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Towers Watson: Cadillac Health Plan Tax to Penalize Majority of Employers by 2018

Posted on 21 May 2010

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Health care reform's so-called "Cadillac plan" excise tax will affect more than 60% of large employers' active health plans by the provision's 2018 effective date, according to an analysis conducted by Towers Watson, a global professional services company. Based on data from the firm's 2010 Health Care Cost Survey, the study also found that, by taking certain actions, employers can contain their costs and significantly delay hitting the excise tax cost ceiling for a number of years.

"The original concept of the excise tax was to penalize employers with excessively rich health benefit plans," said Randall Abbott, a senior consultant for Towers Watson. "Assuming even reasonable annual plan cost increases to project 2018 costs, many of today’s average plans will easily exceed the cost ceiling primarily directed at today’s ‘gold-plated’ plans."

The excise tax was included in the Patient Protection and Affordable Care Act (PPACA) passed into law on March 23, 2010. The provision levies a 40% nondeductible tax on the annual value of health plan costs for employees that exceed $10,200 for single coverage or $27,500 for family coverage in 2018. Towers Watson data reveal that the average 2010 cost of medical coverage for active single and family plans is $5,184 and $14,988, respectively. When these figures are projected out to 2018 with reasonable estimates of future health care inflation, the excise tax is often triggered.

As a result of the excise tax provision, a plan with single coverage costs of $11,200 in 2018 would exceed the limit by $1,000 and be assessed a tax of $400. If 10,000 employees were enrolled in that plan, the total tax bill would be $4,000,000. The tax is paid by the employer either through increased premiums on an insured plan or a surcharge levied by the administrator of a self-funded health plan. Employers will be forced to either absorb the additional tax or pass some, or all, of it back to employees in the form of higher premiums.

"All it takes to drive costs above the excise tax cap for six in ten employers is an 8% average annual cost increase. And, without making plan design changes, that’s what many employers are projecting," said Dave Osterndorf, a consulting actuary with Towers Watson. "This rate of increase has been typical for the past several years. We see it as an open question as to whether the recently passed PPACA will mitigate cost trends in the near term for employers."

The study found wide variations by industry. For about half of the industries examined, more than seven out of 10 employers will have at least one plan that will exceed the excise tax threshold in 2018, including the aerospace, chemicals, energy and utilities, health services and pharmaceutical industries.

It’s important to note that, based on the survey data, employers who are top performers* at managing their health benefit strategies have lower costs and face an annual plan cost increase of only 6%. These companies will experience about a five-year buffer before hitting the excise tax ceiling. "These top performers may avoid hitting the excise threshold until 2023 or beyond due to their focus on workforce health improvement, wellness, chronic condition management, and communicating the prudent use of health care goods and services," explained Osterndorf.

"There is some good news: Employers have a long runway to plan for 2018, so there is time to approach the issue strategically and thoughtfully. But reform and the excise tax may have unintended consequences," Abbott said. "As employers strive to preserve the affordability of core health coverage, there will be difficult decisions to change or eliminate ancillary benefits like dental coverage and health flexible spending accounts, which are included in the excise tax definition." Excise tax rules will also be needed to clarify certain confusing aspects of the law. For example, it appears that the cost of a self-funded dental plan is included in the tax calculation, but an insured dental plan is not.

One reason that employers need to be thinking about the excise tax now is the potential impact on any retiree plans they may sponsor. While the actual excise tax is not charged until 2018 (at the earliest), the projection of that future tax might be required to be recognized in an employer’s financial statements today. “This is one of the more poorly understood impacts of the excise tax — and one that employers are just beginning to address with their actuaries and auditors,” noted Osterndorf.

“The excise tax is likely to have repercussions beyond health care plan design and delivery. To continue to offer sustainable employee benefit programs, employers today will need to look at all areas of employee rewards,” Abbott concluded.

*Towers Watson defines “top performers” as companies that meet their health benefit objectives in key areas that include controlling employer and employee costs; enhancing efficient purchasing of health care services; enhancing employee satisfaction, understanding and involvement in health benefit programs; supporting employees' good health; and addressing health risks/current health problems.