Employers hate the Cadillac tax. Why?
Steve Banke employs 40 people at 3-Points, a small IT outsourcing company he founded almost 15 years ago. And he wants those workers and their families to have strong health insurance options.
Employees at the firm, based in Oak Brook, Ill., can choose between two types of Blue Cross and Blue Shield of Illinois plans: a PPO with a broader network of hospitals and doctors or a cheaper HMO network. Banke's company covers a percentage of the premiums, and those costs have risen rapidly over the past several years, often more than 12% annually, he said.
âIt's seriously concerning that it is rapidly becoming one of the largest expenses in the organization,â Banke said. Other companies have avoided steep premium increases by moving employees into high-deductible plans.
Yet when asked if his company would ever discontinue health benefits, Banke said it would âneverâ happen, even as 3-Points looks to grow past 50 employees. âI would not see that anywhere in our future.â
3-Points and other companies of all sizes have not backed away from offering health insurance to their employeesâand have not dumped workers onto the new exchanges en masseâeven though costs continue to escalate and the process remains administratively cumbersome. In part that's due to the need to recruit top talent in an environment with a low unemployment rate. But just as important is the deep-running societal norm, in place since World War II, that a job includes health coverage.
Employers should, in theory, support the ACA's Cadillac tax. But the political and business reasons for keeping the tax exclusion on employer health benefits trump economics.
Businesses and employer coalitions have aggressively lobbied against any government provisions that would change that status quo. The prime example is the Affordable Care Act's so-called “Cadillac” tax, which is a 40% surcharge on the value of employer-based health premiums above specific thresholds.
Their opposition has paid off so far. The Cadillac tax was supposed to go into effect in 2018 but was pushed back until 2020. There is still a strong push for full repeal.
The policy also controversially gives employers an excuse to back out of offering healthcare, an expensive obligation that usually has nothing to do with the core of their business. So why are employers pushing for the tax's demise?
Experts say employers won't rally behind the Cadillac tax, or the idea of eliminating employer coverage altogether, for a host of reasons. Self-preservation is at play for the benefits industry. From a business perspective, companies want to continue to take advantage of the full tax exclusion since untaxed dollars make paying workers a little cheaper, said Loren Adler, an associate director at the Brookings Institution's Center for Health Policy.
And ultimately, employers have realized it would be a political and reputational nightmare in the short term to stop providing health benefits. It would immediately raise the ire of workers who expect jobs to come with a halfway decent health plan.
“It's just a lot easier to cut the benefits than to abolish the benefits,” said Joseph White, a health policy professor at Case Western Reserve University.
Approximately 155 million Americans receive their health insurance from their employer, according to the Congressional Budget Office. But the employer-based system was never intended to become as mainstream as it is today.
During World War II, the federal government decided to exempt employer-sponsored health plans from taxes as a way to address the labor shortage. Not surprisingly, enrollment in employer plans exploded.
The tax write-off was never addressed after the war because it proved to be popular. “The whole thing is a historical accident,” said Jon Gabel, a senior fellow at the University of Chicago's research institution called NORC.
That accident leaves a big hole in the country's piggy bank. The employer-sponsored insurance tax exclusion will result in more than $342 billion in foregone income and payroll tax revenue in 2016, according to a U.S. Treasury Department report (PDF). From 2016 through 2025, the government expects the tax break will cost almost $4.4 trillion. However, actual tax collections on health benefits wouldn't be that high because people and employers would surely choose less-generous plans—the whole point of the Cadillac tax.
Employers view health benefits as both a tax perk as well as an investment in “human capital,” said Larry Boress, CEO of the Midwest Business Group on Health, which opposes the Cadillac tax. If someone is sick or injured on the job and can't afford the care needed to return to work, then that impacts a company's bottom line.
“Benefits have never been viewed as an altruistic thing,” Boress said. “They offer them for these fundamental reasons.”
But, as Adler of the Brookings Institution said, “One would imagine that most employers do not love having to spend a decent chunk of their revenue figuring out how to run a health insurance company.” Both self-insured and fully insured companies have legions of employees and consultants who manage benefits for their workers.
