Tag Archives: ACA

The Cadillac Tax

“It will be of little avail to the people…if laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood.”  James Madison

 

When the Affordable Care Act (ACA) was passed in 2010, there was a provision to have an excise tax on high-cost employer sponsored health care plans. This tax, known as the “Cadillac tax” was to be 40% of the cost of health coverage that exceeds certain, predetermined threshold amounts. This tax was to go into effect in 2018. In the original law, this tax was to be non-tax deductible and it was to be permanent.

 

In calculating the tax, the cost of coverage was to include the total contributions paid by both the employer and the employees. However, cost sharing amounts such as co-pays and deductibles would not be used in the cost calculations.

 

The intent of the Cadillac tax was to reduce the tax preferred treatment of employer purchased health care insurance; reduce the overall health care spending which was manifest by these high cost plans, and to help finance the expansion of health care coverage of the ACA.

 

The tax was supposed to incentivize employers to pay their employees higher salaries or wages instead of compensating them with these desirable health care plans. The government could tax wages and salaries but they could not tax the health care plans prior to the ACA.

 

It was also claimed by those who were in support of the tax, that the expensive health care plans were more likely to be used by the people; they would be more inclined to visit the emergency room or their physicians when they might not need to. People act rationally; they are more likely to use something if they do not have to pay for it.

 

During the debates on the Affordable Care Act, Nancy Pelosi infamously proclaimed that the bill must be passed so that we can find out what’s in it (or words to that effect). She was being prescient. When it became known what benefits would be effected by the Cadillac tax there was significant movement to have it removed from the law.

 

On December 18, 2015, Congress passed and President Obama signed a two year delay of the Cadillac tax. With the change, the tax would not become effective until 2020 and the payments would be deductible for federal tax purposes.

 

The tax would be 40% of the cost of the health care insurance policy so long as the policy exceeded a predetermined amount. This predetermined amount is currently $10,200 for an individual policy and $27,500 for a family policy. However, these amounts are allowed to be raised before the tax takes effect in 2020. The tax will be indexed for inflation in future years which means it is only going up.

 

For people under 65 who are engaged in high risk professions, the threshold amounts are a little higher, $11,850 for individuals and $30, 950 for a family policy. These amounts may also go up prior to the tax going into effect and they will also be indexed for inflation in future years.

 

A recent survey done by the National Business Group on Health showed that about half of our nation’s largest companies have health plans that will reach the threshold by 2018 if measures fail to control rising costs. Three quarters of these companies are likely to reach the threshold by 2020.

 

Not surprisingly, republicans, employees and employers subject to the tax would like to see it removed from the ACA. What is a surprise is that unions and some democrats are in agreement that the tax should eliminated. Even President Obama agreed to sign off on the two year delay on implementation—this is actually the first significant change of Obamacare that he will sign off on.

 

Initially the Cadillac tax will affect the benefits of employees and union workers that already have generous plans. As the caps rise each year (remember, they are indexed to inflation), this tax will go up. As the tax goes up, it is foreseeable that the wages and salaries of those who have the plans, will go down. Or, if salaries do not go down, it is foreseeable that the benefits will be decreased, or in some cases, eliminated. Since the plans deductibles and out of pocket expenses are not subject to the Cadillac tax calculations, it is likely that these costs will rise.

 

Wellness programs, tax-free contributions to health savings accounts, and on-site health clinics, are all subject to health plan costs that are used in the Cadillac tax calculation. As such, they are likely to be removed from the plans even though they would be likely to decrease health care costs in the long run. Unions that have also been able to negotiate higher benefits in their health care plans (often at the cost of lower wages) would also be subject to changes in their health plan benefits. No wonder that President Obama and some democrats in Congress are willing to hold off on the Cadillac tax and let the next administration deal with its implications.

 

One of the key problems with the Cadillac tax in its present form is the link of the threshold to standard inflation. Historically, inflation of medical costs has exceeded standard inflation and there is every reason to think that this will continue. As the costs of the plans rise faster than the threshold, more plans will be subject to the Cadillac tax. The battle between what the provider’s bill and what the third party payers will be willing to pay will also continue.

 

Since the Cadillac Tax was supposed to help cover some of the costs for Obamacare, the two year delay will lead to increased deficits associated with the law. In fact, the Committee for a Responsible Federal Budget estimates that the delay will add over $90 billion to the federal deficit.

 

It’s hard to predict how people will react once this tax goes into effect. Will it change the way people see their health care providers? Will health care costs decrease as people will be less inclined to see their providers under the lesser plans? Will health care improve? Hard to believe that it will.

 

The two year delay in implementation will allow Congress to make adjustments such as by indexing to medical inflation. However, if a republican administration is elected to the Oval Office, then the postponement will likely become just the first step to repeal, not just of the Cadillac tax, but all of the Affordable Care Act.

 

 

darrylweiman

by Darryl S. Weiman, M.D., J.D.

