In this first of our three-part series concerning the Excise (a.k.a. Cadillac) Tax, we’ll explore how the Excise Tax will affect benefit enrollment and utilization of medical coverage. Before addressing the Cadillac Tax, it’s important to understand how the majority of employees currently enroll in employer health coverage today and how coverage influences utilization and behavior.
Benefits enrollment: Unengaged employees and limited employer options
Employees evaluate and select medical plans each year via “Open Enrollment” – a typically passive, magazine renewal-like process. Studies show that the average American spends more time evaluating wide-screen television sets than they do making their annual selection of employer sponsored healthcare coverage. Yet healthcare premiums and subsequent healthcare expenses typically rank in the top five of an employee’s expenditures each year.
Why are employees unengaged from the healthcare enrollment process?
- Employers standardly offer only one or two plans, and with sparse employee benefit communication resources, the plan descriptions are often incomprehensible. As a result of the employer’s limited enrollment technology, employees are forced to navigate a 20- to 30-page “Open Enrollment” booklet mailed to their homes. In some cases, employees may access an online decision support experience that’s limited to ATM-like questions such as, “would you like a PPO – yes or no?”
- Employers lack the internal resources necessary to change or enhance their benefit enrollment platform. Internal IT staffs are already stretched too thin to meet the requirements associated with maintaining ERPs and/or lack the budget to absorb additional costs to hire a technology vendor to make changes each year. Therefore, employers are prone to limit their medical benefit alterations to adjusting co-pays or subsequent plan design features.
Active versus passive benefits enrollment
As a result of the above, numerous employers have opted for passive open enrollments. The downside of passive enrollment is that employees develop an “I’ll just keep what I enrolled in last year” mentality instead of evaluating and comparing medical plan options based on their individual or family needs each year.
Over-insured yet under-protected
A recent study -- PLOS ONE: Can Consumers Make Affordable Care Affordable? -- indicates that four out of every five employees selected the wrong plan. Basically, employees select coverage the way a non-wine enthusiast purchases wine via the logic – “if it’s expensive, it has to be the best!” Then consider typical copay-driven behavior within HMO and PPO plans where some employees consume healthcare as though it were a flat rate, all-you-can-eat buffet. Quantity is key and quality is an after-thought.
Purchasing “rich” plans based on the assumption that “the more they pay, the better the plan,” can result in a financial disservice to employees as it excludes HSA tax benefits and subsequent future retiree medical funding. While these employees are over-insured in medical coverage, they are under-insured regarding income protection coverage and life insurance—a topic we’ll discuss in the third post of our Cadillac Tax Series.
Employees today are not engaged or not encouraged to look for different medical plans. It’s not their fault. The selection of plans each year is limited, there’s no need for an employee to understand his/her health plan in a fee-for-service world, not to mention the fact that most employees do not understand what they are paying and how much it costs. However, the Cadillac Tax will significantly impact employer involvement in the way employees view their overall benefit offering.
How to begin to reduce your company’s exposure to the Cadillac Tax
Beginning January 1, 2018, the Cadillac Tax is a 40 percent excise tax applied to high-cost health plans that exceed a designated annual limit of $10,200 for individual coverage or $27,500 for family coverage. The American Health Policy Institute Study, “The Impact of the Health Care Excise Tax on U.S. Employees and Employers,” found that the tax is expected to affect 17 percent of all U.S. businesses and 38 percent of large firms in 2018.
With this dramatic change, a significant number of large employers will be forced to introduce a variety of lower cost, consumer health plan options to reduce their Cadillac Tax exposure. Such practices may challenge employee retention in a post-Cadillac Tax environment. Part of the challenge lies in communicating the value of benefits and assisting employees in selecting the most effective options from a growing portfolio of healthcare benefits.
In his book, The Company That Solved Healthcare, author John Torinus Jr. described numerous examples of empowered employees taking a progressive role in understanding and using healthcare benefits as part of an overall benefits and personal income strategy, including Healthcare Savings Accounts (HSAs).The key is providing benefits within the context of a consumer-oriented shopping experience that simplifies the enrollment experience and functions with the ease of popular online retail shopping sites. This will require a strategic benefits education plan while also obtaining executive-level support in transforming the company culture to one where employees are empowered to make informed healthcare choices.
While the transition to a more progressive, highly engaged healthcare experience will take several years to achieve, it can also lead to additional opportunities. For example, patients will become more accountable for their healthcare, providers will become more transparent about the cost of their services and employers will have the capability to provide outcome-based incentives such as health premium discounts achieved through established wellness programs.
Technology will play a key role in facilitating the transition to a friendlier and more simplified benefits enrollment experience, despite increasing benefits complexity. Learn how Benefitfocus technology can simplify benefits administration and help mitigate your company’s exposure to the Cadillac Tax.
Stay connected to learn more about how the Cadillac Tax affects you
In the next post, we’ll discuss the annual, incremental “steps” an employer can take to develop an Excise Tax mitigation strategy. The final post in our three-part series will outline the new role of an employee in this space and their responsibility.
Additionally, for an in-depth look at how the Cadillac Tax impacts the future of your benefits program, as well as tips for thriving in the post-ACA world, check out the all-new whitepaper, Don’t Get Run Over by The Cadillac Tax.