• Hot Topic: Delaying the Cadillac tax: The story of a successful coalition of strange bedfellows
• ICYMI: Noteworthy links from the past two weeks

Delaying the Cadillac tax: The story of a successful coalition of strange bedfellows

Congress has rarely found bipartisan agreement on anything relating to the Affordable Care Act (ACA). However this week they are poised to delay one of the law's key revenue provisions. Section 4980I of the Internal Revenue Code, Excise Tax on High Cost Employer-Sponsored Health Coverage, is part of the Affordable Care Act that charges an additional excise tax on certain employer-sponsored health plans that are valued over the statutorily imposed thresholds and has been called the "Cadillac tax".

The Cadillac tax is an excise tax on insurance companies that provide employer-sponsored health plans valued over a specific amount. As originally drafted, the tax was due to start in 2018 and would impose a 40 percent excise tax on health plans valued over $10,200 for individuals and $27,500 for a family. This single provision was scored to raise $91 billion in revenue over 10 years. Besides being one of the main revenue offsets in the ACA, many economists have also staunchly defended the policy behind the Cadillac tax. They argue that the provision is one of the law's most critical tools for controlling the increasing cost of healthcare. However, because those effected by the Cadillac tax are strategically and bipartisanly aligned—labor unions as well as the business community—this week Congress has intervened to delay the impact of a significant provision of the healthcare law.

Employers have received a tax benefit for the cost of the health benefits they provide to their employees since the 1940s. Because there is no upper limit on this tax benefit, some policymakers have argued it has become an incentive for employers to increase health benefits instead of wages, and that incentive has exacted a cost on the overall health system. They argue that if tax policies encourage businesses to offer more generous health policies than their employees need, then the health system bears the cost of these "Cadillac" health plans. By removing the tax benefit for these plans, policymakers argue that employers and employees would be encouraged to spend their healthcare dollars more efficiently. In 2014, healthcare spending was $3.8 trillion, up from $2.9 trillion in 2013, and some estimates indicate as much as a third of this spending can be due to overutilization of healthcare services.

Some policymakers have also argued that the revenue from this provision may never materialize because most employers and employees will shift their behavior in order to avoid the tax. This they contend would have positive impact on the health system by reducing inefficiencies due to overutilization, but the penalties from the tax would not come into the Treasury.

What is applicable coverage

Section 4980I states the Cadillac tax applies to coverage under any group health plan that is made available to the employee by an employer which is excludable from the employee's gross income. The statute further defines a group health plan to include self-insured plans and other plans employers contribute to in order to provide healthcare to their employees regardless of whether the employee or employer pays for the coverage.

How value is calculated

Those opposed to the tax argue that the definitions spelled out in guidance from the IRS have expanded the impact of the Cadillac tax beyond just "Cadillac" health plans to average health plans as well. The value of applicable coverage is determined by accounting for the entire cost of the insurance benefit. IRS guidance defines the insurance benefit to include employer-sponsored wellness plans, all contributions to flexible spending accounts (including employee-elected payroll deductions) and employer contributions to health savings accounts. Some argue this moves the tax from solely targeting luxury health plans and instead levies the tax on average health plans too.

Who is responsible for paying the tax

Employers will calculate the amount of the Cadillac tax for each of their employees with applicable coverage. The statutory language states that those responsible for paying the tax are the "coverage providers" and who that is depends on the coverage provided. For a group health plan, the health insurance issuer is the coverage provider. For contributions to a health savings account (HSA) the employer is the coverage provider. For all other coverage it is the person who administers the plan benefits. The ACA's statutory language doesn't include a definition of this final category and guidance released by the IRS indicates the agency is considering two alternatives: 1) the person responsible for performing the day-to-day functions that constitute the administration of plan benefits, or 2) the person that has the ultimate authority or responsibility under the plan with respect to the administration of plan benefits. However, no matter who pays the Cadillac tax, it is not a deductible expense.

Employers changing benefits to avoid tax

Because of the broad category of benefits included in the value calculation of health plans, there are several changes to health benefits employers can make to avoid subjecting themselves to the tax, including:

• Increasing employee cost sharing, including increasing deductibles;
• Utilizing narrower provider networks to bring down the cost of health plans;
• Reducing the scope of covered benefits and higher cost insurance options; and
• Capping employer contributions to Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) or Health Reimbursement Arrangements (HRAs).

Experts state that employers have begun to take these steps now in order to avoid the new excise tax in 2018. One survey estimates that unless employers implement changes, 60 percent of employers will be hit by the Cadillac tax in 2018.

Who is impacted

Nearly 175 million Americans are enrolled in employer-sponsored health plans. Another concern expressed by stakeholders is that the structure of the tax will increase its impact on American households over the years. The statutory thresholds are indexed to overall inflation—not healthcare inflation—and since healthcare inflation rises at a faster rate over the course of time, the Cadillac tax will impact an increasing number of Americans. While the Cadillac tax technically is imposed on insurance companies, the increased cost is expected to be passed on to the employers which ultimately translates to increased healthcare costs to the employee.

Rare example of bipartisan synergy

When the provision was included in the ACA, the business community and labor unions both voiced their concerns with the impact of the Cadillac tax. They created an unusual bipartisan coalition in DC calling for the repeal, or at least a delay, of the tax.

A key moment in this legislative debate occurred earlier this month when the Senate voted overwhelmingly to repeal the Cadillac tax by a vote of 90-10. This strong bipartisan vote seemed to foreshadow that Congress would address the Cadillac tax in their end of the year legislative deal. Speaker Paul Ryan on Tuesday night announced that a two-year delay of the Cadillac tax had been included in Congress' end of the year legislative wrap up.

Delaying the Cadillac tax gives Republicans the opportunity to claim they have weakened a key revenue provision of the ACA—therefore undermining the financing and therefore the long term sustainability of the health law. Democrats were able to deliver a win to the unions ahead of the 2016 campaign cycle while giving themselves more time to find a way to restructure the Cadillac tax that would maintain the policy goals of the original provision as well as reinstating the lost revenue. This bipartisan agreement to kick the can down the road was delivered just in time for the holidays.

ICYMI….

Noteworthy links from the past two weeks

General

• The Federal Reserve raised its benchmark index rate for the first time in almost 10 years [The New York Times]
  
  
• The Financial Stability Oversight Council and MetLife joined forces to fight and to make public documents behind the designation of the company as a systemically important financial institution [Law360]
  
  
• Various aspects of the Financial Stability Oversight Council were discussed in extensive congressional testimony [Politico, Business Insurance, Reuters, A.M. Best]

Property and Casualty

• The NAIC tasked its market regulation committee with taking a broad look at insurers' use of big data including "price optimization" techniques [JD Supra]

Health

• Treasury and Health and Human Services released guidance on how states can apply for innovation waivers under the Affordable Care Act [BloombergBNA]
  
  
• The Affordable Care Act open enrollment period was extended due to high last minute demand [The New York Times]

International

• Industry commenters debated the value of Solvency II [A.M. Best]