Companies continue to work to contain rising healthcare costs, with the expense of prescription drugs a key pressure point. But the biggest uncertainty for employers going into the new year is the excise tax on high-cost health benefits, also known as the Cadillac tax, which is due to be implemented in 2020 unless Congress intervenes.

Update: The ECAA appropriations bill signed by President Trump on January 22 delays the Cadillac tax start date from 2020 to 2022. Read more here.

The Affordable Care Act mandated that, starting in 2018, companies pay a 40 percent excise tax on health coverage provided to employees if the costs of that coverage exceed a certain threshold. In 2015, Congress postponed the tax's implementation date to 2020.

A 2015 survey by Mercer showed that 34 percent of employers would be subject to the tax in 2020 if they didn't make changes to their plans. Businesses argue that the tax will increase their costs and cause them to cut back on the coverage they provide to workers.

Steve Wojcik, vice president of public policy at the National Business Group on Health, which represents large companies' interests on healthcare issues, noted that employer-provided health coverage is “the part of healthcare coverage that's working and fairly stable.

“Generally it's doing a better job than the exchanges of providing affordable coverage that people like and value,” he said.

And Wojcik noted that from the perspective of large companies, 2020 is approaching very rapidly. Currently, employers are planning their benefit programs for 2019, he said. “In a few months, toward the end of the summer, they'll be looking to start their process for 2020. So there's not a lot of time.”

Kathryn Bakich, the national health compliance practice leader at consultancy Segal, pointed out that employers haven't yet been given information on how the tax will be implemented. The IRS has issued two notices but has not yet come out with regulations.

“It's on the books effective Jan. 1, 2020, and we have no guidance,” Bakich said. “It's a very bad situation.”

There have been attempts in Congress to eliminate the Cadillac tax. Most recently, there's a measure in the House, H.R. 173, the Middle Class Health Benefits Tax Repeal Act, that was introduced by Rep. Mike Kelly, R-Pa., and has 227 co-sponsors.

James Gelfand, senior vice president of health policy at the Erisa Industry Committee, an association that represents large companies on benefit issues, noted that the number of co-sponsors means the bill has enough votes to be approved by the House.

But is it likely that Congress will eliminate the revenue projected to be produced by the Cadillac tax when it just added substantially to the U.S. budget deficit with the tax cuts signed into law late last year?

“Clearly the excise tax is unpopular sort of across the board,” said Jim Winkler, global chief innovation officer for the health and benefits group at Aon. “Employers don't like it; unions don't like it; consumer groups, once they figure out they will have to pay more, they won't like it. There's bipartisan support. The problem is the federal deficit.”

Gelfand agreed that the cost of a full repeal of the tax could pose a problem. “What we're focused on is showing how much support there is for repealing the Cadillac tax and using that to tip it to a further delay,” he said.

While a full repeal is estimated to shave $100 billion or so off the federal government's revenues, Gelfand said, delaying the tax for another year would cost a little over $3 billion, and a two-year delay would be about $10 billion.

The business community argues, though, that the revenue that's expected to be produced by the tax is illusory. Companies have long said that if the tax takes effect, they will make whatever changes are necessary to keep their health benefit costs below the threshold. The Congressional Budget Office acknowledges this in its estimates, which assume that employers that cut health benefits will compensate employees by raising wages, thus resulting in more revenue from payroll taxes.

But Wojcik said it's unlikely that employers will take money saved by cutting back on healthcare costs and use it to boost salaries. With healthcare costs mounting steadily, companies are more likely to decide to use those savings to meet the higher costs expected in coming years, he said.

“Virtually every employer we work with has said, 'I don't intend to pay that tax. I intend to make changes to my program to stay under the tax,'” Winkler said. But he noted the disparity between the tax cut companies just got and the prospect that the Cadillac tax will boost employees' healthcare costs. “I think it will be challenging to reduce benefits or increase payroll contributions at a time when the corporate tax rate is going down,” Winkler said.

Mergers

Meanwhile, the December news that CVS, which is a pharmacy benefits manager (PBM) as well as a drugstore chain, will buy insurer Aetna for $67.5 billion has drawn attention to consolidation in the healthcare industry.

Winkler noted that the two companies have said very little about their plans for the merger, but cited two ways in which the deal could help employers contain healthcare costs. In its stores, CVS operates MinuteClinics, which can provide flu shots and urgent care. With the merger, “Aetna members would have access to this community system at a time when we have a growing shortage of primary care in the U.S.,” he said.

Combining the two companies might also give CVS's PBM a better way to control the costs of very expensive specialty drugs, which have been driving the increase in drug costs. Such specialty drugs often lack competitors, making it harder for pharmacy benefits managers to negotiate for lower prices, Winkler said. “To the extent that, through Aetna, they can promote which drugs have preferred status and get doctors writing scripts for those, there's potential to lower costs.”

NBGH's Wojcik also cited the deal's potential to promote less expensive types of care like CVS's clinics, which he said “ultimately could lead to better healthcare at lower prices.”

Wojcik said employers' concerns about deal-making have more to do with mergers of hospital systems and acquisitions of physicians' practices, because of the possibility that such consolidation will increase price pressures.

Individual Mandate

The tax overhaul that President Trump signed into law late last year included a repeal of the Affordable Care Act's individual mandate. But consultants downplayed the possible impact of that change.

Gelfand said his organization has been discussing with its member companies whether the elimination of the individual mandate will cause younger, healthy workers to drop company health coverage.

Some companies note that when the mandate was implemented initially, they saw a significant number of people sign up for coverage who hadn't previously used the insurance, raising the possibility that those employees could now drop coverage, he said. “Others said, 'No, it didn't change anything when it was implemented and it won't change anything when it goes away.'”

Bakich said she doubts the elimination of the individual mandate will cause many workers to drop their company coverage. “The only thing I'm really concerned about with the individual mandate is that to the extent there are more uninsured people and there are more uncompensated care costs, employer costs could rise” as healthcare providers pass costs through, she said.

Instant Insights /

2020 Tax on High-Cost Healthcare Getting Closer

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