Would Shakespeare Call American Health Policy a Tragedy or Comedy?

It’s too soon to know whether the Affordable Care Act (ACA) and its 40 percent excise tax will be a comedy or a tragedy for U.S. employers.

James A. Klein, president of the American Benefits Council, took a “Shakespearean” look at health policy as part of The Alliance Annual Meeting focus on “The Role of Employers, The Excise Tax and What Lies Ahead” on Oct. 27 at Monona Terrace.

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The Stage is Set

While American health policy offers elements of both comedy and tragedy, Klein hinted that it’s the type of material that would have given William Shakespeare plenty to write about.

The dynamics of American politics set the stage for drama. While Republicans make up the majority of both the U.S. House and the Senate, Klein noted that Republicans’ recent difficulties in selecting the next Speaker of the House show there is a distinct difference between “majority” and “control.”

Klein pointed out that Republicans also face the possibility of losing their Senate majority in the 2016 election, when Republicans must defend 24 seats while Democrats need only defend 10.

The ACA’s 40 percent excise tax, which Klein referred to by its nickname of the “Cadillac tax,”  is a non-deductible tax of 40 percent of the value of employer-sponsored health coverage that exceeds certain benefit thresholds – initially, $10,200 for self-only coverage and $27,500 for family coverage in 2018.

Klein asked employers to indicate by raising their hands whether they plan to make changes to their health plans based on avoiding the Cadillac tax. Their response roughly mirrored the one-third of employers who have increased employee out-of-pocket costs in 2015, based on an Aon Hewitt study.

The excise tax was designed to help pay the cost of ACA provisions while encouraging health plan changes that policymakers believe would reduce health care costs. The Congressional Budget Office (CBO) projects the excise tax will raise $91 billion over the next 10 years.

One-fourth of that total is projected to come from employers paying the excise tax. The other three-fourths is expected to come from increased income tax collections. This is based on the theory that employers will pare their health benefit plans to avoid the tax but then share their health savings with employees by increasing wages, which generates additional taxable income and increases income tax collections.

The Alliance to Fight the 40

Klein quoted Shakespeare’s assertion that “Misery acquaints a man with strange bedfellows.”

That might explain how union and business groups came together in The Alliance to Fight the 40. The Alliance to Fight the 40 supports legislation to repeal the 40 percent excise tax that is backed by both Republican and Democrat co-sponsors. The Alliance is a member of the “Fight the 40” coalition.

Klein said repeal legislation faces a significant challenge in the short-term because President Barack Obama has promised to veto the bill and supporters so far lack the votes needed to override a
veto. But support for full repeal continues to gain momentum. In addition, there are some policymakers who acknowledge the flaws of the 40 percent tax, but are not yet willing to support full repeal.
They do, however, support other “legislative fixes” including:

• An actuarial value safe harbor that would mean plans with an actuarial value of, perhaps, 85 percent or less of health costs would not trigger the tax, regardless of the plan’s cost.
• Providing a more realistic framework for rising health plan costs in calculating the tax by linking the 40 percent calculation to increases in the cost of medical care, rather than the general consumer price index (CPI) that typically rises more slowly.
• Excluding some employer costs that otherwise could be counted in tax calculations, including onsite clinics, wellness programs, health savings accounts (HSAs), flexible spending accounts (FSAs) and health reimbursement accounts (HRAs).

Employer Reporting and Tax Policy

Employers with 50 or more full-time employees face a deadline of Jan. 31, 2016, for submitting Internal Revenue Service (IRS) form 1095, used to report whether an employer offered health benefits that met the ACA’s “minimum value” standards in tax year 2015.

Klein said the IRS is aware of the complexity of this reporting and is expected to enforce reporting rules with a “light touch” for at least the first year and possibly two years.

A bigger long-term question is whether legislators will attempt to change tax policy on health benefits in an attempt to collect more revenue and reduce the deficit. Klein wryly quoted Shakespeare on their motivation: “Words pay no debts.”

The CBO calculates the income tax exclusion for employer contributions to medical insurance premiums and medical care will cost the U.S. government $2.6 trillion in foregone tax revenue over the next 10 years. Klein said that estimate is based on an assumption that every $1 spent on health coverage is $1 that would otherwise be paid to employees and thus subject to income tax.

Klein listed three proposals – all unsuccessful to date – that are aimed at limiting tax exclusions and increasing U.S. tax revenues:

1. The Bipartisan Commission for Fiscal Responsibility and Reform proposed reducing the 40 percent excise tax to 12 percent and limiting income tax excludability for health benefits.
2. Republican “Repeal and Replace” legislation aimed at providing an ACA alternative would limit excludability to $12,000 for single coverage and $30,000 for family coverage while providing a standard deduction for coverage purchased in the individual market.
3. In the 2008 presidential race, candidate Hillary Clinton proposed limiting income tax excludability for high-income earners. It’s unknown whether her 2016 campaign will include this proposal.

Klein said changing the tax exclusion for health coverage could “change the nature of the bargain” between employers and employees, possibly even making employer-based coverage unappealing to
employees.

What’s Ahead for Employers in American Health Policy

Klein offered a long-term strategic vision for employers and described three specific legislative proposals that could help facilitate that vision or improve the ACA.

1. The movement to defined
   contribution coverage. With this approach, employers would replace health benefits by funding HRAs that employees could then use to purchase individual coverage in exchanges. Klein called his a “win-win-win” because it protects employers from paying an ACA penalty while helping workers afford coverage and relieving the government from the need to give out premium tax credit
   subsidies.
2. COBRA reform.
   Employees have access to a better deal by receiving subsidized coverage in exchanges, rather than paying 102 percent of a prior employer’s health insurance offering. So it would be possible
   to relieve employer’s burden, and serve workers’ interests, by either repealing COBRA or limiting its duration to the current plan year.
3. The ACA’s State Innovation Waivers. States can now request ACA waivers that would take effect in 2017. These waivers would allow states to implement the ACA as they feel is appropriate if they show their model will be financially self-sufficient. If waiver guidelines are interpreted narrowly the marketplace is unlikely to change significantly. But if they are interpreted broadly it could
   pose a significant challenge to employer-sponsored health plans by undermining ERISA’s federal framework and creating different health plan rules in different states. “This could become really, really big,” Klein said.

Of course, the 2016 presidential race also has the potential to significantly impact health policy. Klein summed up those prospects with another quote from the Bard of Avalon: “If you have tears, prepare to shed them now.”

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