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Comparing Two Iowa Counties on Health Insurance Tax Credits

Once again, another attempt is being made by the other major political party to fix what ails our national healthcare ‘system.’ But this newest attempt by House Republicans, the American Health Care Act (AHCA), has already been met with opposition by major stakeholders, such as the American Medical Association, American Hospital Association, the insurance industry, in addition to Democrats and uber-conservative Republicans.

Despite the flurry of headlines, summaries, analysis and opinions about what this bill does and does not do, the Congressional Budget Office (CBO) has scored that the cost of this bill would reduce the federal deficit by $337 billion through 2026, however, it would leave 14 million people without insurance in 2018 compared with the ACA.  The CBO just released its’ findings.

To ensure coverage, the Affordable Care Act (ACA) currently subsidizes insurance premiums based on age and income. The ACA also attempts to factor the local cost of insurance into its subsidy. In addition, for those making less than 250% of poverty, cost-sharing assistance is provided to lower the deductibles and copayments for those enrolled in eligible marketplaces. The AHCA, on the other hand, provides tax credits based on age only, and this phases out for individuals with incomes above $75,000.

For any healthcare reform plan to work, there must be a large incentive for young and healthy people to seek coverage to help equalize (or subsidize) the unhealthy population. This is largely known as Health Insurance 101 – mitigating adverse selection risks.

I took great interest in an interactive map (at the county-level) provided by the Kaiser Family Foundation that compares estimated premium tax credits consumers would receive under the ACA in 2020 compared to what they would receive under the AHCA released by House Republican leaders on March 6. The interactive map does not factor in the cost-sharing assistance offered through the ACA, only the premium subsidy (ACA) and tax credits (AHCA).

I wanted to learn just how different subsidies and tax credits were between the ACA and AHCA, based on age and income, comparing a metropolitan county (Polk) to a rural county that I grew up (Appanoose). The results are quite staggering.

As a 27-year-old earning $20,000 and living in Polk county in 2020, the ACA is estimated to provide a $2,360 subsidy while the AHCA would provide a $2,000 tax credit. Living at this same age (and income) in Appanoose county, the ACA would provide an even greater subsidy of $4,440 vs. $2,000 (AHCA). At this younger age, and presumably healthy, this individual would have a greater incentive to seek insurance coverage through the marketplace under the ACA compared to the new version that would replace it. We don’t know if the replacement plan will generate lower-premium health plans for the public to purchase – this is pure speculation at this point.

Below are summaries of how people compare based on age, income and location (Polk and Appanoose counties). The subsidies and tax credits in red indicate that this amount is less than the opposing plan at that same age (ACA or AHCA). Generally speaking, the comparisons suggest that older people with lower-income (and live in higher-premium areas) receive larger tax credits under the ACA than they would under the AHCA replacement plan. This first chart is for those who earn $20,000, $30,000 and $40,000 annually.

This next chart compares people who earn $50,000, $75,000 and $100,000.

As I have written numerous times in the past, this second attempt to fix healthcare will be meaningless unless we focus on the true drivers of cost, which includes waste, lack of transparency and the exceedingly poor health of our population.

With that said, what are we really trying to solve?

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How Many Iowa Employers Will Pay
the ‘Cadillac’ Tax in 2018?

Cadillac Taxes - 2018 and BeyondThe year, 2018, will arrive quickly and Iowa employers better be ready!

Thanks largely to the red-hot topic known as the “Cadillac plan” tax, employers in Iowa and around the country have some big decisions to make this fall and over the next number of years.

Beginning in 2018, the Affordable Care Act (ACA) imposes a non-deductible 40 percent excise tax on employer-sponsored health coverage that provides high-cost benefits.The 2018 threshold amounts that will trigger this tax are currently set at $10,200 for self-only coverage and $27,500 for family coverage. The thresholds are higher for those pre-65 retirees and individuals in high-risk professions.

The intended purpose of this tax is three-fold:

  1. Reduce the preferred treatment of employer-provided healthcare.
  2. Reduce excess healthcare spending by employers and their employees.
  3. Finance the ACA expansion of health coverage.