The Cadillac tax and other policies to reduce or terminate employer coverage would reduce the influence of these large, self-interested firms. The employer benefits consulting industry—which includes large companies such as Aon, Willis Towers Watson and Marsh & McLennan Cos. as well as many brokerage firms—wants companies to continue offering health insurance because it is a lucrative business. Aon and Marsh & McLennan have spent a combined $1.8 million in political contributions and lobbying during the 2016 election cycle, according to the Center for Responsive Politics.
The careers of human resources professionals also depend on employers providing health coverage. “The opinion of the CFO is probably different than the VP of HR,” Gabel said. “You've got this whole segment of corporate America where this is their job.”
The possibility of the Cadillac tax is at least forcing employers to consider paring their standard benefits package. Case Western Reserve University, where White teaches, scaled back benefits several years ago, and he said the changes were blamed in part on the ACA's tax. Harvard University notably altered health insurance for employees in 2015, creating a furor. The Cadillac tax could have hit anywhere from a quarter to a third of employers if it had gone into effect in 2018, according to some estimates.
Shifting employees into high-deductible plans is one of the most common ways companies are avoiding the Cadillac tax. About 24% of workers in employer plans were enrolled in a high-deductible option with some type of savings account in 2015, compared with 20% in 2014, according to the Kaiser Family Foundation. In 2006, only 4% of employees were in high-deductible plans. Experts and even some companies have said the connection between high deductibles and the looming Cadillac tax is not coincidental.
“Raising the deductible to $1,500 from $1,000 is a lot less visible than dropping coverage,” White said.
Indeed, while benefits are getting trimmed and deductibles are getting higher, most companies like 3-Points still have little to no desire to take the extreme step of ending health benefits. Only 4% of large employers believe it's likely they will terminate their health plans within five years, according to a 2015 survey from benefits firm Mercer, which is owned by Marsh & McLennan.
Steve Glass, chief financial officer at Cleveland Clinic, said the self-insured academic health system has no intent of ending health benefits or pushing people to the public exchanges. “We don't want to give them a contribution and tell them to go shopping,” he said, adding the organization is “well-managed” for the Cadillac tax. Cleveland Clinic also does not have any high-deductible offerings for employees and instead relies on wellness programs, Glass said.
If a company axed health benefits, some logistical problems would crop up, White said. It would have to pay workers more in salary so they could buy their own plan on the exchanges. But that pay bump would be somewhat muted by the penalties associated with the ACA's employer mandate. Companies would also have to calculate how they would compensate a single employee versus an employee who has a family and inherently receives more untaxed health benefits.
Perhaps most importantly, no company wants to be the first to make that move because employees could easily decide to jump to a different employer that still offers coverage. “You are looking like the crappy employer compared to all the other ones,” White said. “It's just opening a can of worms.”
The Cadillac tax is a cap on the tax exclusion. During the run-up to passage of the Affordable Care Act in 2010, most policymakers concluded getting rid of the tax-advantaged nature of employer benefits would be as impossible today as it was during the 1990s healthcare reform debate.
“It's a very difficult thing to do politically,” said Stuart Butler, a senior fellow at the Brookings Institution who promoted many of the ACA's concepts when he was at the conservative Heritage Foundation. “The only way this could be done is to phase it in very slowly and gradually over many years so that one year from the next the impact on anybody is not very high.”
Stanford health economist Laurence Baker agrees. “Who doesn't like getting something tax-free?” he said. Baker and Butler were two of the 101 economists and policy experts who wrote an open letter to senators last year in support of the Cadillac tax.
As long as that tax preference and a public expectation of linking a job with health insurance exists—and as long as the Cadillac tax stays at bay—the private sector will likely continue to be the main source of health benefits for most of the employed population and their dependents.
“It's a very important part of our business model,” said Banke, the owner of 3-Points. “We're in the service business. We want to ensure our staff has the greatest healthcare.”
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