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Mercer

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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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 I’ve written before, I have a few concerns with the excise tax on high-cost health plans. A major goal behind the tax is to remove the incentive to offer overly generous coverage, but using cost as the yardstick to measure richness will catch many plans that are “high cost” for reasons other than plan design — for example, because health care costs more in some locations than others. This seems so obvious that I keep wondering if I’m missing something.

So I was eager to read this interview with Harvard economist David Cutler, who’s a supporter of the tax. But, sad to say, he couldn’t convince me that the tax, as currently designed, will have all the benefits he hopes it will. Economists hope that the threat of having to pay the tax will cause employers not just to shift cost to employees, but to negotiate harder with providers and implement cutting edge measures such as…encouraging generic drug use. Well, I don’t have to tell the employers reading this that virtually every health plan includes generic incentives. But don’t take our word for it — according to the FDA, nearly 8 of 10 prescriptions filled in the US are for generic drugs, which means there’s not a lot of room for more savings there. It’s this kind of naivety about the real world of employer-sponsored health plans that makes it hard to feel confident that the excise tax will have the good effects that economists hope for. Will employers increase employee compensation as they pull back on health benefits to avoid hitting the excise tax threshold? David Cutler thinks they will. But when you actually ask employers, that’s not what you hear.

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As if we didn’t have enough evidence that health benefit cost is driven by more than plan design (yes, I’m thinking of the excise tax on high-cost plans), the Health Care Cost Institute just released the Healthy Marketplace Index Report, which shows the economic performance of more than 40 health care markets across the country. It includes measures of price, productivity (based on population health and utilization of services), and competition. The US map showing pockets of high cost and high utilization will raise many eyebrows. You’d expect to see high costs in New York City, but in Boulder, Colorado? Also of interest is the finding that price and utilization are not related – meaning, high price is not a barrier to utilization. The dataset for the HMI includes HCCI’s administrative claims data from 2011 to 2013 for over 40 million Americans per year with employer-sponsored insurance, which accounts for more than 25 percent of the nation’s privately insured population.

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