On December 18, Congress gave employers and insurers an early Christmas present when, as part of an Omnibus Spending Bill, they amended the Patient Protection and Affordable Care Act to include a two-year delay of the much-maligned excise tax, aka the “Cadillac tax.”
As a result, employers don’t have to worry about the possibility of a 40 percent excise tax on high-premium health insurance plans until 2020. That’s great news and gives employers more time to work on their “glide paths” to reducing health premiums within their benefits programs.
But beyond giving employers more time, what does the delay really mean for employers and employees? Let’s take a look at http://www.benefitspro.com/2015/12/18/whats-ahead-for-ppaca-in-2016 and how to look beyond the Cadillac Tax to pragmatic, long-term benefits goals.
Part 1: What now?
In recent months, the Cadillac Tax took on a rare status inside the corridors of political power in Washington DC — a policy for which there was bipartisan agreement that something had to change. None of the 2016 presidential candidates from either party support the tax, and a symbolic Senate vote for its delay was almost unanimous. Add to that a chorus of interest groups that don’t often find themselves on the same side of political debates, such as the U.S. Chamber of Commerce and numerous labor unions, and the biggest surprise is that all we’ve got is a delay.
In fact, more than a delay may still be in the works. Here are several potential outcomes for the Cadillac tax:
The delay is the only action taken and companies must plan for its 2020 implementation.
Delay is followed up, most likely after the 2016 election, with full repeal and no other action, i.e., the Cadillac tax dies.
Delay is followed up with a “repeal and replace” approach, similar to what has been touted by Republicans for PPACA overall.
Rather than speculating on which of these actions may occur, let’s examine what is motivating those who will decide the tax’s fate.
Generally speaking, Democrats dislike the tax because they feel it unfairly penalizes labor unions and populous states in the west and northeast — both key Democratic constituencies — where premium costs are high with or without “Cadillac” levels of coverage (aka, high actuarial value for plans). Republicans dislike the tax because they feel it’s a penalty against employers.
However, Democrats don’t want to give up the tax revenue and Republicans, all the way up to new Speaker of the House Paul Ryan, support what’s called an “exclusion” on tax deferment for employers. The exclusion is the tax break that employers get on premiums for employer-based health insurance. The more premium costs rise, the higher the exclusion, which drains revenue without replenishing it with value. Some form of an exclusion is included in recent GOP plans to replace PPACA.
So, even if the Cadillac tax itself goes away, the ideas behind the Cadillac tax may live on in other forms of revenue generation and/or a cap on tax exclusions.
What does this dynamic mean? Simply put, any preparation that companies have done to avoid the Cadillac tax will continue to help them through the coming period of legislative uncertainty and change. That’s good news!
More importantly, when we expand beyond the debates happening inside the Beltway, we see that what has happened and may happen next with the Cadillac tax is less important than what is happening in the market and the benefits world overall — that the Cadillac Tax is a flawed antidote, rather than the ailment itself.
Part 2: Why the Cadillac tax doesn’t matter
In 1980, a benefits consultant named Ted Benna devised a way to use an obscure provision of the IRS Code enacted in 1978 to create a tax-advantaged means of saving for retirement. This loophole would become the 401(k), which is now the prevailing model for retirement savings in the United States.
The 401(k) came at a time when pensions were crumbling under their own weight. Employers, especially in manufacturing, were having trouble keeping their retirement plans afloat and were desperate to find a way to provide retirement savings without sinking their entire operations. The only way they could do it was to start shifting some responsibility (and costs) to employees. The 401(k) provided the vehicle for them to do so, and today, 401(k) plans outnumber company-sponsored pensions by more than 3 to 1.
The parallel in the health benefits business is defined benefit, the dominant current model, versus defined contribution. Defined contribution has caught on in recent years with the rise of private exchanges, where one of the key value propositions is giving employees more choice and enabling them to make these choices through a defined contribution against their health (and other) insurance premium costs. While data are still limited regarding the impacts of defined contribution on consumer behavior, small studies indicate that employees, when given more plan choices and a defined contribution to pay for them, will “buy down” their health insurance, frequently opting for a high-deductible health plan.
