how to avoid a head-on collision with the cadillac tax

Presented to SALGBA Jurisdictional MembersMay 27, 2010

By Healthcare Data Management, Inc. (HDM)

Presented by David McSweeney, COO, Healthcare Data Management, Inc. (HDM)

David Ermer, Ermer & Brownell, PLLCBarbara Niehus, FSA MAAA, Niehus Actuarial Services, Inc.

What is the Cadillac Tax?

The capstone of healthcare reform (a combination of PPACA – The Patient Protection and Affordable Care Act – and the Health Care and Education Reconciliation Act), which passed in March, 2010.

Beginning January 2018, this 40 percent, non-deductible, excise tax will be levied on both insured and self-funded employers who fail to comply with health plan premium thresholds…

Premium Thresholds:• $10,200 for individual coverage• $27,500 for family coverage

– Subject to certain adjustments.

The tax is imposed on the balance above the threshold determined on a monthly basis during the taxable period.

The tax expressly applies to governmental plans.

Special rules apply to multi-employer (Taft-Hartley) plans.

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The following adjustments apply to the thresholds:

Employee Classification Adjustments

• Dollar limit increases for retirees ($1650 individual, $3450 family).

• Same dollar limit increases apply for an employer when the majority of employees are in a “high risk” profession – e.g. police, fire, paramedics.

One-Time Adjustment

• Thresholds are subject to a one-time, catch-up adjustment in 2018 based on the premium growth of the Blue Cross Blue Shield Federal Employee Plan’s Standard Option.

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Annual Adjustments

• Beginning in 2018, an adjustment is made for employer’s age/gender composition (versus national average).• In 2019, thresholds are adjusted by CPI-U plus 1 and thereafter by the CPI-U.

No Adjustment

• For geographical variations – e.g. New York City is the same as West Virginia.

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Premium calculation will include employer and employee contributions made on a pre-tax or after-tax basis for…

• Medical• Healthcare Flexible Spending Account (FSA)

– Capped at $2,500, plus CPI-U beginning in 2013• Employer Contributions to a Health Savings Account (HSA)• Health Reimbursement Arrangement (HRA)• Worksite clinics.

Employers are responsible for making the calculations.

Note: Calculation excludes insured, stand-alone dental and vision coverage.

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Self-funded plans will calculate premium essentially the same way COBRA continuation coverage calculations are made.

• Insured plans – actual premium.• Self-funded plans – accepted actuarial methodology.

Cadillac tax is excluded from the calculation.

Rate determination is to be performed annually.

Tax calculation is performed monthly at the employee level.

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The illustrations below are based on U.S. average costs for single and family healthcare in 2008 and projected to 2018.

The illustrations show that even plans of average cost will find it challenging to meet 2018 Cadillac premium thresholds.

Note: Assumes 7.5% annual trend. This illustration does not factor in any of the cost escalators created by healthcare reform.

Source: Kaiser Family Foundation website – Agency for Healthcare Research and Quality, Center for Financing, Access and Cost Trends. 2008 Medical Expenditure Panel Survey (MEPS) – Insurance Component Tables II.D.1, II.D.2, II.D.3. The Medical Expenditure Panel Survey IC is an annual survey of establishments that collects information about employer-sponsored health insurance offerings in the United States.

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Classification 2008 actual cost

2018 projected cost

FSA addition ($2,500)

Cadillac tax threshold (before

adjustments)Single $4,386 $9,040 $11,540 $10,200

Family $12,298 $25,350 $27,870 $27,500


We’re 7 ½ years from the effective date of the Cadillac tax.

Towers Watson projects that 60% of large employer plans will be impacted by the Cadillac tax in 2018. *

What’s your average annual per employee spend today?

Every premium dollar you spend over $10,200 or $27,500 starting in 2018 will be taxed at the rate of a non-deductible 40%!

The Cadillac tax will cause the biggest problem for rich plans in high-cost areas.

*Source: Towers Watson projects that 60% of large employer plans will be impacted by the Cadillac tax in 2018. (Source: http://www.towerswatson.com/press/1895)

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Grandfathering: a Catch 22 of Reform

Healthcare reform claims to grandfather group health plans in effect on March 23, 2010.

True, grandfathering protects against some provisions of healthcare reform, and it gives state and local governments more control over their plans.

For example, grandfathering exempts a plan from extending coverage to children up to age 26 who are covered by other plans.

Special rules also apply for grandfathered, multi-employer plans.