Coverages that would be eligible for the threshold amounts are listed below.*

  • Cost of coverage includes the total health premiums paid (both employer and employee contributions), but does not include cost-sharing arrangements such as deductibles, coinsurance and copayments when care is received
  • Insured and self-insured group health plans – including behavioral and prescription drug coverage
  • Wellness programs that are group health plans
  • Health Flexible Spending Accounts (FSAs)
  • Health Savings Accounts (HSAs) – Employer pre-tax contributions only
  • Health Reimbursement Arrangements (HRAs)
  • Archer-Medical Savings Accounts (MSAs) – Employer pre-tax contributions only
  • On-site medical clinics providing more than de minimis care
  • Executive physical programs
  • Hospital indemnity or other fixed-indemnity insurance
  • Pre-tax coverage for a specified disease or illness
  • Federal/State/Local government-sponsored plans for its employees
  • Retiree coverage
  • Multi-employer (Taft-Hartley) plans

To avoid paying the Cadillac tax, employers have been making various modifications to reduce cost, and not be subject to the tax beginning in 2018. Such modifications include increasing deductibles, copayments and other cost-sharing arrangements, using narrower provider networks that are less expensive, limiting or eliminating tax-preferred savings arrangements, such as FSAs, HSAs, or HRAs, and a host of many other approaches.

The Kaiser Family Foundation released their analysis last week and projected that, when using a five-percent premium growth, about 26 percent of U.S. employers will reach the threshold in 2018 when factoring in HSAs, HRAs and FSAs.

The calculation is more involved than one might believe. For example, Kaiser made assumptions that employers would not make cost-sharing adjustments to their plans from 2015 to 2018, which we all know is simply not feasible. Kaiser also assumed modest premium growth scenarios (four percent, five percent and six percent), and that employees who are offered an FSA option are permitted to elect contributions up to the maximum allowed by law ($2,700 is the assumed FSA maximum in 2018). Kaiser based their analysis on the employee-only coverage, which is a reasonable approach.

The FSA assumption is very important because some employees will contribute the maximum allowed by law. The FSA maximum (currently $2,550 in 2015) will quickly add to the health premium which will make the plan eligible for this tax. Being subject to the Cadillac tax can vary by employee – based on what the employee elects to contribute into his/her FSA.

As I am reviewing our 2015 study results, I decided to make similar assumptions. Thankfully, we asked key questions within our study to determine whether employers offer HSAs, HRAs and FSAs. In addition, we asked employers to report the health premiums they pay to insurance companies (or budget).

So what did we discover? For 2018, our findings appear to be very similar to Kaiser’s, at least at the lower-growth estimates. Using a modest four percent premium growth from 2016 to 2018, we found that over 24 percent of employers may reach the threshold to incur the Cadillac tax in 2018. Like Kaiser, we made the assumption that the FSA maximum in 2018 would be $2,700. So how would higher premium growth rates affect employers reaching this important threshold? Increasing the growth rate by just a few percentage points will push those organizations into the tax who are teetering at the threshold.

Cadillac Threshold in 2018

Even though the assumptions we made are similar to Kaiser’s, I could not help but notice that a healthy number of Iowa employers will reach this threshold at higher premium growth rates when compared to the Kaiser analysis. Our survey does have a strong representation of employers with government plans (city, county and state), public school districts, bargained organizations, healthcare organizations, and yes, even insurance companies. Such organizations typically offer high-cost plans and teeter on the tax threshold, especially when the annual growth rate moves from five to six percent.

Could the Cadillac tax be the beginning of the end for popular spending accounts, such as FSAs? We’ll see.

We expect to be releasing our 17th annual Iowa Employer Benefits Study within the next few weeks which will provide additional insight on how employers altered their key offerings to help tame their health premiums.

To stay abreast of employee benefits and healthcare issues, we invite you to subscribe to our blog.

*As indicated by an IRS notice issued on February 23, 2015, and subject to future regulatory clarification. This information was taken from Cigna.