Since the passage of the Affordable Care Act (ACA), I have talked to many companies about the law and its new employer mandate, reporting requirements, and tax provisions that affect companies who offer employer-sponsored benefits. During that time, most of the attention has been focused on the coverage expansion – companies stretching their existing health budgets to comply with the employer mandate and the use of federal dollars to expand coverage through the Exchanges and Medicaid.
Now, the so-called “Cadillac tax” appears to be on track to dwarf much of the prior discussions in the employer community. But it should not stop there. The potential impact of the tax on the overall commercial market and the more than 150 million lives covered in employer-sponsored plans should spur hospitals and all health care providers to sit up and take notice. The Cadillac tax is emerging as an important financial consideration for providers as it begins to put downward pressure on health care spending and reshape employers’ approaches to employee benefits.
The Cadillac tax was included in the ACA to help pay for the health coverage expansion and control the growth of health care costs in the private health insurance market by removing incentives for employers to offer more robust health benefits. Beginning in 2018, employers could face a 40 percent non-deductible excise tax if the value of health benefits offered to their employees exceeds certain premium thresholds ($10,200 for self-only coverage, $27,500 for all other coverage). While Congressional lawmakers have introduced four bills to repeal the tax, the Joint Committee on Taxation estimates that it would cost $91 billion to repeal it and none of the bills include provisions to replace that revenue (see the October 6, 2015 Health Care Current).
As the tax starts to impact employers, many may employ strategies to reduce premiums and limit employee benefits and choices to avoid incurring the tax. In fact, Deloitte’s 2015 Survey of US Employers found that most employers expect the Cadillac tax to influence their benefits strategy. Over time, because the premium thresholds are not indexed to medical inflation, even employer-sponsored health coverage that meets the ACA’s standards for affordability and minimum value is projected to incur the excise tax. As the tax hits more and more standard plans, employers may be faced with a difficult choice: pay the growing Cadillac tax on the benefits they offer or pay the arguably smaller tax under the current employer mandate. Either way, these changes will affect individuals in private employer-sponsored plans who have not felt significant disruption in their employer plans or benefit packages to date.
None of this may be news, as policymakers, economists, and even presidential candidates have begun to beat the drum about the tax and its future impact on employers. But what is covered less is what impact this tax will have on hospitals and health care providers.
The bottom line is that the excise tax could significantly affect the market for health care services and products. It will present a strong incentive for employers to redesign their health benefits packages and move toward less generous health coverage to delay incurring the Cadillac tax for as long as possible. Employers will be trying to hold premiums down and control the administrative complexity of compliance with the Cadillac tax. As they do that, hospitals, health plans, and life sciences companies will need to consider the potential impact the Cadillac tax may have on projected utilization of their services, demand for products, and revenue from previously more generous commercial payers.
These changes to employer-sponsored health plans will require health care providers to re-evaluate their revenue cycle management. Provider organizations will see more patients with higher deductibles and less generous benefits who are self-paying a greater share of health care costs. Pressure to hold premiums for employee benefits below the excise tax thresholds could also lead to greater adoption of narrower networks and care and utilization management. Some employers might seek to negotiate and contract directly with health care providers for certain services if they think it can improve their bargaining position. Health care providers that also operate health plans could face excise tax liabilities for providing employer-sponsored benefits packages that exceed the excise tax thresholds.
An August 2015 Health Affairs article authored by several economists and actuaries at the US Centers for Medicare & Medicaid Services (CMS) also held some important conclusions. Health care spending is expected to grow and the uninsured population will continue to decrease, which are all good signs for providers. But, these changes could be modest as the prevalence of insurance plans with greater cost sharing and the impact of Medicare payment updates in government programs set in. Indeed, they state, “The increased availability of private health insurance plans with high cost-sharing requirements, however, is expected to have continued to restrain the use of hospital services among enrollees.”1 Similarly, the effects of high-deductible health plans will restrain utilization for physician and clinical services. These factors should be taken into account by providers to understand and assess their future revenue risk.
The Cadillac tax may prove to be one of the biggest game changers under the ACA. It is expected to have wide reaching impact on millions of lives in the private coverage market. In addition, it may require providers to consider key strategic issues across their entire organization. As employers, it will require them to examine their own philosophy as a care provider offering generous health benefits to their employees. As health care providers, it will affect their commercial revenue, pricing considerations, and engagement with consumers. The Cadillac tax requires providers to take all of this under consideration well ahead of when the first tax bills are due.
1Sean Keehan, et al, Health Affairs, “National Health Expenditure Projections, 2014–24: Spending Growth Faster Than Recent Trends,” July 2015