Trends, Insights & Analysis

10 Questions Employers Should Be Asking About the Cadillac Tax

10 Questions Employers Should Be Asking About the Cadillac Tax.jpg

  1. What Is The Cadillac Tax?

The Cadillac Tax is an excise tax levied on employers that provide high-cost health benefit plans to their employees. Once the law goes into effect, employers that offer plans valued at more than $10,200 for an individual and $27,500 for a family will be subject to a 40 percent excise tax. This is designed to discourage firms from offering these plans and take measures to curb their healthcare spending.

  1. What Is An Excise Tax?

According to the Internal Revenue Service (IRS), an excise tax is paid when purchases are made on a specific good. Excise taxes are often included in the price of the product, but they may also apply to activities such as wagering or on highway usage by trucks. One of the major components of the excise program is motor fuel.

According to the Tax Foundation: “Excise taxes started out historically as luxury taxes. The very first two excise taxes in the United States were taxes on carriages and on whiskey. A telephone excise tax started as a luxury tax; so did gasoline. In our country, things that start out as luxuries come to be enjoyed by most people.”

  1. Who Created The Cadillac Tax?

The Cadillac tax was introduced in 2010 as part of President Obama’s Affordable Care Act (ACA).

  1. Why Was The Cadillac Tax Developed?

According to the ACA, the Cadillac Tax was designed to slow the growth of healthcare costs by discouraging unequal health coverage and the overuse of healthcare services.

  1. When Will The Cadillac Tax Go Into Effect?

The government has proposed that the Cadillac Tax be implemented in 2020, which should give employers, employees and pharmacy benefit managers (PBMs) an opportunity to prepare for it.

  1. Who Pays For The Cadillac Tax?

Employers that hire employees will pay the Cadillac Tax if they meet the the requirements.

  1. What’s Wrong With Having High-End Health Coverage?

Despite the upside, a company that pays for robust health plans will affect other healthcare plans’ pricing and may increase the total cost of care in the region.

  1. What Does My Health Plan Have To Do With Overall Healthcare Pricing?

According to the ACA, these high-end plans can boost insurance rates in adjacent regions due to free market economics and competition. High-end healthcare plans also encourage overuse of care.

  1. What Is Overuse Of Care?

Overuse means undertaking unnecessary medical care, like visiting the doctor when there’s nothing wrong and utilizing emergency services for non-emergencies.

For example, overuse may be when an elderly person becomes impatient waiting for a taxi and calls an ambulance. The ambulance is legally required to fulfill its duty and pick the patient up. However, this situation means that someone who really needs an ambulance may miss out in a true emergency.

  1. What Are The Benefits Of The Cadillac Tax?

According to Forbes, the Cadillac Tax may stimulate private-sector innovation and decrease health care costs.

“On the bright side, the Cadillac tax could have a positive impact on the pricing of healthcare if employers take into account the long-term effects of their immediate maneuvers to avoid the tax.

Rather than scheming to avoid the tax at all costs, employers can accept some portion of increased tax while instituting cost-sharing mechanisms that use consumer shopping and market forces to drive down overall healthcare prices. For example, employers can employ strategies like referenced-based pricing and consolidation of services with specific providers to allow for lower contracted costs.

Creative solutions like these will actually decrease the cost of care, not just move money around on the balance sheet.”

 

Topics: Trends, Insights & Analysis

Posted by

Elizabeth Bugayong

Elizabeth Bugayong is a member of Truveris’ Life Sciences team. In her role as Manager, Elizabeth leads the company’s efforts in delivering patient access programs for pharmaceutical companies. Elizabeth has a BS from Babson College and an MBA from the Kellogg School of Management at Northwestern University.