Impending Excise Tax Driving Change for Health Benefits

According to an Aon Hewitt pulse survey of 317 U.S. employers, 40% expect the excise tax to affect at least one of their current health plans in 2018, and 14% expect it to immediately impact the majority of their current health benefit plans. However, one-quarter of employers said they still have not yet determined the impact of the tax on their health plans, and more than one-third reported that their executive leadership and finance teams have limited or no knowledge of the implications of the tax for their organizations.

Implemented as part of the Patient Protection and Affordable Care Act (ACA), the excise or “Cadillac” tax is a 40% tax assessed on the value of all affected health care programs a participant elects that exceed certain dollar cost thresholds in 2018 ($10,200 single / $27,500 family) and beyond (see “Employers Need to Understand Factors Determining Health Plan Excise Tax”).

Of those employers that have determined the impact the excise tax will have on their plans, 62% say they are making significant changes to their health plans for 2015:

• One-third (33%) are reducing the richness of their plan designs through higher out-of-pocket costs, including 10% that say they will eliminate high-cost, rich design options;
• 31% are increasing the use of wellness incentives in their plans;
• 14% are evaluating private exchange options for pre- and post-65 retirees, while 7% are considering private exchanges for active employees;
• 14% are significantly reducing spousal eligibility or subsidies through mandates or surcharges; and
• 5% are implementing narrow/high performance provider networks.

“While the excise tax provision of the Affordable Care Act doesn’t go into effect until 2018, it is accelerating the pace of change for U.S. employers,” notes Jim Winkler, chief innovation officer for Aon Hewitt’s health business. “Over the next few years, employers expect to use both traditional and innovative tactics to make substantive changes to their health plans to minimize their exposure to the tax and put them on a path to lower rates of health care cost increases.”

Looking ahead, due to medical costs expected to rise more rapidly than the tax thresholds in the future, 68% of the employers Aon Hewitt surveyed expect the excise tax to affect at least one or the majority of their current health plans by 2023. When asked about future actions they are likely to consider in order to minimize their exposure to the tax, the vast majority (79%) expect to reduce plan design richness through higher out-of-pocket member share. More than 40% of employers say they are likely or highly likely to adopt cost control strategies, such as reference-based pricing and narrow provider networks.

Other strategies employers are likely or highly likely to consider include:

• Restructuring coverage tiers to align with tax threshold ratios (37%);
• Limiting flexible spending account (FSA), health savings account (HSA) and/or health reimbursement account (HRA) contributions counted against thresholds (31%);
• Limiting buy-up options for employees (26%); and
• Moving to a private health exchange (16%).

Aon Hewitt’s survey revealed that an overwhelming majority of employers (88%) favor repeal of the excise tax. However, just 12% of employers say they have taken public actions, either directly or through a third-party industry organization, to express opposition to the tax. Although the majority dislike the tax, only 2% of employers say they are likely or highly likely to consider eliminating employer-sponsored health care coverage as a strategy for minimizing their exposure to it.