Survey: 'Cadillac tax' would lead employers to trim costs

Kaiser Health NewsDecember 2, 2009 

WASHINGTON — Two-thirds of employers would raise deductibles, change insurers or scale back coverage to avoid the so-called "Cadillac tax" on high-cost benefits proposed in the Senate Democrats' health care bill, according to a survey to be released Thursday by consulting firm Mercer.

Among the things employers might change or drop: flexible spending accounts, which are used to cover unreimbursed medical expenses, and dental or vision policies.

Their actions would tend to shift more costs to workers, but could help accomplish one of the goals touted by economists and policymakers who support the excise tax: slowing medical spending.

Yet some employers already have raised deductibles or taken other steps to bring down premiums and still have expensive packages.

"On the one hand, the majority of employers will respond the way policymakers hope, by reducing benefits," said Beth Umland, the director of research for health and benefits at Mercer. "But the X factor may be employers who hit the cap but don't offer overly generous plans. What are their options going to be?"

The excise tax — which would be placed on insurers but is expected to be passed along to employers — could hit up to 19 percent of medical packages that employers offer in 2013, the first year it would go into effect, according to a separate Mercer analysis of data from 3,000 firms.

Whether an employer's benefits are subject to the tax depends on the combined cost of all medical benefits, including health, dental, vision and other benefits, such as worker and employer contributions to flexible spending or health savings accounts. Workers and employers can put pretax money into health savings accounts, helping to cover deductibles, for example.

If the total of all benefits exceeds annual thresholds of $8,500 for individuals or $23,000 for families, the difference would be subject to a 40 percent excise tax.

The Mercer survey of 465 employers — a nonscientific sample — also found that of the 63 percent who'd make changes to avoid the tax:

  • 75 percent would raise deductibles or copayments to bring down the costs of premiums.
  • 40 percent would add a lower-cost health plan as an alternative.
  • 19 percent would terminate employer contributions to health or flexible savings accounts.

While employers aren't yet changing benefits in response to the proposal, analysts said, the excise tax is one of their main concerns.

"One of the top issues is understanding and anticipating the high-cost excise tax," said Michael Langan, a principal at consulting firm Towers Perrin. "We're finding that about half of the large employers we work with will be at or above those (threshold) limits."

The tax is controversial, but it remains one of the main ways the Senate proposes to offset the costs of its legislation, bringing in $149 billion over 10 years. It has support from many economists, who say an excise tax would help control medical spending over time by discouraging overly generous coverage. The tax also could result in higher wages for workers, economists say, if employers shift to lower-premium plans and use the savings to give workers bigger raises.

Labor unions strongly oppose the tax, which isn't included in the version of the health bill that the House of Representatives passed. The unions say it unfairly would penalize workers in firms that have higher proportions of older or sicker workers and those that have forgone wage increases to keep better health benefits.

Senators added higher limits for certain employers, such as those in high-cost states or high-risk professions.

Most analysts — including the Congressional Budget Office in a report this week — say they expect that employers would try to reduce their total medical benefit costs to avoid the tax by shifting more costs to workers, pushing harder to get employees to sign up for wellness programs or making other changes to their benefit offerings. The CBO forecast that 19 percent of employer-sponsored plans would be subject to the tax in 2016, three years after it goes into effect.

Ken Sperling, the global health care practice leader at benefit consulting firm Hewitt Associates, said that employers might look first at scaling back or eliminating flexible spending accounts.

These accounts allow workers to set aside money before taxes are paid on it to cover such costs as copayments for drugs, prescription eyeglasses or contact lenses and other unreimbursed medical expenses. The legislation proposes limiting such contributions to $2,500 a year per worker, but that amount still could put some plans or employees above the threshold.

"Their first reaction will be scale back the FSA so that no employee is above the threshold," said Sperling, who added that employers also might look at reducing or eliminating other benefits, such as dental coverage, which can add about $1,000 a year to family coverage costs.

Employers already have spent the past few years pushing workers to sign up for health management programs, and raising deductibles and copayments to try to slow rising health spending, benefit analysts said. The threat of an excise tax probably would spur on those efforts.

Even if Congress doesn't approve an excise tax, Umland said, workers are likely to continue to pay more for health coverage as employers seek ways to slow the growth of premiums: "This comes down to the essential question: When you shift more costs to employees, do they cut back on unnecessary care or on needed care? Or do they just pay more? The answer is probably all three."

(Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy-research organization that isn't affiliated with Kaiser Permanente.)

ON THE WEB

Senate roll call vote on health care proposal

Congressional Budget Office analysis of Senate Democrats' health care bill

Text of Senate Democratic health care bill

Congressional Budget Office analysis of House health bill

Kaiser Family Foundation survey of employer health benefits

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