Up next: The ACA “Cadillac” tax

The Affordable Care Act provision to heavily tax “Cadillac” health insurance plans is scheduled to be implemented in 2018. Employer-sponsored health plans that exceed a federally-determined cost will be taxed 40 percent of the amount above the threshold. The question will be: Who will bear the cost of the “luxury” tax?

Employers with multi-year contracts and generous benefits have to start planning now. For example, a three year “Cadillac” plan negotiated in 2015 with an effective date of July 1 will have a tax exposure for the last six months of the contract term. Few public or private sector employers would expect to absorb the entire additional cost. Their only choice, therefore, would be to reduce the cost of their health plans by cutting benefits for plans that exceed the threshold. If they choose to offset the reduction in benefits by increasing employee wages, the additional personal income would be subject to taxes.

One way or another, the federal government is in for a revenue boost to help pay for the Affordable Care Act, legislation that has increased access to health insurance through taxpayer subsidies.

According to a summary posted by CIGNA Insurance, plans that exceeded $10,200 for an individual or $27,500 for family coverage in 2010 will be subject to the tax. Under current guidelines, insurers will pay the surtax for their customers but will likely pass those costs through in the form of higher health insurance premiums. For employers that are self-insured, the tax will be calculated and paid directly by the employer to the federal government.

So how will this work for individual coverage? Let’s use an annual insurance premium of $12,000 ($1,000/month). This plan costs $1,800 more than the federal threshold and will be taxed an additional $720 per year. If an employer has 50 employees with only individual coverage, the employer’s plan would rise by $36,000.

If the same employer had all participants enrolled in a family plan that cost $30,000 per year, the plan would be $2,500 above the threshold. The additional tax would increase the cost of the “Cadillac” plan by $50,000.

Actual threshold figures will be recalculated to account for any inflation that occurred between passage of the legislation and the implementation date. The cost of a health plan includes both worker and employer contributions to flexible spending and health savings accounts. Stand alone dental and vision plans, long term care insurance and disability benefits are not part of the calculation.

The good news is that most people in Maine and New Hampshire will not have to worry about the tax on “Cadillac” plans. According to Kaiser Health News, the total cost of the average family policy offered by employers was $13,375 nationwide, less than half of the threshold plans.

The challenge for employers operating under a negotiated employment contract, however, is to begin setting expectations about the added costs. Many such contracts attempt to pay lower wages in exchange for more generous but costly benefits.

In most all organizations, health benefits are the second largest line-item in the budget after salaries/wages.

Though the 2014 elections changed the majority in Congress, few believe that the basics of the Affordable Care Act are likely to change in the near future. With more Americans being insured and everyone now required to have health insurance coverage, the challenge will be to control the cost of health care.

Though simple to say, the real cost drivers of our health system are individual behaviors when it comes to utilization of health services, diet and exercise. With low barriers to emergency room services, far too many people seek treatment through the most expensive door in our hospitals. That care often is a function of chronic diseases such as diabetes, heart disease and pulmonary complications from smoking.

If American wants to reduce the cost of health care, we simply need to take better care of ourselves and see and listen to a primary care physician on a regular basis.