Healthcare Reform and Excise, Part III, or: “Are You Sure That’s a Cadillac?”

Photo Courtesy of Wyrdlight

Part II of this series described the general effects of the excise provision of the Senate’s Health Care Reform bill, the Patient Protection and Affordable Care Act (PPACA), as projected by CBO, JCT, and CMS.  The post concluded:  “The excise generates revenue, reduces affected premiums, and ‘bends the cost curve.’  So, what is the problem?”  Here, I will attempt to describe the problems with the excise provision as written in the Senate’s PPACA.

The most obvious flaw in the excise is its “kill-em all” approach to determining which plans would be subject to the 40% tax.  According to JCT, the excise would affect 27% of “single” employer-sponsored plans and 22% of “family” employer-sponsored plans by the year 2019.  It is hard for one to imagine that a quarter of all active employee health insurance plans are “Cadillac plans.”  Either the Senate was disingenuous in purporting to target “excess benefits,” or the excise provision was drafted in a grossly careless manner.  (Note:  The short excise provision in the PPACA uses the term “excess benefit” ten times.)

Simply looking at the text of the PPACA shows that the Senate failed to consider (or simply ignored the fact) that affected plans would be disproportionately composed of the following:

• Plans with large number of women and/or older workers
• Plans providing coverage in high-cost areas (as opposed to simply high-cost states)
• Plans negotiated through collective bargaining
• Plans covering those in high-risk professions that are not specifically exempted by the PPACA

The excise also works to disproportionately burden middle-class workers.  According the JCT, over 80% of the revenue generated by the excise from 2013-2019 would be in the form of additional taxable income from those enrolled in affected plans.  Such additional taxable income would come from the conversion of non-taxable healthcare benefits into cash compensation.  Simply put, health benefits would be reduced, wages would be increased proportionately (although some increased wages may be eaten-up by increased cost-sharing), and taxes would be levied on the increased wages.  By 2019, affected persons earning $20K - $100K would, on average, be paying an additional 1% - 2% in federal taxes.  However, affected persons earning $1,000,000+ would, on average, be paying only additional .1% in federal taxes.  Of course, this is assuming that in our current economy, employers will actually pass-on savings from reduced healthcare benefits to wage-earners.

These flaws garnered significant amounts of criticism, particularly from organized labor, whose members would be disproportionately affected by the excise.  During reconciliation of the House and Senate bills, labor unions achieved a tentative compromise with legislators regarding the excise, which would:

• Exempt collective bargaining contracts, state and local workers and VEBAs through January 01, 2018.
• Raise the threshold to $8,900 for single plans and $24,000 for family plans. (Taft-Hartley plans will be considered at the family rate.)
• Add adjustments for gender and age, raising the threshold for plans that have significant numbers of women and/or older workers.
• Raise the threshold for plans with workers in high-risk professions, affecting more than 9 million workers.
• Raise the threshold for plans with retirees age 55 and up.
• Exempt dental and vision costs beginning in 2015.
• Raise the threshold on plans further if health care costs grow faster than expected from 2010-2013.

Putting aside the massive political implications, the compromise merely puts lipstick on the pig.  What about other affected “non-Cadillac” plans not exempted under the compromise?  What about the lost excise and income tax revenue?  How much would the compromise “un-bend” the cost-curve?

Furthermore, if affected plans choose to increase-cost sharing to avoid exceeding the premium threshold, the excise could actually decrease health and increase health expenditures:

If the excise tax pressures people to purchase health plans with increased cost-sharing (e.g., higher copayments), consumers may very well respond to this effective price increase by haphazardly cutting back on medical spending.  However, many of the interventions that are avoided may turn out to be health-improving and/or cost-effective. This problem is especially true for vulnerable populations. Research has demonstrated that low-income and chronically ill populations are generally harmed by higher cost-sharing and may actually incur higher overall costs in response to the introduction of this cost-sharing, as they cut back too much on the cost-effective managing of chronic conditions.

