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Mercer

Despite last week’s cold snap, the bloom of cherry blossoms along Washington DC’s Tidal Basin is now under way – a peaceful sight that belies this stormy moment in Congress, where new healthcare legislation is being debated and the headlines seem to shift from moment to moment. However, one thing is for sure: any legislation affecting the US healthcare system must consider the impact on employer-sponsored health insurance – the source of coverage for 177 million Americans, 16 times the number enrolled in public exchanges.

 

That’s why the leadership of MMC companies Mercer and Oliver Wyman created a health policy group to help formulate MMC’s views on ACA repeal-and-replace legislation. Our efforts led to the issue of a policy paper that showcased original Mercer research on changing the tax treatment of employer-sponsored coverage.  

 

Last month, we took this research to the US House of Representatives to meet with policymakers actively working on the newly proposed American Health Care Act, or AHCA. We demonstrated that the excise tax on high-cost plans, currently law under the ACA, is not an effective method of penalizing rich “Cadillac” plans because plan design is only one factor affecting plan cost and often less important than location and employee demographics. 

 

This would also be true of a cap on the employee individual tax exclusion for employer-provided health benefits, a provision included in an early draft of the AHCA and favored by powerful voices such as House Speaker Paul Ryan (R-WI), House Ways and Means Chair Kevin Brady (R-TX) and new HHS head Tom Price. Mercer had also modeled the impact such a cap would have on the effective tax rates of Americans based on their income. The hardest hit, by far, would be lower-paid workers with families. Some staffers faced with this information for the first time were visibly struck.

 

When the bill was released for mark-up, the cap on the exclusion was not included, and the Cadillac tax was delayed until 2025 (and possibly 2026). But while we were pleased with this outcome, we also knew the bill was a long way from becoming law and the cap could easily resurface.  

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In an unprecedented move, JAMA published President Obama’s status report on the ACA. In it, the President details the impact of the ACA using charts and data from various sources and offers up some suggestions for what should happen next.

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This article in Business Insurance hits the highlights of the GOP proposal in terms of its impact on employers. There are features that are attractive to employers –in particular, the elimination of both the employer and individual mandates and substantially higher limits on contributions to health savings account. But it also includes a controversial proposal to convert the Cadillac Tax, to another method of taxing high-cost plans. Health plan cost above a threshold (that was not specified in the report) would be considering taxable income for plan members. From an employer perspective, the revised approach has the same flaws as the Cadillac tax under the ACA. Geography, age of the population, number of dependents are all components that can have a very positive or very negative impact on cost. In the end, politics – and the outcome of the Presidential election – will be the biggest determinant of what happens.

 

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Employers have made their opinion about the excise tax clear. There is another Affordable Care Act (ACA) provision, however, that irks them nearly as much: the employer mandate. In our recent survey of 644 employers, we asked employers what changes they would like to see made to the ACA. Repealing the excise tax was first, with 85% in favor, but repealing the employer mandate was second, favored by 70%. It’s not that employers don’t want to offer coverage; it's that proving they offer coverage is so much work.

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We all know that many employers have concerns about the excise tax set to hit in 2020, so you might think that the excise tax reform bill introduced last month by Rep. Charles Boustany, R-La., would be met with unanimous support among Cadillac tax opponents. Not so, says this Business Insurance article. Some worry that the legislation, which would exclude pretax contributions made to employees’ FSAs and HSAs from excise tax calculations, might sidetrack congressional leaders from pursuing employers’ overarching objective: full repeal. But Mercer’s Geoff Manville disagrees, arguing that the business community is still very much aligned in its position that Congress should repeal the excise tax, not just one aspect of it. “The momentum is not on mending the excise tax, but repealing it,” he said. Employers have some breathing room, though, ever since the two-year delay in imposing the tax, from 2018 to 2020. Even so, “in 2017, the odds of repeal go up,” he added, since 300 House members have gone on record in favor of repeal.

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New legislation introduced in the US House of Representatives would exempt employee contributions to health savings accounts (HSAs) and flexible spending accounts (FSAs) from the ACA’s 40% excise tax on high-cost plans. While employers continue to push for a repeal of the tax, this is welcome news for those that have been considering eliminating health accounts to help mitigate excise tax risk. In comment letters sent to the IRS last May, Mercer and several other employer groups recommended these contributions be excluded from the excise tax calculation. This is definitely a piece of legislation to watch.

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Since the earliest days of the excise tax, we’ve been explaining to policymakers, the media, and anyone who would listen that the cost of health care coverage is driven by many factors other than the richness of the plan design. Geographic location is just one of the more obvious. As anyone who lives in New York City or San Francisco can tell you, some places are just more expensive than others. And cost-of-living is just one factor affecting prices in a given health care market – competition and variations in provider practices come into play as well. So you’d think we’d be pleased by the recent announcement, discussed in this Business Insurance article, that the administration is now proposing revisions to the excise tax to address cost variations by state. Unfortunately, it is not an adequate fix for the geographic cost differences. In its upcoming 2017 federal budget, the administration will propose that in any state where the average premium for “gold” coverage on the state's individual health insurance marketplace exceeds the Cadillac-tax threshold under current law, the tax trigger would be set at the level of that average gold premium. First, health care cost varies by market, not state. But in addition, premium rates for individual plans on the public health exchange are generally lower than in employer plans because the networks are smaller and have targeted the lowest-cost providers. Because of this, there may only be a few states where the average gold plan cost is over the tax threshold. Finally, and perhaps most importantly, to use the average cost of a gold plan as a trigger – a plan with an actuarial value of 80%, which is very typical of employer plans today – seems like a low-ball match for an adjustment to the threshold for a “Cadillac” plan.  