Professor, Cardiothoracic Surgery, University of Tennessee Health Science Center and Chief of Surgery, VAMC Memphis, TN

MORE ABOUT THE AUTHOR: Darryl Weiman is a featured expert in www.healthcaredive.com on February 17, 2016. 

Pay Cuts for Physicians

The Affordable Care Act (ACA) was enacted to ensure that most people would have access to affordable health care insurance and to decrease the high cost of health care in our country. I have previously written about the Independent Payment Advisory Board (IPAB) and the role they will play in decreasing costs, but it looks like Health Care Insurers are already acting to cut payments without even waiting for guidance from the IPAB.

 

Highmark, a Blue Cross and Blue Shield provider that has programs in Pennsylvania, Delaware, and West Virginia has recently announced that they will be cutting payments to their participating physicians because of mounting losses from the plans they have provided through the ACA exchanges in those states. Highmark has found that they are paying out more in claims than they are collecting in premiums. This is not surprising as many healthy patients have chosen to opt out of health care insurance until they need it. Without participation from healthy patients who pay premiums but don’t use much health care, the losses were predictable.

 

Highmark claims they lost $221 million in 2014 and are projected to lose another $500 million in 2015 because of the mismatch in claims and premiums.     In the original ACA plan, recognizing that health insurers may be facing some significant losses until the system comes into balance, the Act originally had federal subsidies which were meant to offset losses for the first three years of the Act. However, the Congress, which is now under Republican control, has blocked the administrations access to these funds for the time being. As a result, companies like Highmark are only getting 13% of the subsidy money they were counting on; which was projected to be $220 million in 2014. Even though 13% of the money was made available, Highmark has not yet received any of their shares.

 

As a rational business, these losses will be handled by pay cuts to the physicians who are Highmark providers. Of course, Highmark could spread some of the losses to the participating hospitals but they have chosen not to do this. Apparently, cutting reimbursements to hospitals would require hospital specific negotiations whereas the doctor contracts are more flexible and “adjustments” are already built in to the present contract structure.

 

Highmark could have taken the losses and remained viable by dipping into their reserve funds and they have done this in the past, but they have now decided that subsidizing money-losing exchange plans is no longer a reasonable option.

 

Highmark is not the only insurer that is losing money under the ACA. I have previously written about Kynect, the Kentucky exchange which is talking about abandoning their state exchange altogether. The United Health Group has recently reported a $720 million loss for 2015. If they don’t see a financial turnaround soon, it is predictable that they will pull out of the exchanges. Other insurers such as Aetna and Anthem are also losing money on the exchanges.

The insurers are facing increasing losses because the patients opting into insurance purchases are a riskier pool than the insurers had originally anticipated. Highmark has shown that the congestive heart failure rates for those among the ACA purchasers was 43% higher than for members of their regular commercial plans. Chemotherapy claims per ACA users has been found to be 49% higher than the regular commercial users. These patients have high cost for care and the premiums paid by these patients (due to community ratings) does not cover the costs.[1]

 

To remain in business, the insurers will need to increase their premiums and decrease their payments on claims. Decreased payments can be done by increasing deductibles on the plans as well as paying less for each claim made. It is hoped that more healthy people will opt into buying health insurance since the penalty (tax?) for not having health insurance is scheduled to rise. However, if the penalty is still significantly less than the premiums, it is unlikely that a rational healthy person will participate in the exchanges. This is even more likely due to “guaranteed issue” which allows a person to buy insurance at any time; this means he can wait until he is sick to buy the needed insurance.

 

Another strategy being used by the insurers is to deny payment for those drugs or procedures that do not meet the insurance company guidelines. This denial usually results in the health care provider appealing the decision which can be labor intensive and time consuming. Providers are justifiably aggravated as it seems like gatekeepers for the insurance companies are making clinical decisions on patients they have never seen. Also, guidelines have never been deemed to be the “standard of care” as each patient has their own unique characteristics which the provider needs to understand in order to make a reasonable medical judgment.

 

If the payments to physicians are decreased, there will come a time that they will no longer participate as their overhead costs will exceed their remuneration. They will either refuse to see patients with certain insurance or they will retire. Either of these two options can put the Affordable Care Act in jeopardy as physicians are a critical resource in the health care model.

 

Can the government force the physicians to participate in the ACA? Can the government prevent the physicians from retiring? These questions will need to be litigated and will probably have to go to the Supreme Court for a definitive decision. This process will take time.

[1] Robert Lowes, Medscape Medical News, March 3, 2016.

 

darrylweiman

 

by Darryl S. Weiman, M.D., J.D.

Professor, Cardiothoracic Surgery, University of Tennessee Health Science Center and Chief of Surgery, VAMC Memphis, TN

MORE ABOUT THE AUTHOR: Darryl Weiman is a featured expert in www.healthcaredive.com on February 17, 2016.