Monthly Archives: November 2014

Why Private Exchanges Kill the Cadillac Tax

One of the most pernicious of many pernicious features of healthcare reform is the infamous “Cadillac” or Excise Tax. This tax was so unpopular a part of the the ACA that its initial planned effective date in 2014 was pushed back to 2018–intentionally long after the ACA’s presidential author had left office.  The excise tax seeks to create more equal footing between the classes, since rich benefit “Cadillac” plans are not taxed at the same level as wages.  As the thinking goes, people with rich benefit plans (executives, for instance) pay less taxes as a percentage of total compensation than those at the same income level who do not have rich benefits (since $1,000 in benefits is taxed less than $1,000 in wages).  The Cadillac Tax was designed to offset this perceived injustice while increasing the revenues available for ACA.
Unfortunately, the plan was poorly written and the actuarial estimates were off, so much so that Towers Watson estimates the Cadillac tax is estimated now to hit over half of all plans by the time is goes into force–far more impact than what had been purported.  Furthermore, the tax overly penalizes union members who have excellent benefits.  The unions are ostensibly the constituents of the politicians most concerned about the tax inequality in the first place, which undermines the tax’s political support.
Due to the heavy handed and widespread consequences of the tax, some have theorized that as we near its implementation date the tax would be eliminated or pushed back again.  The only challenge with this strategy is that the government isn’t getting any richer and the ACA isn’t costing any less now than when it was originally foisted on the American people.  There will be strong motivators for the government to keep this tax in play.  Furthermore, employers are planning for it, as the excise tax is on the short list of planning topics for every major brokerage company.  With companies finding creative ways to scale down the value of their plans to avoid this tax, the likelihood decreases that the tax will hurt wide groups of people, thereby reducing the political risk of keeping it in play.
What this all means is that companies who are innovative enough to scale back their benefits to avoid the tax–with the least amount of disgruntlement among their employees–will be the strategic winners.  Companies who anger their populations, cause turnover, or embroil themselves in labor disputes while ratcheting down benefits will be losers, as will those who pay the 40% penalty the tax demands for those who maintain high coverage.
This is where private exchanges come into play: private exchanges have arisen as one of the primary strategies to combating the Cadillac Tax.  Exchange providers have found that when exchanges are used for open enrollment, the enrollment in high-deductible, lower-cost healthcare plans often triples.  These plans cost less per month in exchange for the member taking on more financial responsibility.  If enough members switch to these less-rich plans, it reduces the actuarial value of the benefits package and eliminates Cadillac Tax liability.  The most elegant part of this solution is that the members opt-out of the high cost, rich plans voluntarily, thereby avoiding population disruption that could occur if rich benefits were forcibly removed.