The year 2018 may mean very little to the average Joe on the street, but it means a great deal to employer groups. That’s because 2018 is the year that the dreaded “Cadillac tax” kicks in. There has long been the belief that as 2018 comes closer, Congress will act upon this piece of the Patient Protection and Affordable Care Act (ACA) regulation to ease the impact of the Cadillac tax, by either delaying it or altering the impact. If the Cadillac tax stays as currently written, plan sponsors have a right to be concerned.
The Cadillac tax, or “excise tax” as it is also referred to, is calculated as 40% of the cost of health coverage exceeding annual threshold amounts of $10,200 for individual coverage and $27,500 for family coverage in 2018. For fully insured plans, the insurer will pay the tax, which will ultimately be passed onto the employer group. For self-funded plans, the employer groups must calculate and subsequently pay the tax. It is important to note that Cadillac tax payments are not tax-deductible for federal tax purposes.
We have access to a database of group health plan information for over 3,900 employers across the United States with an average size of over 700 employees. Utilizing single and family fully insured premiums or fully insured equivalent budgeted rates for self-insured employer groups, we can project the expected number of plan sponsors that will hit the Cadillac tax thresholds in 2018 and subsequent years. We assume that each plan’s healthcare trend will continue at 6.4%, consistent with the Milliman Medical Index average over the past five years.1 Also, we assume that each employer will keep its current plan design in place throughout the duration of the 10-year projection.
Based on our analysis, we expect 28.5% of plan sponsors will hit the Cadillac tax threshold in 2018. We expect that number to grow to 31.7% by 2019 and 59.2% by 2024. The rapid growth is due to the fact that the Cadillac tax is linked to the consumer price index (CPI) while medical costs are rising at a much higher rate. Therefore, more and more plans will hit the Cadillac tax threshold in each passing year. The year 2023 will be the first year that we project more plan sponsors will be paying the Cadillac tax than those that aren’t.
Figure 1: Percentage of Employers Hitting Cadillac Tax
One of the major underlying issues with the Cadillac tax is that it doesn’t adjust the threshold for the geographic area. Clearly, healthcare costs vary significantly across the country, but the ACA ignores this important factor when determining the threshold amount. In 2018, we will see a wide differential in prevalence of plans that hit the threshold. The high-cost areas in the West and North Atlantic regions have the highest percentage of plans we expect to hit the threshold, with close to 40%. Similarly, the lower-cost areas in the Midwest and East South Central regions of the country have the lowest percentage of plans potentially affected.
Figure 2: 2018 Cadillac Tax Prevalence
What can plan sponsors do to combat the impact of the Cadillac tax? First and foremost, many are beginning to reduce their plans’ benefit levels. By moving to higher deductibles, copays, and out-of-pocket maximums, plan sponsors can shift some cost to the employee and lower the cost to the plan. Employers also can implement spousal surcharges or reduce spousal subsidies with the idea of driving the more costly spouses off the plan. Another less onerous option is to offer wellness programs in order to drive down the cost of healthcare. Employers may also consider searching for lower-cost health plan vendors in an effort to reduce healthcare costs.
The ultimate goal for any employer will be to limit its healthcare trend to the CPI. Once a plan hits the Cadillac tax threshold, it will be extremely difficult to get back below it in subsequent years. Congress may act on the Cadillac tax prior to 2018, but the success of the ACA relies heavily on the income expected to be generated by this tax. Therefore, it is probably not wise to expect help from Congress if the ACA is to stay properly funded.
For assistance in dealing with the Cadillac tax, please contact your Milliman consultant.
1Future medical trend rates may be materially higher or lower than the assumed 6.4% in this blog.