Research has found that the optimal cost-sharing rate for many chronic conditions and large classes of prescription drugs is very low or even zero. This same research shows that increased cost sharing in certain areas (e.g., prescription drugs or primary care) can lead to higher overall costs due to increased utilization in other areas (e.g., hospitalization).

Bad ideas are Congress’ second-most abundant resource.  Really bad ideas are its’ first.  The excise on high-cost employer-sponsored insurance plans constitutes the latter.  I hope that continuing to discuss the excise provision may deter Congress from considering any similar provision in future legislation.

Excise & Healthcare Reform, Part II, or: “What Overall Effect Would the Cadillac Plan Tax Have?”

Photo by Tamorlan

Part I of this series provided an overview of the excise on high-cost health insurance plans contained in the Senate’s healthcare reform bill, the Patient Protection and Affordable Care Act (PPACA).  This part summarizes the projected general effects of the excise provision.  The final part of this series will address the problematic and controversial consequences of the excise and possible alternatives.

Three governmental agencies have been primarily responsible for calculating the effects of healthcare reform legislation for Congress:  the Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), and the Center for Medicare and Medicaid Services (CMS).  Both the CBO and JCT operate under the auspices of Congress, while CMS operates within the Department of Health and Human Services (HHS).

Additionally, numerous private entities separately analyze legislative language to ascertain its effects.  As expected, private entities often issue findings that differ, in varying degrees, from those provided by governmental entities.  This post focuses on the government findings regarding the excise provision, upon which the Senate relied (presumably) in passing the PPACA.  This post is summarized from information contained in the following documents:

JCT letter to Representative Joe Courtney, Dec. 08, 2009

JCT letter to Representative Joe Courtney, Oct. 16, 2009

CBO letter to Senator Bayh, Nov. 30, 2009

CBO letter to Senator Reid, Dec. 19, 2009

CMS memorandum “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as passed by the Senate on December 24, 2009,” Jan. 08, 2010

Present tax law allows for the exclusion of employer-provided health benefits from individual income tax and contributions made by employers from FICA (Federal Insurance Contributions Act) tax. The excise would generate approximately $148.9 billion dollars in revenue from 2010-2019.  The excise tax itself would not be deductible from Federal income tax.

For each year after 2013, the actual excise tax collected would account for a smaller percentage of the total revenue collected as a result of the excise provision.  This would be the result of an increase in wages following shifts away from the high-cost insurance plans.  The JCT provided the following explanation:

[T]he Joint Committee on Taxation estimates that the excise tax would be mainly passed along [to consumers] through increases in premiums and that many consumers respond by reducing their demand for insurance above the excise cap.  As described above, because health insurance premiums are a component of compensation, which is not likely to fluctuate due to the excise tax, as consumers spend less on tax-excluded benefits, their taxable cash wages will increase.  Therefore, as the value of health insurance plans decline, the income tax base will increase in the long run.

The total number of health plans affected by the excise would increase from 2010-2019 due to the compounding difference between the inflation rate applied to the premium threshold and medical cost inflation.  The percent of active plans affected by the excise tax would increase during the 2013-2019 period from 14% to 27% and 9% to 22% for single plans and family plans, respectively.  The average premium for those affected plans would actually be lowered.  How?  CBO provides:

For policies whose premiums remained above the threshold, the tax would probably be passed through as a roughly corresponding increase in premiums.  However, most employers would probably respond to the tax by offering policies with premiums at or below the threshold; CBO and JCT expect that the majority of the affected workers would enroll in one of those plans with lower premiums.  Plans could achieve lower premiums through some combination of greater cost sharing (which would lower premiums directly and also lower them indirectly be leading to less use of medical services), more stringent benefit management, or coverage of fewer services.