The Cadillac tax was seen as accelerating that trend, with or without a private exchange and defined contribution in play. Self-insured employers would be taxed, so to avoid the tax they would put employees in lower-cost plans — almost always high-deductible health plans with a health savings account.
So if the Cadillac tax was an accelerator of this trend, and ultimately this trend is seen as a cost-saver, then why, as this section title claims, does the Cadillac tax not matter?
Because these trends were happening anyway and still would have demanded changed behavior from employers and employees alike. The path forward is to speed up the rate of change now that the Cadillac Tax has been delayed, not slow it down.
Here are two charts that illustrate what is happening with health benefits, costs and other economic factors.
First, here is a chart from the Kaiser Family Foundation, which compares the rise in premium costs and worker share of those costs, as well as relative wage growth and inflation.
Since 1999, health insurance premiums have risen, on average, by 203 percent, and workers’ share of premium costs have increased even more, at 221 percent. Over the same period, inflation has risen by just 42 percent and worker wages have increased by 56 percent. So while our actual earnings have gone up a modest 14 percent (less than 1 percent per year), an employee’s share of health insurance premiums has outstripped our income increases by 165 percent
Furthermore, after modest increases of 2 percent to 3 percent for the past several years, the Kaiser Family Foundation reported that health premium costs rose at 5.3 percent in 2015.
Such disparity in cost vs. wages is unsustainable. Indeed, it was this high level of cost increases that led to the drafting of the Cadillac tax, which is supported by more than 100 tenured economists, despite its political unpopularity.
In other words, while you can remove the Cadillac tax to avoid having plans reach the thresholds and invoke the excise tax, you are not removing what made the model unsustainable. In fact, you’re prolonging it.
And yet, in spite of all the evidence that would lead us to believe that the system is unsustainable, this chart shows that benefits administrators are positive about offering benefits.
While one in three may seem like a small number at first glance, notice that it is the highest number ever recorded by the Society for Human Resource Management (SHRM), and at a time when few would disagree that health costs are out of sync with other costs of living. Another SHRM poll showed that 93 percent of organizations of all sizes and industries either increased their benefits or kept them the same in 2015. Only seven percent reduced benefits.
The reason employers are willing to spend more on benefits may be another number that’s at five percent—unemployment. Even in “unsustainable” conditions, employers are still fighting for talent, and talented employees look for great benefits. Great benefits cost money. Hence, rising costs.
As you can see, it’s challenging to keep costs in check, but it’s a challenge that benefits administrators are willing to take on. Fortunately, there are tools and strategies that are making it easier for administrators to empower themselves to maintain high-quality benefits while also controlling costs.
Part 3: How to Look Ahead with Pragmatism
One of the unexpected thrills of working in the benefits business is getting to solve big challenges and getting to do it for real people—your employees, to be exact. There is possibly no bigger challenge facing our industry than bending the benefits cost curve while maintaining or even increasing quality. It’s a huge issue—so much so that the Affordable Care Act has nearly 1,000 pages devoted to it.
Yet, in the case of the Cadillac tax, the ACA has been deemed the problem rather than the solution. Whether or not that is the case, the power is in your hands to make change happen for real people.
And the key to that challenge is in consumerism.
In previous posts, we have discussed what we call the “Glide Path Toward Consumerism.” It is a multi-year approach to empowering employees to become more engaged and informed healthcare consumers through a combination of decision support tools, new wellness programs, plan design changes that favor HDHP’s without having to go “full replacement,” and other strategies.
The Glide Path is a way to make the most of what was being required under the ACA and still avoid the Cadillac Tax. The good news is that the Glide Path is just as applicable now that the Cadillac Tax has been delayed and may ultimately be repealed.
Here are the basic concepts of the Glide Path and how you can put them to work to benefit your employees while impacting the cost curve.
Good decisions require good information. Technologically-driven decision support tools enable employees to learn more about their benefits without increasing the burden on them or on administrators who would otherwise handle employee inquiries. Such decision support tools are commonplace in online retail, and now they’re being applied to the benefits enrollment experience to help employees make wise decisions with less effort.
