With Cadillac tax delayed, employers are not rushing to end health benefits

Employers competing for skilled labor will continue to provide health benefits to their employees as long as health care costs continue to remain under control and favorable tax treatment exists. So says Dr. Robert Galvin, Chief Executive Officer of Equity Healthcare, in an article appearing in the New England Journal of Medicine. This situation could change, according to Galvin, if and when employers get hit with the 40 percent nondeductible excise tax on health plans that exceed a maximum dollar value (the Cadillac tax), as contained in section 9001 of the Patient Protection and Affordable Care Act’s (ACAs) (P.L. 111-148). Even then, however, he does not believe there will be a big rush by employers to discontinue benefits.

Galvin offers three rationales for why employers are currently continuing to provide health benefits for their employees: (1) there is no cost advantage to discontinuing health coverage; (2) the business community is skeptical that the government can manage the employer mandate (ACA section 1513) efficiently and therefore expects the penalties on employers for not providing coverage to increase; and (3) the growth in health care costs has slowed over the past several years.

In explaining why there is no currently no cost advantage for discontinuing health coverage, Galvin says that “the simple math that a $2,000 fine is less than the $10,000 average per-employee cost of coverage is complicated by the tax deductibility of employers’ health care contributions. The increase in non–tax-deductible salaries that would be needed to keep projected health care costs from damaging employee recruitment and retention efforts exceeds the savings an employer could expect from dropping health care coverage.”

Private exchange option. While private insurance exchanges are a nongovernmental option for providing employee health benefits, Galvin points out that very few companies have adopted this strategy for active employees. Galvin notes that under the private exchanges employers “can continue to be regulated under the Employee Retirement Income Security Act (ERISA) and remain self-insured — which means lower costs and less exposure to regulation — but employees receive no means-based subsidies.” Galvin concludes that most companies pursuing the private exchange option “compete in low-wage labor markets in which offering health benefits is not considered essential to finding employees.” He does not think “that private exchanges can control costs any better than employers are doing on their own.”

Cadillac tax. In 2018, employers with more than 100 employees were to be subject to the Cadillac tax on health coverage over a maximum dollar value (currently set at $10,200 annually for individuals). Congress, however, delayed implementation of the tax until 2020. Galvin cites Kaiser Family Foundation (Kaiser) data predicting that based on a 5 percent annual health care cost increase, 27 percent of employers could face the Cadillac tax in 2020, 30 percent in 2023, and 42 percent by 2028. According to Galvin, repeal of the Cadillac tax alone, without broader tax reform, is unlikely, due to the amount of funds (about $87 billion through 2021) that the tax would produce. Galvin concludes that “the tax’s uncertain future is likely to moderate but not reverse employer actions to control costs.”

Controlling costs. Galvin believes that the primary tool employers have traditionally used to address rising health care costs has been to increase employee cost sharing. To address the increased costs caused by the ACA, Galvin believes that employers have sought first to limit eligibility for coverage by reducing workers to a less than 30 hours per week. Employers have found this difficult, according to Galvin, because employers had already thinned out excess labor capacity over recent decades, and shifting workers to part-time hours can compromise service quality and customer satisfaction.

Two other cost controlling options. Galvin notes that some employers have turned to defined-contribution plans and consumer-directed high-deductible plans (CDHPs) to controls costs. According to Galvin, “Defined contributions [plans] affect employees at the time of their annual choice of coverage. Employers fix their contribution on the basis of a specific benefit design, and employees may buy up or down to purchase more or less insurance, but without any additional employer subsidy for a more expensive plan; less expensive designs generally include narrower provider networks.”

Galvin describes the CDHPs as affecting “enrollees when they’re seeking a health care service. They are subject to a high deductible (about $2,500 for individuals) and draw on an associated tax-advantaged health savings account. These plans frequently provide access to information on prices of services, and enrollees benefit financially if they choose lower-cost options.”

Galvin concedes that both of these approaches save money in the short term. According to a Kaiser report, more employees in defined-contribution plans buy down to less coverage than buy up to more coverage. In addition, a research brief by Truven Health Analytics found that CDHPs result in markedly reduced service utilization.

SOURCE: ”How Employers Are Responding to the ACA,” www.nejm.org.

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