Approaching health law tax is not just a levy on luxury

The last major piece of President Barack Obama's health care law could raise costs for thrifty consumers as well as large corporations and union members when it takes effect in 2018.

The so-called Cadillac tax was meant to discourage extravagant coverage. A growing chorus of critics from Hillary Clinton and Bernie Sanders to the entire GOP field say it's a tax on essentials, not luxuries. It's getting attention now because employers plan ahead for major costs like health care.

With time, an increasing number of companies will be exposed to the tax, according to a recent study. The risk is that middle-class workers could see their job-based benefits diminished.

Dr. Tevi Troy, president of the American Health Policy Institute and a former deputy secretary of the Department of Health and Human Services in the George W Bush administration and Elise Gould, senior economist and director of health policy research at the Economic Policy Institute joined MPR News with Kerri Miller to discuss the pitfalls and possible alternatives to the excise tax on healthcare plans.

First to go might be the "flexible spending accounts" offered by many companies. The accounts allow employees to set aside money tax-free for annual insurance deductibles and out-of-pocket health costs. That money comes out of employees' paychecks, and they're not able to use it for other expenses. Savvy consumers see it as a way to stretch their health care dollars.

The catch is that under the law those employee contributions count toward the thresholds for triggering the tax.

There are other wrinkles: Companies in areas with high medical costs, such as San Francisco, are more likely to be exposed to the Cadillac tax than those in lower-cost areas like Los Angeles. Ditto for employers with unionized workers who won better benefits through bargaining.

Republicans in Congress and a sizable contingent of Democrats are calling for repealing the tax. Hillary Rodham Clinton, the front-runner Democratic presidential candidate, says she's concerned and would re-examine the tax. Since it doesn't take effect right away, it's an issue for the next president.

"As currently structured, I worry that it may create an incentive to substantially lower the value of the benefits package and shift more and more costs to consumers," Clinton said in response to a candidate questionnaire from the American Federation of Teachers.

The Cadillac tax has two purposes: to act as a brake on health care spending and to raise money for covering the uninsured.

The value of employer-sponsored health insurance is tax-free to workers and tax-deductible for companies. It amounts to an income tax break worth $206 billion this year, according to the president's budget. Many economists call that an indirect subsidy that encourages wasteful spending. They argue that if not the Cadillac tax, some other kind of limit is needed. Major Republican health overhaul plans have also proposed curbs.

A recent study from the nonpartisan Kaiser Family Foundation estimated that 26 percent of all employers would face the tax in at least one of their plans during its first year, 2018. Nearly half of larger companies would face the consequences of the tax that same year, because they tend to offer better benefits.

"It is a pretty broad-based tax that has a powerful effect on controlling the growth of premiums," said Larry Levitt, a co-author of the study. "The downside is workers may see an increase in their out-of-pocket costs."

Since the tax is indexed to general inflation, which rises more slowly than health insurance premiums, over time it would affect a growing share of health plans.

The Obama administration says such studies overstate the potential impact. The Treasury Department said in a statement that only "a small fraction of workers" would be affected. Regulations to implement the tax could soften some feared consequences, but proposed rules aren't expected until late this year or early next.

The Cadillac tax is 40 percent of the value of employer-sponsored plans that exceeds certain thresholds: $10,200 for individual coverage and $27,500 for family coverage. The tax is levied on insurers and plan administrators, who are expected to pass it back to employers. The 40 percent rate is well above the income tax rates that most workers face.

Joe Kra of the benefits consultancy Mercer said he believes many employers will be required to make fundamental changes in their health plans to mitigate the tax's impact. Measures such as ditching flexible spending accounts may not be enough. That would accelerate a shift to high-deductible plans that require workers to pay a bigger share of health costs before insurance kicks in.

Here are some other potential twists:

-- The Treasury Department says it is considering an exemption for flexible spending account contributions for dental and vision care, which are two popular uses.

The health care law already limited FSA contributions and without such accommodations, the Cadillac tax could lead to their demise.

"A benefit that you are offering your employees so they can save money on taxes is going to wind up costing you money," said economist Paul Fronstin of nonprofit Employee Benefit Research Institute.

-- Treasury is also trying to figure what do about a different kind of workplace arrangement called a "health savings account."

A growing number of workers have high-deductible health insurance that comes with tax-sheltered health savings accounts, or HSAs, that they and their employer can contribute to.

But if an employee has his or her contribution deducted from their paycheck, it could potentially trigger the tax.

Officials say they're considering options.

4 ways companies may adjust to looming employee benefits tax

Here's how your employer might react to this tax and, in some cases, how it may affect your coverage:

1) Encourage Healthy Living

The push by employers to make employees healthier may get stronger in 2016 and beyond.

Mercer's survey found that 42 percent of employers were considering adding or expanding programs to improve employee health, specifically to avoid the excise tax. These programs often start with a health risk assessment and coaching to help employees improve their well-being. That might include help for those who want to quit smoking, eat better or manage chronic conditions like diabetes.

Companies have become more aggressive with this approach in recent years by levying surcharges or added costs on employees who smoke or don't take a health risk assessment.

Employers want workers to take better care of their health with the hope that this wards off future medical expenses. Simply put, a worker who manages his diabetes or improves cholesterol levels may prevent a heart attack.

2) Adjust Coverage

If your spouse can get coverage through his or her job, expect your employer to encourage this. More companies are adding surcharges to the cost of coverage for spouses who have other options.

Companies also have been raising deductibles, or the amount a person has to pay before most insurance coverage begins. This lowers the premium or cost of coverage. It also can encourage patients to shop for better prices on some forms of care. Companies are offering some help with these high deductibles.

A quarter of employers surveyed by Mercer say they are considering adding a consumer-directed health plan to the coverage choices they offer or working to increase enrollment in one to help avoid the tax. That's in addition to the 41 percent that have already done this. These plans pair coverage that has a deductible topping $1,200 with an account that lets the employer or worker save for medical expenses.

Some businesses also may cut back on their use of flexible spending accounts, which can give workers who don't have a consumer-directed health plan a chance to set aside money before taxes for out-of-pocket health care costs. The amounts that employees set aside count toward the thresholds that trigger the tax.

3) Offer New Alternatives

More employers and insurers are attempting to shave costs by providing telemedicine options that connect people virtually with a care provider through a smartphone, tablet or desktop computer for relatively minor conditions. These visits can cost half as much as a trip to the doctor's office, which can run around $100 for people with high deductible coverage.

Some companies also are considering moving their employees to a private insurance exchange. For that coverage, employers give workers a set amount of money and then send them to an exchange that offers several different plans.

Research shows that employees tend to pick less expensive options when given choices, said Tracy Watts, a senior partner with Mercer, which operates a private health exchange.

More employers also are offering supplemental accident coverage that can help patients with medical expenses left by a high-deductible plan, according to the insurer Sun Life Financial. That coverage doesn't count toward the tax threshold.

4) Wait Out The Debate

Some employers may choose to do nothing for now until they see what happens with the tax.

Both Republicans and Democrats in Congress are calling for its repeal. The so-called "Cadillac Tax" was aimed at excessive health insurance coverage, but it stirs worry because the threshold levels that trigger it will rise slower than the cost of care.

That means that each year, a growing percentage of plans may hit it.

If a repeal doesn't happen, politicians may push to soften its impact by preserving the use of things like flexible spending accounts. The IRS is still finalizing tax guidelines.

"Even if it doesn't get repealed, at least there's a really strong voice for some major changes to how it's calculated," Watts said.

The Associated Press contributed to this report