What’s in a name? For the Cadillac Excise Tax, it’s jam-packed with meaning. A component of the Affordable Care Act, it is a tax imposed on expensive employer-sponsored health insurance plans.

These plans are dubbed "Cadillac" policies of health coverage and, although the tax would be paid by insurers and employers that self-insure, experts expect the cost ultimately would be borne by consumers.

With increasing concerns about administrative and financial burdens employers and employees are expected to face, why is this tax being implemented in the first place?

Tool or Threat?  

Back in 2010, Congress passed the policy in an effort to reduce excess healthcare spending and place pressure on employers to restructure employee health plans by increases in cost sharing with employees. If employees had more skin in the game, then they would consume less healthcare, resulting in lower medical spending in the long-term.

Additionally, the levy would fundamentally help finance the expansion of health coverage under the Affordable Care Act (ACA), helping to raise $30 billion in additional federal revenue in just the first two years. Proponents of the tax argue that the tax is intended to target lavish plans, but surveys and data find that a growing number of working class Americans would be negatively impacted. 

The realization of this unintended consequence lead to a recent change in the policy.  In December 2015, Congress passed and the President signed a two-year delay of the 40% excise tax on high-cost employer-sponsored health plans ($10,200 for individual; $27,500 for family). Additionally, the tax was originally non-tax deductive, but the recent changes make it tax deductible for employees who pay it. The delay was part of a year-end government funding package and changes the effective date from 2018 to 2020.  

Employer Response & Employee Consequence

Despite the delay, businesses large and small continue to actively prepare for the early effects of the tax and determine long-term health benefits strategies. As employers explore ways to lower the cost of their health plans, many are considering shifting costs to their employees in the form of higher deductibles, co-payments, and out-of-pocket maximums. According to an August 2014 study by the National Business Group on Health, 42 percent of employers surveyed will increase employee cost sharing and 37 percent will reduce spousal subsidies or implement a spousal surcharge. 

Some employers will reduce employee health benefits to avoid the hefty 40% excise tax, while at the same time increase wages in order to make up the difference to attract and keep top talent. But a second scenario is much more sobering — a reduction of employee benefits without a pay increase to compensate. According to a November 2014 report by the American Health Policy Institute (AHPI), employees could see up to a $6,150 reduction in health benefits and little or no increase in wages. Such an impact would hit hard on the middle class. 

The Road Ahead 

While employers are looking for leaner plans and adopting cost-sharing strategies, some self-funded companies and organizations are doing things a little differently. Nearly one in three large employers have opened on-site clinics to increase access to basic primary care services despite the impending Cadillac tax. Some industry observers and analysts anticipated the demand for on-site clinic services would subside after the recently issued Internal Revenue Service guidance counting care at worksite clinics towards the Cadillac tax threshold. Despite the guidance, employers are preserving this tactic according to a Mercer study. 

This study also determined that, following the IRS ruling, 72% of large employers who have on-site clinics said "managing employee health risk and chronic conditions" is an important strategy and employer-sponsored clinics help to achieve this blueprint for healthcare savings. Notably, 49% of survey respondents survey respondents reported that costs for the clinic are 5% or less of annual spending on all active employee health plans, including the cost of the clinic. These clinics focus on saving costs by improving employee education and health. Such clinics generally offer acute care, wellness exams, education, and chronic disease management. More comprehensive clinics also offer pharmacy services.

Offering worksite clinics is the the road less traveled, especially in the wake of the Cadillac tax. But it’s one that can yield great rewards and savings, acquire and keep top talent, and empower you to be an attractive employer in a climate where others are reducing or completely eliminating competitive benefits. The good news is that this strategy isn’t limited to the giant manufacturing companies of yesteryear. Scalable solutions are achievable today and is worth taking a look at as you navigate your long-term benefit offerings.