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Employers wait with great anticipation for the passage of budget laws this week that include a two-year delay for the dreaded excise tax on high-cost health plans. Robert Pear points out the best news of all for employers -- many think this delay takes us one step closer to complete repeal of the tax. It definitely gives us some breathing room to prepare to avoid the tax should it be implemented – and more time to work for a repeal! 

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A $1.1 trillion budget deal released by congressional leaders yesterday could push the implementation of the Cadillac Tax back by two years, to 2020.  Many see this delay as a stepping stone to a full repeal, although, as  Mercer’s Geoff Manville points out in this Business Insurance article, this postponement also “really clouds the outlook for implementation of the tax.”  A delay in the excise tax would be a welcome relief for employers, and especially the 29% of employers with at least one plan that was likely to exceed the tax threshold in 2018 (according to Mercer research). In addition, the proposal includes a request for further investigation into the benchmarks the reform law currently uses and whether the excise tax should be adjusted to take into account factors other than cost, such as age and gender factors, which has been a key argument among opponents of the Cadillac tax.  Stayed tuned for further developments!

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Long-awaited 2016 spending and tax bills teed up for final House and Senate votes within days would postpone the Affordable Care Act’s (ACA) “Cadillac” tax on high-cost health plans to 2020, make this levy deductible to employers, and mandate a study of suitable benchmarks to use for age and gender adjustments to the limits triggering the tax. Other changes would provide a one-year moratorium on ACA’s annual fee on health insurers' net premiums (for US risks) and a two-year halt to the tax on sales of medical devices.

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The Cadillac tax remains front and center in the ongoing health care debate as, last week, the US Senate approved legislation that would repeal the Cadillac tax, among other Affordable Care Act provisions. While it’s predicted that the House of Representatives will also pass the bill, expectations are that President Obama will ultimately veto it. Even so, the approval of this legislation is an important step in the fight to repeal, or potentially amend, the excise tax (a two-year delay is now also a possibility). The Congressional Budget Office projects that this tax will raise about $87 billion dollars over ten years – about 25% of which will come from the tax itself, while 75% will come from income taxes on the higher wages that employers will pay their employees to make up for the reduction in health care benefit offerings. Still, as this USA Today article points out, this expectation may reflect a lack of understanding about how employers determine compensation; for instance, they may choose to enhance their retirement or life insurance benefits or reinvest their money, rather than increasing wages, which would mean a shortfall in the income tax revenue the White House is expecting.

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As a final entry in our excise tax series, we wanted to share an analysis that shows why the excise tax has been, from the beginning, the provision of the ACA that has caused employers the most heartburn — and why it will take creative strategies like those described in the Excise Tax Survival Kit to avoid it in 2018 and beyond.

 

In earlier posts, we’ve demonstrated that health plan costs vary widely by geographic region and workforce demographics (as plan sponsors know all too well), and argued that the excise tax will put undue burden on employers in higher-cost areas of the country and on those with less-healthy workforce populations. Based on premium costs provided in Mercer’s 2014 National Survey of Employer-Sponsored Health Plans, we’ve estimated that a third of large employers (those with 500 or more employees) have at least one plan whose cost will exceed the excise tax threshold in 2018 if they make no changes. Because of the way the excise tax threshold is indexed, the percentage of employers at risk will rise every year that medical inflation exceeds the general CPI — which, based on past history, is every year. So no employer can afford to be cavalier about the tax.

 

But what do these high-cost plans look like? Are they really the overly rich plans that economists argue have led to inefficient usage of medical services and increased health costs?

 

It depends on how you define “overly rich.” It makes sense that the richest plan on the public exchange — the “Platinum” plan — would be the type of plan targeted by the excise tax. But, taking a deeper dive into our survey data, we find that fewer than a third of those employer-sponsored plans estimated to exceed the excise tax in 2018 have an actuarial value (AV) of 90% or higher, the definition of a Platinum plan. So are Gold plans considered excessive as well? About half of the high-cost plans in our analysis have a Gold level AV of 80%. But 15% are Silver level plans (AV of 70%), and 7% are actually Bronze (AV below 70%).

 

On the public exchanges, Silver plans are the marketplace standard, accounting for 68% of enrollment as of June.1 These plans are also the basis for determining cost-sharing reduction subsidies on the exchanges, and yet, under employer-sponsored coverage, many of these same plans will be deemed “high cost” and subject to the excise tax.

 

 

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