Although the effect of healthcare reform on retiree health plans is difficult to gauge at this point, there are several provisions that could impact the long-term costs and strategies for employer plans. Let’s start with the so-called “Cadillac Tax” on high-cost insurance plans effective in 2018.
What it is:
A non-deductible 40% excise tax paid by the coverage provider (employer and/or insurer) on the value of health plan cost in excess of certain thresholds. Currently, most plans are well below the thresholds, but are likely to exceed them in the next decade. This is because the thresholds will be indexed at CPI-U which is significantly lower than medical inflation rates affecting plans.
Purpose of the provision:
One of the goals of the Patient Protection Affordable Care Act (PPACA) was to lower long-term healthcare costs. By their nature, plans with generous benefits implicitly encourage participants to maximize their usage and thus cause higher medical costs. This provision seeks to discourage high-cost plans by leveling a tax on “excessive” benefits and possibly help fund healthcare reform.
Important considerations for retiree health plans:
Health plan costs for early retirees, which are often significantly higher than employee costs, may exceed their thresholds sooner, even though thresholds for early retirees are slightly higher than thresholds for employees.
Combining early retiree and Medicare eligible retiree costs is allowed and can keep plans under the retiree thresholds longer. Prescription drug costs for Medicare retirees on your plan may be another area to reduce cost by considering other options for these retirees.
If your plan is self-insured, then you are the coverage provider paying the tax. You will need to decide whether to reduce benefits to avoid the tax or how the additional cost will be allocated by you and/or the participants.
If your plan is fully-insured, then the insurer is on the hook for the tax. However, I suspect insurers will pass the tax to the employer through higher premiums. For many public sector employers with implicit rate subsidy OPEB liabilities, the effect should be minimal since the additional cost will be paid by the retiree who pays the premium. It’s possible this could slightly decrease OPEB costs if some retirees are swayed to search for other non-employer options.
To be proactive, employers have a couple of steps that they can take now to explore how they’ll be affected by the PPACA “Cadillac Tax”. These include:
Determine if and when your plan is expected to exceed the thresholds. Start with your current premium rates (plus FSA, HSA and HRA contributions) and project out what you think they will be in 2018.
Strategize as to your options for managing your plan’s costs to stay under thresholds or at least to delay the day when you will exceed them.