At least one in three and as many as one in two employers will be forced to pay Obamacare’s 40 percent excise tax on pricey health benefits in 2018.
Unless they change course now.
That’s the conclusion of two recent projections by the large benefits brokerages Mercer and Towers Watson, based on their annual surveys of employer health plans. But employers are not standing still, said Andrew Rosenberg, leader of Mercer’s Indianapolis health benefits practice.
“The Cadillac tax is absolutely something that employers are looking at closely,” he said. “Most employers are telling us, we don’t want to be paying that excise tax.”
The tax will be applied to all amounts employers and employees spend on their total package of health care benefits that exceed $10,200 for employee-only coverage or $27,500 for family coverage.
That means an employer would pay $400 out of every $1,000 in spending on health benefits, per worker, that exceeds those limits.
So employers are pushing high-deductible health plans more than ever, as well as encouraging employees to use wellness programs, telemedicine services and cost transparency tools to spend less on health care, Rosenberg said. Many are mulling a shift to a defined contribution, in which employers would give employees a pre-set amount of money to spend on a private insurance exchange, so the employer no longer bears the risk of high-spending workers.
For example, 41 percent of workers at the 77 Indiana employers Mercer surveyed are now in high-directed health plans, also known as consumer-directed health plans, or CDHPs. That is nearly twice as high as the national rate, which was 23 percent.
In Indiana, the 77 mostly large employers that participated in the survey are not enough to make the results statistically meaningful. Only eight of those employers had fewer than 50 workers and only 32 had fewer than 500 workers.
“While new plan implementations are driving up CDHP enrollment, we are also seeing growth in enrollment in existing plans as employees become more comfortable with consumerism and employers provide them with decision-support tools to help manage the higher deductible,” Rosenberg said.
These actions appear to be having some effect. When Mercer surveyed 75 Indiana employers last year, they said they expected their 2014 benefits costs to rise 9.3 percent—if they made no changes to their plans. But with changes they expected increases of 4.7 percent.
This year, Mercer surveyed 77 Hoosier employers—although not necessarily the same companies as the previous year. They reported benefits spending rose 4.4 percent his year.
But if they made no further changes, their spending would rise an expected 9.1 percent next year. Instead, employers are implementing changes they expect to keep cost increases down to 5 percent.
Spending increases of 4 percent to 5 percent look good historically, but they are still rising faster than inflation—as they have done for decades.
That’s significant because after 2019 , the Cadillac tax threshold will rise by the rate of inflation—not by the rate of medical inflation.
If health care spending continues to rise faster than inflation, even the average family health plan will trigger the Cadillac tax in 2031, according to a November analysis by the American Health Policy Institute.
More dramatically, MIT economist Jonathan Gruber predicted, in recently revealed comments, that the Cadillac tax will in 20 years completely wipe out the employer tax break for health benefits.
“While the cost trend has mitigated bit over the past two yers, we continue to expect upward pressure on costs,” Rosenberg said.
That’s why, he added, even small employers are breaking with their usual short-term focus on health costs, and are spending time developing multi-year strategies to slow the rising costs of health plans.
“Small employers, more so than ever before, are taking to a multi-year approach, in part because of the excise tax that’s looming in 2018,” Rosenberg said.