Kaiser Health News, December 3, 2009
By Julie ApplebyKHN Staff Writer
Dec 03, 2009
Two-thirds of employers would raise deductibles, change insurers or scale back coverage to avoid the so-called Cadillac tax on high-cost benefits proposed in the Senate Democrats’ health care bill, according to a survey released today by consulting firm Mercer.
Among things employers might change or drop: flexible spending accounts, which are used to cover unreimbursed medical expenses, and dental or vision policies.
Their actions would tend to shift more costs to workers – but could help accomplish one of the goals touted by economists and policymakers who support the excise tax: slowing medical spending.
Yet some employers have already raised deductibles or taken other steps to bring down premiums and still have expensive packages.
“On the one hand, the majority of employers will respond the way policymakers hope, by reducing benefits,” says Beth Umland, director of research for health and benefits at Mercer. “But the X factor may be employers who hit the cap, but don’t offer overly generous plans. What are their options going to be?”
The excise tax —which is placed on insurers, but is expected to be passed along to employers — could hit up to 19 percent of medical packages offered by employers in 2013, the first year it goes into effect, according to a separate Mercer analysis of data from 3,000 firms.
Whether an employer’s benefits are subject to the tax depends on the combined cost of all medical benefits, including health, dental, vision and other benefits, such as worker and employer contributions to flexible spending or health savings accounts. Workers and employers can put pre-tax money into health savings accounts, helping cover deductibles, for example.
If the combined total of all benefits exceeds annual thresholds of $8,500 for individuals or $23,000 for families, the difference would be subject to a 40 percent excise tax.
The Mercer survey (.pdf) of 465 employers – a nonscientific sample – also found that of the 63 percent who would make changes to avoid the tax:
— 75 percent would raise deductibles or copayments to bring down premium costs.
— 40 percent would add a lower cost health plan as an alternative.
— 19 percent would terminate employer contributions to health or flexible savings accounts.
While employers aren’t yet changing benefits in response to the proposal, analysts say, the excise tax is one of their main concerns.
“One of the top issues is understanding and anticipating the high cost excise tax,” says Michael Langan, a principal at consulting firm Towers Perrin. “We’re finding that about half of the large employers we work with will be at or above those (threshold) limits.”
The tax is controversial, but remains one of the main ways the Senate proposes to offset the costs of its legislation, bringing in $149 billion over 10 years. It has support from many economists, who say an excise tax will help control medical spending over time by discouraging overly generous coverage. The tax could also result in higher wages for workers, economists say, if employers shift to lower-premium plans and use the savings to give workers bigger raises.
The tax – which is not included in the House health bill — is strongly opposed by labor unions. They say it unfairly penalizes workers in firms with higher proportions of older or sicker workers and those that have forgone wage increases to keep better health benefits.
The threshold has been raised from an original proposal, and Senate lawmakers also added higher limits for certain employers, such as those in high-cost states or those in high-risk professions.
Most analysts – including the Congressional Budget Office in a report out this week – say they expect employers will try to reduce their total medical benefit costs to avoid the tax by shifting more costs to workers, pushing harder to get workers to sign up for wellness programs or making other changes to their benefit offerings. The CBO forecast that 19 percent of employer sponsored plans would be subject to the tax in 2016, three years after it goes into effect.
Ken Sperling, global health care practice leader at benefit consulting firm Hewitt Associates, says that employers may first look at scaling back or eliminating flexible savings accounts.
FSAs, as they are called, allow workers to set aside money pre tax to cover such things as copayments for drugs, the cost of prescription eye glasses or contact lenses and other unreimbursed medical expenses. The legislation proposes limiting such contributions to $2,500 a year per worker, but that amount could still put some plans or employees above the threshold.
“Their first reaction will be scale back the FSA so that no employee is above the threshold,” says Sperling, who says employers may also look at reducing or eliminating other benefits, such as dental coverage, which can add about $1,000 a year to family coverage costs.
Employers have already spent the past few years pushing workers to sign up for health management programs — and raising deductibles and copayments to try to slow rising health spending, benefit analysts say. The threat of an excise tax would likely spur on those efforts.
Even if Congress doesn’t approve an excise tax, Umland says workers are likely to continue to pay more for health coverage as employers seek ways to slow the growth of premiums: “This comes down to the essential question, when you shift more costs to employees do they cut back on unnecessary care, or on needed care? Or do they just pay more? The answer is probably all three.”
Also see Bob Herbert’s December 28 NY Times article “A Less than Honest Policy” saying, “It’s not expected to raise this money directly. The dirty little secret behind this onerous tax is that no one expects very many people to pay it. The idea is that rather than fork over 40 percent in taxes on the amount by which policies exceed the threshold, employers (and individuals who purchase health insurance on their own) will have little choice but to ratchet down the quality of their health plans.”