A major component of the Patient Protection and Affordable Care Act (PPACA), more commonly known as “Obamacare,” is the highly controversial “Cadillac Tax.” This surcharge is scheduled to take effect in 2018, and it will require businesses to pay a 40% non-deductible excise tax on annual premium amounts that exceed $10,200 and $27,500 for individual and family plans respectively. These thresholds for 2018 will be updated once regulations are written and indexed for inflation in the following years.
In addition to reducing tax preferred treatment of provided health care, this provision intends to promote a reduction in excess health care spending by employers and employees. The estimated $90 billion that will be collected over a 10-year period will be used to fund the expansion of health care under “Obamacare.”
Perceived Benefits & Consequences
Proponents of the Cadillac Tax argue that employers will be incentivized to support payment reforms and efficiencies that will ultimately bring down the cost of health care. Opponents point out that employers will increase deductibles and other out-of-pocket expenses for their employees to avoid hitting the threshold.
On December 3, 2015, in a rare show of bipartisanship, the Senate pushed to repeal the Cadillac Tax by including the provision in a larger tax bill, one that would likely gut Obamacare, that passed by a vote of 90-10. However, it will not likely become law, as President Obama is expected to veto the bill. While the Senate has clearly expressed its dislike of the provision, it remains unclear if the president would be willing to consider a compromise.
While the anticipated implementation of this tax is two years away, business owners should take the time to consider options that would help reduce health care expenses. While that piece of advice should be standard business practice, the ramifications of a significant health insurance surcharge could have a profound effect on the bottom line, which would be far more troubling for a business owner.
A Different Option
Over the past few years, Consumer Directed Health Plans (CDHP) have become increasingly popular. Why? More employers are adopting them in hopes of better controlling health care costs by educating the consumer. We have seen this strategy work quite well, because these plans encourage subscribers to take an active role in considering health care options. For example, is it necessary for an MRI when a simple X-ray will do? Of course, your doctor should make that determination—but by having the discussion, subscribers might be able to select a cost-effective and very viable alternative and save on out-of-pocket expenses.
Ultimately, this strategy can help mitigate premium increases. Whether a CDHP can keep an employer from paying a Cadillac Tax surcharge when (and if) the tax takes effect remains to be seen. But, this much is certain—it’s a good place to start.