Establishing the value of an HDHP with an HSA
First, the bad news: the rise in HDHP adoption has also led to a great deal of anxiety around employees confronting unexpected costs and/or forgoing treatment because of an inability to pay first-dollar costs out of their own pockets. The good news is that a health savings account can help alleviate these concerns. When employers provide a sizable (and tax-deductible) contribution to an employee’s HSA, it can provide employees with first-dollar expense coverage and, over time, help them to build a healthcare nest egg so that they’re truly prepared for the unexpected if and when it occurs.
But we already know all of this detail, right? The issue is not so much how HDHPs work as it is getting employees—and, in some cases, senior executives and CFOs — to see the value of this combination of consumer-centric coverage options. This situation is, again, where decision support becomes key. By showing employers how a shift to HDHP can impact employer costs while not leaving employees high and dry, and by showing employees how to make the most of their new coverage and savings account, you can make everyone in your company an advocate rather than a critic.
Another method to show the value of HDHPs is to show how benefits overall are evolving to meet the needs of new, consumer-driven plan designs described below.
According to a recent MetLife study on employer-based benefits, employers that offer more benefits packages report higher company loyalty among their workforces.
The same survey found that 30 percent of employees at companies with more than 11 benefits showed a strong “intent to stay” at the company. Conversely, companies offering fewer than five benefits showed only 18 percent “intent to stay.”
Do these statistics mean that simply piling up on benefits will make employees more loyal? Nope. Smarter, more personalized benefits offerings are what will make an impact. Luckily, the benefits business is diversifying quickly to meet new consumer needs. New forms of “gap coverage” are emerging to meet the demands of HDHP adoption, while integrated wellness programs and telemedicine, among other new kinds of coverage, are leading the charge in empowering consumers to manage their costs without forgoing seeing a doctor.
Plus, with new methods of providing benefits, like defined contributions inside or outside of private exchanges, combined with more choices for health coverage before even getting to ancillary benefits offerings, benefits professionals have more options than ever, as well as the decision support they need to make the options both work and be cost-effective to employer and employee alike.
Consumerism in the digital age is defined by our ability to provide personalized experiences. In online retail, personalization can mean recommendations based on my past purchases, or based on what “others like me” have purchased. It can also mean question- and algorithm-driven experiences that get me to exactly what I want exactly when I need it. Applying these norms of online retail to the benefits business is an essential component of any benefits program. Doing so requires new technology, which can be a major decision. But it’s an essential one if we’re to reverse the trend of higher costs without higher value.
Finally, we are at the root of what we want to achieve and how we’ll be able to achieve it—through measurement. Having the tools at your disposal to see how your new benefits programs are working enables you to react quickly to employee behavior. As you learn more, you can refine more. As you refine more, the experience becomes more and more personalized without increasing administration. You have transformed yourself from simple administration of your benefits programs to true management and empowerment. The key is in the data, and the data will show you the way to the future.
There was certainly a sigh of relief as we learned that the Cadillac tax would be delayed by two years. It was a decision that, at a minimum, gives companies more time to plan for how to update their benefits programs to avoid the tax. Yet, smart companies will not delay the inevitable by assuming that the Cadillac tax will be repealed and that the status quo will prevail—because the status quo is unsustainable. Action is needed, and has been needed for quite a while, to curb costs and maintain great employee benefits without perpetuating the decades-long upward cost curve.
So, forget about the Cadillac tax. Like retirement benefits before them, health benefits are bound to evolve from the current, predominantly defined benefit model to something that more closely resembles the defined contribution notion of 401(k) plans. The Cadillac Tax wasn’t a protection against this evolution, and its repeal will not prevent it, either. The most important move now is to keep forging ahead. There is a bright future in benefits when you are empowered, through technology and information, to enable employees to make effective consumer decisions. The Cadillac tax was a blunt force object for bending the cost curve when, in fact, a nuanced approach will have at least as large of an impact… provided administrators are empowered to make it so.