The excise certainly generates a significant amount of revenue to fund other aspects of healthcare reform.  However, the excise is also expected to decrease the overall national health expenditures (NHE).  According to CMS, the excise “…would have an initial, significant impact on the overall level of expenditures.”  Furthermore, “In 2019, these impacts would reduce the total NHE by an estimated 0.3 percent.”   The current NHE projection for the year 2019 is $4.7 trillion.  That puts the savings at $14.1 billion.

The excise generates revenue, reduces affected premiums, and “bends the cost curve.” So, what is the problem?

Excise & Health Reform, Part I, or: “What is an Excise & How Would this Tax on Cadillac Plans Work?”

Photo by Tamorlan

[Ed. Note: We are very pleased to introduce James Christiano to the blog. He is a law student here at Seton Hall Law and, after receiving his B.A. in psychology in 2002, worked from 2003 to 2008 as a District Adjudications Officer for the United States Citizenship and Immigration Services (USCIS), an agency within the Department of Homeland Security.  During his time with USCIS, James was primarily responsible for adjudicating applications for immigration benefits, including naturalization, lawful permanent resident status, and work authorization. As you might imagine, James has an eye for regulatory analysis, and will be offering a series of posts (to start) on provisions in the health reform bill regarding  "excise" along with analysis as to their potential impact.]

One of the many controversial aspects of healthcare reform is the Senate’s proposed excise on high-cost health insurance plans.  Such high-cost plans have often been referred to, arguably inappropriately, as “Cadillac plans.”  This post provides an introduction to the proposed excise on high-cost plans as provided in the Senate Bill.  Subsequent posts will address the ramifications and controversies of the excise.  (Note: The Senate Bill contains other excise provisions, including a 5% excise on elective cosmetic surgery procedures, which this post does not discuss.)

What is an excise?

Black’s Law Dictionary defines excise as “[a] tax imposed on the manufacture, sale, or use of goods (such as a cigarette tax), or on an occupation or activity (such as a license tax or an attorney occupation fee).”  Excises are commonly, and redundantly, referred to as “excise taxes.”

A quick skim of Subtitles D and E of Title 26 of the United State Code provides one an idea of the types of goods and activities that Congress has deemed deserving of an excise.  A few examples are luxury passenger automobiles, certain vaccines, communications services, authorized and unauthorized wagers (i.e., gambling), petroleum, firearms, cigarettes, and “excess expenditures to influence legislation.”

Excise currently imposed on group health plans

Federal law already subjects group health plans to an excise under certain circumstances.  For instance, 26 USC § 5000 imposes an excise on certain group and large group health plans deemed “nonconforming” — i.e., those that do not comply with the requirements of particular subsections of 42 USC § 1395y(b)(1) and (2).  Additionally, 26 USC § 4980B and D impose an excise (as a form of penalty) on group health plans that fail to meet HIPAA and COBRA requirements.

Excise on high-cost plans in the Senate Bill

The Senate Bill includes a provision imposing a 40% excise tax on high-cost, employer-sponsored health insurance plans.  High-cost plans would include those costing $8,500 for individuals and $23,000 for those other than self-only, beginning in the year 2013.  Starting in 2014, the threshold for high-cost plans would be increased annually by the change in the Consumer Price Index (CPI) plus 1%.  These thresholds are further increased for individuals employed (or previously employed) in certain high-risk professions or the repair or installation of electrical or communications lines.  Also, residents of states that rank in the top 17 among the highest-costing average employer-sponsored health insurance plans would be subject to more lenient thresholds for the years 2013, 2014, and 2015 (120%, 110%, and 105% of the threshold, respectively).

For each given high-cost plan, the coverage provider would be responsible for paying a 40% tax on the amount equal to the cost of the coverage exceeding the threshold.  For example, a coverage provider would be subject to an excise of $400 for a plan costing $24,000 in 2013 ($24,000 - $23,000 = $1,000; $1,000 x 40% = $400).  A coverage provider may be the insurance issuer, the benefits plan administrator, or the employer, depending on the coverage arrangement.