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However, grandfathering does not protect against the more costly provisions of reform, such as…

• The elimination of lifetime limits on essential health benefits

• The restriction – and ultimate prohibition – on annual limits

• Extended dependent coverage for children up to 26

• The prohibition on coverage exclusions for pre-existing conditions

• The Cadillac tax.

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If you make plan or rate changes in your grandfathered plan, does that make it a new plan?

• The Department of Health and Human Services (HHS) will issue an answer to this question soon.

• We do know that HHS has stated that extending coverage to 26-year-old dependents will not cause a plan to lose grandfathered status.

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Other Catch 22s of Reform

Other key provisions of healthcare reform – which is actually health insurance reform – that will be effective through 2014, and make avoidance of the Cadillac tax a daunting challenge:

Self-funded public sector health plans

• Elimination of traditional plan design tools• Increase in dependent eligibility age• Mental health parity (passed pre-PPACA)• Numerous new reporting and recordkeeping requirements• Increased cost shifting from Medicare and Medicaid

Fully insured plans

• All of the above, plus• Health Insurance Provider’s Fees.

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Elimination of traditional plan design tools

Elimination of lifetime limits – effective 2011*

Restrictions on annual limits – effective 2011*

Elimination of annual limits – effective 2014

Lack of restrictions on pre-existing conditions

• Under age 19 – effective 2011*.• All age groups – effective 2014.

Maximum 90-day waiting period – effective 2014

* Plan years beginning on or after 9/23/10.

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Increase in the dependent eligibility age

In 2011 alone, some 1,250,000 young adults are expected to take advantage of the increase in the dependent eligibility age to 26.*

These “children” can be a son, daughter, adopted child, stepchild, or eligible foster child of a health plan member.

For self-funded plans, all of this will translate to higher costs.For fully funded plans, premiums will definitely rise.

*Source: U. S. Department of Labor estimate.

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Mental health parity (passed pre-PPACA).

The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 takes on much grander meaning as a result of healthcare reform.

Although the Act still does not require an employer to offer mental health benefits, it does require complete parity with medical benefits, if the employer chooses to offer mental health benefits.

This means that mental health benefits are subject to all of the new provisions of reform, including… …• The elimination of restrictions on lifetime and annual limits• The removal of restrictions on pre-existing conditions• The increase in the dependent eligibility age.

Offering mental health benefits just got a lot more expensive.

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Numerous new reporting and recordkeeping requirements

W-2 reporting is required in 2011. PPACA authorizes CMS to do surveys and require data from plans. The amount of required reporting will increase over time.

Uniform operating rules that require certifying compliance with HIPAA begin in 2013.

Electronic funds transfers required under PPACA.

To the extent that administrative fees increase to cover these costs, they add to the total plan costs measured for the Cadillac tax.

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Increased cost shifting from Medicare

Lower reimbursements to healthcare providers and facilities have historically caused cost to be shifted by providers and healthcare facilities to commercial plans.

Reform established an Independent Payment Advisory Board that, beginning in 2014, is to submit legislative proposals to reduce the per capita growth rate in Medicare spending beyond established targets.

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Increased cost shifting from Medicaid

Beginning immediately, a projected 16 million additional low-income Americans will join the more than 60 million who currently receive Medicaid in one form or another.

The pace of the increase in Medicaid enrollees will quicken in 2014, when Medicaid becomes available to all non-Medicare eligible individuals under age 65 with incomes up to 133 percent of the Federal Poverty Line (FPL) – $14,400 in 2010.

Cost shifting currently caused by decreasing Medicaid reimbursements to providers will increase dramatically because of the huge expansion of the Medicaid population.

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Catch 22s Specific to Fully Insured Plans

The Health Insurance Provider’s Fee

This multi-billion dollar fee will be imposed on all net written premiums for all health insurance companies:

• 2014 – $8 billion• 2015 and 2016 – $11.3 billion• 2017 – $13.9 billion• 2018 – $14.3 billion• Thereafter, the fee will be calculated using the fee from the preceding year, increased by the rate of premium growth.

Fully insured, public sector plans will be treated like all fully insured plans. Insurance companies will pass these fees on as increases in premium.

Self-funded employer and Taft-Hartley plans are exempt from the tax.

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Catch 22s Already at Work in the Marketplace

ICD –10 and 5010

Coincidental to healthcare reform, implementation of X12 5010 transaction standards and the ICD-10 code sets will take effect.

