuously challenge your administrator/insurer and other vendors to make sure you are getting the best value for your money.27

64. You will also avoid the Health Insurance Provider’s Fee that will be charged to insurance companies who will most certainly pass it along in higher premiums.

65. Remember, the fee begins at $8 billion in 2014 and goes up from there.28

68. If the rules don’t exclude self-funded dental/vision, consider insuring these benefits.

69. In any event, make sure that these plans are considered stand-alone. Update plan documents and contribution schedules if necessary.30

71. The Cadillac tax calculations allow you to calculate premiums separately for active employees and retirees.

72. Rules also allow for combining costs for Medicare-eligible with under-age retirees. Some modifications to your plan documents may be required to take full advantage of this provision.

73. If you are taking advantage of the Retiree Drug Subsidy, you may want to rethink your approach to Part D for 2018.31