Congress’ January 2018 stop-gap budget bill did more than keep the federal government open until February 8; it also delays the implementation of the highly unpopular Cadillac tax until 2022. This is particularly good news in the California healthcare insurance market, where premiums are higher than the national average.
What Is the Cadillac Tax?
The Affordable Care Act (ACA) includes a high-cost plan tax, which is more commonly referred to as the “Cadillac Tax.” This permanent 40% excise tax is charged on health insurance plans with premiums that exceed a specific threshold. While the numbers are linked to inflation and the consumer price index, the threshold is currently about $10,200 for an individual and $27,500 for a family. Certain demographics (such as high-risk employees like law enforcement officers) would get a higher threshold.
The excise tax is charged on the difference between the Cadillac Tax’s threshold and the actual premium cost. For example, if an employer offers an individual health plan with an $11,000 premium, the Cadillac tax on this policy would be $320 per employee ($11,000 – 10,200 = $800; $800 x 0.4 = $320).
Importantly, contributions from both employees and employers are counted towards the tax’s threshold, as well as contributions to health care savings accounts (HSAs), flexible spending accounts (FSAs), and other health accounts.
The Cadillac Tax could also indirectly increase payroll and income taxes. The federal government hopes that employers will increase wages to offset their employees’ out-of-pocket healthcare costs. While these wage increases aren’t guaranteed, the Congressional Budget Office estimates that 75% of the increased tax revenue from the Cadillac tax would be from increased income and payroll taxes.
How Could the Cadillac Tax Impact Bay Area Healthcare Benefits?
While the IRS will levy the Cadillac Tax on insurance companies and self-insured employers, the impact will probably trickle down to employees. It is likely that some employers will switch to cheaper health insurance policies with less coverage or only offer high deductible policies, transferring health costs to their employees. However, employers should also consider different forms of healthcare, such as accountable care organizations and healthcare alliances that provide integrated medical care for lower premiums.
The Cadillac Tax was originally aimed at reducing the number of high-end, high cost insurance plans in the market, but many middle-of-the-road plans have premiums at or above its threshold. This is particularly true in California, where healthcare insurance premiums are higher than the national average. Between 2003 and 2013, California employer-based health insurance premiums increased by 69% for an individual and 84% for a family. The national average was 60% growth for an individual and 73% for a family during the same period.
Statistically, a higher number of California residents will be subject to the Cadillac Tax simply due to our state’s higher premiums. And because healthcare costs generally increase at a faster rate than inflation, more and more Bay Area healthcare plans will become subject to the Cadillac Tax as time passes. Unless the Cadillac tax is repealed, Bay Area employers will eventually have to make hard decisions about their employees’ healthcare benefits and wages.
A Diverse Coalition Is Pushing for the Cadillac Tax’s Repeal
In our increasingly polarized world, there is almost unanimous opposition to the Cadillac Tax. A large coalition of businesses, healthcare entities, non-profit organizations, and labor groups are lobbying heavily for its repeal. Similarly, the tax has little political support. In 2015, 90% of U.S. Senators voted to repeal the Cadillac tax in a symbolic vote.
The clear majority of shareholders in the industry see the Cadillac Tax as bad for business, American families, and medical providers. There is almost unanimous agreement that the tax will limit access to medical care by increasing deductibles and out-of-pocket expenses for working families, while simultaneously increasing payroll and income tax burdens.
Canopy Health Continues to Monitor Cadillac Tax Developments
While many see this newest delay as a sign of an impending repeal, nothing is certain.
At Canopy Health, we carefully monitor legal and regulatory developments that might impact our members and the healthcare industry.
Schoen, C. (2015, January). State trends in the Cost of employer health insurance coverage, 2003–2013. The Commonwealth Fund. Retrieved from http://www.commonwealthfund.org/~/media/files/publications/issue-brief/2015/jan/1798_schoen_state_trends_2003_2013.pdf
Troy, T. (2014). The impact of the health care excise tax on U.S. employees and employers. American Health Policy Institute. Retrieved from http://www.americanhealthpolicy.org/Content/documents/resources/Excise_Tax_11102014.pdf