The Cadillac Tax, the widely debated aspect of the ACA, can have both positive and negative effects for certain employers. In a nutshell, the Cadillac Tax is an excise tax for very “benefit-rich health plans” that feature low out-of-pocket costs and deductibles, and lower co-pays. There’s been a lot of speculation about what employers can expect from this tax, so let’s take a look at what it all means (as it stands today).
- Fact: Starting in 2018, the excise tax will impose a 40% fee on employer-sponsored health insurance premium prices above the threshold ($10,200 for individual coverage and $27,500 for family coverage).
- Fact: Beginning in 2020, the threshold will be based on macro-economic factors – better known as inflation.
- Fact: Companies that offer plans that are considered Cadillac Plans usually have very low premiums for their employees by virtue of a high contribution percentage.
Companies offering such rich benefits for a competitive price have set a precedent for their employees that their own healthcare costs (and the healthcare costs for American healthcare consumers in general) are, in fact, just as competitive or economically reasonable across the board. According to many analysts, this creates a false sense of security in employees who then over use their health insurance, which in turn, adversely impacts the overall healthcare system. How? Because over utilization could result in unnecessary office visits to a specialist physician or unnecessary refilling of prescriptions (because the co-pay is so low). Therefore, employees might think this is how the rest of country experiences health insurance, when in fact, that is NOT the case.
The consequences of the latter point also affects employees after they are no longer insured by a Cadillac Plan. For example, once an employee has been on such a plan with less than a $1,000 in deductible costs and $5 co-pays for office visits, and an excellent prescription drug program, and then goes to shop in the individual market, they are usually shocked by the cost of the plans now available to them. It is at that time that the employee realizes that they may have to adjust their way of thinking (and living!) about their healthcare and consider a high deductible health plan with a large upfront deductible and much higher co-pays.
The Cadillac Tax is made to proactively change behavior and bridge the gap for the inequality of the health insurance plans for employers. But, like any big shift (especially in healthcare), employers must be ready (when the time comes) to educate their impacted workforce on how these changes may affect them directly. They can do this by explaining things in layman’s terms – consistently and frequently – and ensuring employees understand the implications. But, stay tuned for now, as there is much more to come from Washington on this topic in the near future.