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Employers Would Reduce Health Benefits to Avoid Excise Tax
Reform would tax ‘too generous’ benefits. Also, limits on catastrophic plans.

By Stephen Miller  12/7/2009
 

Nearly two-thirds (63 percent) of U.S. employers would cut health benefits to avoid paying an excise tax included in the Senate’s proposed Patient Protection and Affordable Care Act, according to a survey by Mercer, an HR consultancy. Mercer estimates that one in five employers offer health coverage that would be deemed “too generous” and thus be subject to the act’s 40 percent non-deductible tax on the excess value.

In November 2009, Mercer surveyed 465 employer health plan sponsors to find out how they might respond to such a tax on their health plans. Respondents included roughly equal numbers of small employers (fewer than 500 employees), mid-sized employers (500-4,999 employees) and large employers (5,000 or more employees).

In general, excess annual costs under the proposed legislation are those above $8,500 for employee-only coverage and $23,000 for family coverage, starting in 2013. Higher annual cost thresholds—$9,850 and $26,000—would apply to retiree plans, coverage for certain workers in high-risk jobs and coverage in certain high-cost states.

In all cases, annual costs include:

 Employer-paid, employee-paid, pre-tax and after-tax premium or premium-equivalent amounts for health, dental and vision coverage.

Annual expenses include pre-tax contributions to health flexible spending accounts (FSAs) and employer contributions to health savings accounts (HSAs) and health reimbursement arrangements (HRAs). See Reform Could Impact Use of Health Savings Accounts.

As health care costs continue to trend upwards, the proposed tax is predicted to apply to about a fifth of all employers if it becomes effective in 2013. The percent of employers impacted by the cap would increase annually because the act proposes that the baseline trend be inflated by the annual consumer price index (CPI) plus 1 percent, which is only about half the average health care cost trend.

“For many employers, it’s a matter of when, not if, they will hit the cap,” said Linda Havlin, a worldwide partner with Mercer. 

How Employers Would Respond
Employers that could be subject to the proposed excise tax on high-cost health plans said they would:

Reduce plan costs to avoid reaching the threshold.

63%

Maintain the high-cost plan but share the cost of the excise tax with employees.

23%

Terminate the high-cost plan.

7%

Take some other measure.

5%

Maintain the plan and absorb the cost of the tax.

2%

Source: Mercer

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Cutting Benefits
Employers that intend to cut covered benefits to avoid the excise tax would:

Increase deductibles and co-pays within the allowed guidelines.

75%

Add an alternative low-cost health plan to their benefit offerings.

40%

Replace their current plan with a low-cost option.

32%

Terminate employer contributions to an FSA, HSA or HRA.

19%

Source: Mercer

Among employers with 5,000 or more employees, 25 percent would terminate employer contributions to FSAs, HSAs and HRAs to avoid the excise tax, compared to 19 percent of employers of all sizes. 

'Cadillac' Plans?
High-cost health insurance plans are sometimes called "Cadillac" plans because of the rich benefits they are assumed to provide. But according to an analysis in the January 2010 issue of the journal Health Affairs (Taxing Cadillac Health Plans May Produce Chevy Results), "Health reform provisions that treat these plans like luxuries may be misguided." That's because plan costs can be driven up by many factors, including industry type, regional medical costs and the health status of the covered employee population. "For small and midsize firms, one to five sick people may account for 50 percent of spending, and thus greatly affect the cost of coverage," the researchers note.

Other Cost Pressures

“The risk to employers is that reform has a lot of other costs that will make it even harder to stay under the cap,” Havlin said. For example, “employers will likely bear the brunt of the government’s [proposed] $156 billion fees on insurers, manufacturers, hospitals and other suppliers—and they will pass the cost on to employees,” she contended.

One argument that some have made in favor of the excise tax is that employers cutting benefits would return the savings to employees in the form of higher wages. However, less than a fifth of respondents (16 percent) said they would convert their cost savings into higher pay, Mercer found.

'Catastrophic' Plans Affected, Too

In addition to asking about the effects of reform on plans deemed to be too generous, Mercer's survey asked employers about the impact on high-deductible health plans intended to cover only catastrophic health expenses, such as hospitalizations. Such plans would be limited severely under House and Senate proposals in the fall of 2009.

Under the Senate bill, for example, a health insurance plan in the small-group market must cover a range of “essential health benefits,” as defined by the Department of Health and Human Services, and must be equivalent to the "typical" employer plan. No health insurance plan could have out-of-pocket limits exceeding those that apply to HSA-linked high-deductible health plans, and small-group plans could not have deductibles exceeding $2,000 for individuals and $4,000 for families (with an exception allowing higher deductible policies for people under age 30).

Many catastrophic plans, in contrast, currently have individual deductibles of $2,500 or more for individuals and $5,000 or more for families. In some HSA-linked plans, very high deductibles are offset by employer contributions to HSAs that are intended to promote employees' cost-effective selection of medical services.

Respondents agreed overwhelmingly (86 percent) that Congress should allow employers and insurance companies the option to continue offering catastrophic plans, Mercer found.

“Small employers have been exiting the health market for years,” Havlin noted. “In some markets that have expensive benefit mandates and taxes on insurance, such as New York City, we’re seeing an uptick in that exit rate.”

Stephen Miller is an online editor/manager for SHRM.

Related Articles: 

Reform Could Impact Use of Health Savings Accounts, SHRM Online Benefits Discipline, January 2009 

Employers Watch and Wait as Health Reform Advances, SHRM Online Benefits Discipline, January 2009 

Employers Group Offers Mixed Appraisal of Senate Health Bill, SHRM Online Benefits Discipline, November 2009

Employers Hold the Line on Health Benefit Cost Increases, SHRM Online Benefits Discipline, November 2009

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