Yes, your employee health benefits are under attack by the Cadillac tax! This tax may not be here yet, but it is responsible for the accelerated reduction in your benefits over the past several years.
This attack takes a form that most employees have learned to accept. Once in place, the resulting reduced health benefits are permanent . As long as employees don’t complain or leave jobs to take better health benefits elsewhere, employers have no incentive to stop the attack. Burdened with the legal obligation to provide health benefits for their employees, employers feel they have no other choices if they are to contain the growth of costs. They use any and all methods legally available to them. This reduction in health benefits is occurring irrespective of how “generous” company health plans actually are today. Perpetually high, health cost inflation makes today’s “Chevy” health plan, tomorrow’s “Cadillac” health plan.
Armed with the health benefit definition for what is considered “too generous” ($10,200 single coverage, $27,500 family coverage), the Cadillac tax has given employers an excuse to accelerate the reduction in health benefits process. They are taking advantage of it.
The Employer’s Attack on Employee Health Benefits
For many employees, total compensation includes health benefits (as well as wages, pension benefits, vacation, and paid leave). For every company that competes on the global marketplace, employee compensation is a cost that must be minimized whenever possible. In the 1980s when defined benefits pension obligations became too costly, companies moved employees into defined contribution pensions (401Ks). It is now time to target employee health benefits in the same way; namely, by transferring the financial risk of the benefit costs onto employees and away from the employer. The delay in the application of the Cadillac tax (pushed back to 2020 this past December) gives employers added time to gradually reduce the health benefit so that employee reaction is muted. What are employees getting in return for reduced health benefits? …Increased wages to compensate? …Increased pension benefits? Increased paid leave?
Employers are utilizing a number of strategies to reduce health benefits. They include:
- Shift costs to employees. Employers are replacing popular low cost-share health plans (like Preferred Provider Organization plans) with high cost-share High Deductible Health Plans (HDHP). While only 8% of all covered employees where covered by HDHPs in 2009, 24% are covered today according to the Employer Health Benefits: 2015 Annual Survey by the Kaiser Family Foundation.
- Reduce medical benefits. Employer-sponsored insurance plans are not subject to Essential Health Benefit mandates, so they do not have to provide minimum health care benefits.
- Eliminate health benefits for spouses who were eligible for coverage through their own employer. One spouse with minimal coverage will no longer be able to opt for other spouse’s more “generous” coverage.
- Decrease employer subsidizes to family coverage. Family coverage is already subsidized less than single coverage. Future family coverage subsidizes can be further reduced, especially if the employee pool is minimally affected.
- Remove higher cost hospitals and medical providers from network coverage. Employers are creating their own health care benefit networks. The employer negotiates lower rates with these providers and narrows the selection of providers meeting these lower costs (narrow networks).
- Limit or eliminate out-of-network reimbursement. By creating their own networks, employers can move all of the cost of out-of-network claims to the employee (Exclusive Provider Organizations (EPOs)).
- Separate dental and vision plans. By separating or eliminating dental and vision insurance from primary medical plans, these stand-alone plans are not included in Cadillac Tax calculation and can be removed from employer subsidy demands.
- Limit what employees can contribute to HSAs and FSAs. Since these medical savings account contributions are included in the Cadillac tax computation, removing them will lower the employer tax liability. In the case of the HSA, this would make the high cost- share HDHP much less desirable as an insurance product and therefore will have to be accomplished after strategy 1 above is complete.
- Reduce or eliminate employer contributions to HSAs. This can be accomplished only after strategy 1 above is complete.
- Eliminate the health insurance plan altogether. Employers would gladly get rid of this burdensome and open-ended cost. If we are lucky, the employer would give employees higher wages to compensate for the loss. The existence of the Health Insurance Marketplace makes this option a viable strategy today.
- Helping to improve the health of employees. Through the introduction of wellness programs, employers are attempting to help reduce the medical expenditure of its employees and thereby reduce its overall cost.
The list above is an inevitable consequence of the unreformed (and politically unstoppable?) high cost of health care. For some companies, the retention of key employees requires they keep generous (low cost-share) health benefits and, therefore, many of the price-reducing strategies above are not viable. These employers will have to pay the Cadillac tax and raise prices for their services or products (if the market allows).
Government’s Attack on Employee Health Benefits
As we all know, individual Americans do not have a strong voice in Washington and therefore it is politically easier to increase our burden of healthcare costs than to tackle inefficiencies and inflated healthcare costs within HICUP. The Cadillac tax was structured with all the ingredients for employee health benefit reduction; namely:
- Introduce the concept and delay it so that employers have time for gradual reduction in health benefits,
- Make it onerous (40% of the excess over the benchmark thresholds) so that employers have strong incentives to reduce benefits,
- Define specific dollar benchmark thresholds that act as price ceilings for benefits ($10,200 for individual coverage, and $27,500 for family coverage), and
- Soothe employer’s complaints by making the Cadillac tax deductible for the employer.
Why is Our Government Targeting Employer-Sponsored Health Benefits for Taxation?
Employer-sponsored health benefits are heavily taxpayer-subsidized (health insurance premiums and medical savings account contributions are excluded from income and payroll taxes). In “Options for Reducing the Deficit: 2014 to 2023”, the Congressional Budget Office (CBO) estimates our government has lost about $250 billion in 2013 tax revenues because of these tax-free treatments for employer-sponsored health insurance. The Cadillac tax is our government’s attempt to get some of this money back.
The Bottom Line
Employers are reducing employee health benefits and transferring the financial risk of medical costs onto employees. The Cadillac tax thresholds, which serve as definitions for what are considered “too generous” health benefits ($10,200 single coverage, $27,500 family coverage), have given employers an excuse to accelerate the orocess of health benefit reduction.
Targeting individual Americans with erosion of their health benefits is not the solution to reducing health care costs that are twice those found in other industrial countries. A system needs to be identified which gives all Americans access to affordable health care . Achieving this goal is the objective of BB’s Brigade.