Excise Tax on High-Dollar Health Care Plans

Monday, December 28, 2009

The Senate’s version of health care reform contains a provision to impose a 40% tax on excess benefits for individuals with premiums above $8,500 for single coverage and $23,000 for family coverage, commencing in the 2013 plan year. The House’s version does not contain a similar provision. In order for the Senate’s (or some variation of it) version to find its way into the final law, the two houses must reach a mutual agreement on its features. The tax is designed to impact those individuals, presumably top corporate employees, who have access to “Cadillac” style plans. By including such a provision, it can only be assumed that the Senate’s intent is to limit or restrict benefits above this level in a manner similar to restrictions on Highly Compensated Employees found within 401(k) plans. However, this feature could have the reverse affect for those individuals who have higher than normal premiums due their current claims expense.

From the view of someone who has designed and administered health care plans for a number of years and employers, it takes more than a “premium” to make a plan a “Cadillac”. It is necessary to look at a number of factors including: the plan sponsor’s industry, competitors, out-of-pocket expenses (deductible, co-pay, and co-insurance payments), geographical location(s), financial position, and the overall (total rewards strategy) compensation philosophy of the sponsor. These are typical factors when attempting to determine the relative nature of a given plan compared to the marketplace and competitors.

It is not uncommon for a plan sponsor to offer a number of health care plans to its employees depending on factors such as: business line, geographical location, union vs. non-union, executive, vs. non-executive, salaried vs. hourly, … etc. In addition, a sponsor may offer a diversity of plan types that include: PPO’s, POS’s, and HMO’s. And within such choices, there may even be a High Deductible, HSA, and/or HRA (consumer-directed health care) style options as well. Plan sponsors do this in an effort to attract and retain their desired workforce in a financially effective manner. One feature I have personally used is to differentially price one type of plan, i.e., PPO, POS or HMO, in a way that focuses enrollments on a specific plan type that is more financially effective for the plan sponsor.

Health care is expensive, in its 2009 Health Care Cost Survey, Towers Perrin reported US employers participating in the survey spent an average of $9,660 per employee for health care benefits in 2009, an increase of 32% from 2004. As costs have risen, plan sponsors have absorbed the larger part of the increase while employees have picked up the remainder. The Towers’ survey reports that employers have taken on 73% and employees 27% of the 2004-2009 cost increase respectively. During this time plan designs have been amended to reflect higher employee out-of-pocket expenses in an effort to shift direct service costs to the employee. Finally, Towers reports employee salary increases as indexed to health acre cost increases have lagged behind at a rate of 33% vs.148% for the period 1999 to 2007. (Towers Perrin 2009 Health Care Cost Survey) http://www.towersperrin.com/tp/showdctmdoc.jsp?url=Master_Brand_2/USA/Press_Releases/2008/20080924/2008_09_24b.htm&country=global

While the Towers’ survey was directed at health care costs, the survey’s finding does point to one in disputable fact; better performing (financially) organizations have lower overall health care costs for both the employer and the employee and a higher degree of employee engagement in the process of managing those costs. Tower’s report this is accomplished by:

o Clearly articulate their strategies............................... o Engage leaders
o Understand their employee populations.................... io Engage employees
o Optimize investments................................................ io Support employee health
o Measure for success

For more information on the Towers Perrin 2009 Health Care Cost Survey, please contact: Joe Conway, Towers Perrin, Phone:(914) 745-4175, joseph.p.conway@towersperrin.com