Cadillac tax a bitter pill for health care sector

The Cadillac tax under the Affordable Care Act (ACA) will have a more significant impact on the health care sector than on other industries. Based on current medical trends, many health care plans are expected to exceed the premium thresholds of $10,200 and $27,500 in 2018, when the 40% excise tax goes into effect. All health plans are affected, including both self-insured and fully insured programs. Employers need to know their risks from the Cadillac tax and educate their employees on reasons for plan changes.

The health care sector tends to have a diverse workforce, union employees and high benefit-level health plans. Union groups typically pose a particular problem because they bargain for health coverage over a number of years, making it more difficult to proactively make plan changes to reduce exposure to the tax.

Regardless of the setup, health care organizations that have not begun to strategically plan for the effect of the tax should do so, to learn if they are subject to the tax in 2018, how much it will be and what they can do to reduce the impact.

Already changing
Many health care organizations have already begun making changes in anticipation of the tax, reducing the breadth of benefits, lowering the cost of coverage, eliminating higher-cost options such as indemnity plans, HMOS and benefit-rich PPO programs. These moves are tied not just to the Cadillac tax but to overall ACA compliance.

Employers with collective bargaining plans also are beginning to focus on the Cadillac tax simply because collective bargaining agreements may apply for several years. As a result, the Cadillac tax must be considered for any new contracts. Agreements must clearly outline who is responsible for the tax (individuals or employers), how it will be paid, and steps taken to reduce exposure, if any. This creates a challenge for negotiations, since in most cases, plan benefits will be reduced and/or the burden for the tax shifted to the employee.

It’s also important to highlight that the Cadillac tax will significantly affect health care flexible spending account (FSA) programs, which are included in the tax calculation. As a result, employers may need to reduce the amount of employee contributions or terminate the FSA program altogether.

Communication is a vital step to maintain employee relations. Employees need to know how the Cadillac tax affects them and how the employer plans to reduce costs, including plan design changes, lower benefit levels or aggressive wellness programs. An employer that waits until the fall of 2017 to think carefully about the tax may need to slash benefits or raise employees’ out-of-pocket costs. If there is little to no explanation, employers likely will face resistance from unhappy workers.

Now is the time to start getting stakeholders involved, whether union leadership or department heads, so they know the reason changes are coming, and employees don’t think that cutting benefits or changing plan design is simply to save the employer money. That way they can begin to understand and accept why an employer is implementing changes to lower premiums.

Can wellness reduce Cadillac tax exposure?
It stands to reason that if an organization is going to reduce the benefits level to lower premiums, they are also going to take steps to expand their wellness programs. Although these programs are voluntary, they are increasingly offering “rewards/incentives” to encourage employees to be engaged and adopt a healthy lifestyle to reduce their overall claim costs. Lower claims will lead to lower premiums and reduce exposure to the tax. A fully engaged workforce participating in wellness should be primed to lower the cost of health care and reduce Cadillac tax exposure.

Alternative providers
The ACA, the Cadillac tax and the rise in health care costs in general have led to alternative approaches to lower plan costs. One approach is for employees to seek an appropriate level of care that is cost-effective. Rather than a physician office visit, employees can use “minute clinics” at pharmacies and online physician visits on Teladoc®.  These alternatives offer lowered costs for the plan and employee as well as increased access to services for participants. To alleviate costs, some very large employers are hiring major health care systems to run health care clinics specifically for their employees. The organization spends less, and employees see substantial cost savings.

Consumerism? Pricing services by specific provider
Some national insurance carriers now offer their members price comparisons, whereby someone can see the actual cost by service, doctor or hospital. For example, someone looking to have knee replacement surgery at one hospital can view the costs to have the surgery done at an equally respected, but less expensive, hospital. Other insurers offer only estimates for the geographic area. The differences for similar procedures can be surprising ― and knowing the differences can provide significant cost savings and change behavior.

Bill Hopkins
+1 612 677 5296

Andy Mechavich
+1 312 602 8167

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