This sweeping change expands the number of diagnosis and procedure codes used by healthcare providers and facilities from 24,000 to 155,000.

Providers and health plans must comply with ICD-10 by October 2013 – just about the time the biggest of the health reform Catch 22s take effect.

ICD-10 – and the related upgrade to version X12 5010 – will prompt…• Increases in administrative expenses• Increases in payment errors• Greater need for auditing.

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Do the Math

Many plans will pay the Cadillac tax in 2018 – and since thresholds increase by only the CPI-U after 2019, over time even more plans will pay.

IT’S NOT TOO EARLY TO START TAKING ACTION!

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Classification 2008 actual cost

2010 projected cost

FSA addition ($2,500)

Cadillac tax threshold (before

adjustments)Single $4,386 $9,040 $11,540 $10,200

Family $12,298 $25,350 $27,870 $27,500

Do the Math

Whether you’re self-funded or fully insured, begin now to develop an acute understanding of the cost of delivering healthcare to the individuals and families in your plan.

Get sound actuarial advice from an actuary who has a solid understanding of your plan, your workforce, and your objectives.

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Continuously Monitor Paid Claims

You can’t do the math, if you don’t have the numbers!

With so many cost escalators – and so many new opportunities for errors and fraud – entering the healthcare system, consider the new paradigm for reviewing paid claims, continuous monitoring. It gives you all the numbers – and makes sense of them.

Unlike retrospective auditing, which identifies claims errors and abuse going back one or two years, continuous monitoring scrutinizes claims practically as they are paid, preventing the accumulation of wasted expense.

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Continuously Monitor Paid Claims

A retrospective audit limits you to measuring your administrator’s performance against your plan documents.

Continuous monitoring combined with 100-percent-of-claims analysis is the state-of-the-art tool for controlling health plan expense in the era of healthcare reform.

Continuous monitoring allows you to focus on health improvement, wellness, chronic condition management, and communicating the prudent use of health care goods and services to plan members.

According to Towers Watson, employers who manage their health benefit strategies the best and concentrate on wellness and chronic condition management can…• Contain the annual increase in their health plan expense to about six percent.• Prolong the impact of the Cadillac tax by as much as five years.

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Continue Efforts to Manage Costs

The information you have collected will support ongoing efforts to manage costs.

Many of the rules are changing. Some of the cost management tools you have used in the past may no longer be available. And new ones will be developed.

Continuously challenge your administrator/insurer and other vendors to make sure you are getting the best value for your money.

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Consider Self Funding

With self-funding, you will assume plan risk, but have more control.

You will also avoid the Health Insurance Provider’s Fee that will be charged to insurance companies who will most certainly pass it along in higher premiums.

Remember, the fee begins at $8 billion in 2014 and goes up from there.

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Rethink Your Contribution Structure

It may be time to consider less traditional contribution structures. Charging separately for young adults (under 26) is prohibited. Examples of possible structures could be:

Separate contribution amounts for…• Employee • Spouse• Children (up to 2 children)• Each child (applied to each child beginning with the 3rd).

Separate contribution amounts for…• Employee• Spouse• 1 child• 2 children• 3+ children.

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Make Sure Your Dental/Vision Plans Are Stand-Alone

As written, PPACA only allows these coverages to be excluded from the tax, if they are insured. In our opinion, this is a drafting error that does not reflect intent.

If the rules don’t exclude self-funded dental/vision, consider insuring these benefits.

In any event, make sure that these plans are considered stand-alone. Update plan documents and contribution schedules if necessary.

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Manage Your Retiree Plans Appropriately

The Cadillac tax also applies to retirees. You may want to communicate with retirees to reserve the right to pass along the tax to avoid any immediate impact on OPEB liabilities.

The Cadillac tax calculations allow you to calculate premiums separately for active employees and retirees.

Rules also allow for combining costs for Medicare-eligible with under-age retirees. Some modifications to your plan documents may be required to take full advantage of this provision.

If you are taking advantage of the Retiree Drug Subsidy, you may want to rethink your approach to Part D for 2018.

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Thank you for joining us today

David McSweeneyHealthcare Data Management, Inc.610-491-9800 (ext 225)[email protected]

David Ermer, Esq.Ermer & Brownell, PLLC202-833-3400 ext. [email protected]

Barbara Niehus, FSA MAAA Niehus Actuarial Services, [email protected]

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how to avoid a head-on collision with the cadillac tax

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