Excise Tax Avoidance Strategies Reduce Employer Health Costs

The business imperative to control health benefit cost growth has taken on a new urgency with the fast-approaching implementation of the excise, or “Cadillac,” tax Affordable Care Act’s (ACA’s) provision, Mercer notes.

According to the National Survey of Employer-Sponsored Health Plans, conducted annually by Mercer (with 2,486 participants in 2015), employer actions to reduce their exposure to the 40% excise tax, which goes into effect in 2018, helped hold growth in health benefits cost per employee to just 3.8% in 2015, for a third straight year of increases below 4%. Total health benefits cost averaged $11,635 per employee in 2015. This cost includes both employer and employee contributions for medical, dental and other health coverage, for all covered employees and dependents.

Small employers were hit with higher increases than large employers. Cost rose by 5.9% on average among employers with 10 to 499 employees but by just 2.9% among those with 500 or more. 

Employers predict that in 2016 their health benefits cost per employee will rise by 4.3% on average. This increase reflects changes they will make to reduce cost; if they made no changes to their current plans, they estimate that cost would rise by an average of 6.3%. But about half of all employers indicated that they would make changes in 2016.

The survey also found employers are getting more creative with how they support workforce health—the most desirable route to long-term cost management. About one-fourth of large employers (24%) encourage employees to track their physical activity with a “wearable” device, while 30% use mobile apps designed to engage employees in caring for their health. They are broadening the focus of workforce health and wellness programs to include other elements of well-being, offering programs to address sleep disorders (39%, up from 32% last year), improve resiliency (42%), and provide help in managing finances (69%).

Helping to hold down cost growth for large employers was a jump in enrollment in high-deductible consumer-driven health plans (CDHPs) as they continued to implement new plans in 2015. Among small employers, use of these plans has grown more slowly. Where enrollment has nearly doubled among large employers over the past three years—from 15% to 28% of covered employees—among small employers it has risen from 17% to just 19%.

Overall, CDHP enrollment reached 25% in 2015. The largest employers have moved the fastest to add CDHPs—73% of employers with 20,000 or more employees now offer a CDHP, and 30% of their covered employees are enrolled.

A health savings account (HSA)-eligible CDHP costs about 18% less, on average, than a traditional preferred provider organization (PPO), and it’s typically the lowest-cost option for employees in terms of their paycheck deduction, Mercer says. However, when they are offered as an option, even among large employers that have offered the plan for at least three years, only 29% of employees, on average, elect to enroll.

“Employers have learned that the higher deductible can be a real deterrent for employees without enough savings to comfortably handle a major medical expense,” says Tracy Watts, Mercer’s national leader for health reform. “When CDHPs were first introduced, the concept made intuitive sense but we didn’t have the tools we have now to help employees actually become better health care consumers. I think we’re finally turning the corner.”

Employers are moving quickly to implement telemedicine services—telephonic or video access to providers—as a low-cost, convenient alternative to an office visit for some types of non-acute care, Mercers survey found. Offerings of telemedicine services jumped from 18% to 30% of all large employers.

The ability to compare prices for higher-cost services is becoming a reality as well. More large employers contracted with a specialty vendor to provide their employees with a “transparency tool”—an online resource to help them compare provider price and quality (among employers with 20,000 or more employees, 24% provided transparency tools in 2015, up from just 15% last year).

When employees can comparison shop, employers can give incentives to avoid the most expensive providers—in turn giving those providers a reason to adjust their prices. With “reference-based pricing,” for example, employers set a limit on how much they will cover for a specific service in a specific area, and the patient is responsible for the cost above that amount. Use of reference-based pricing rose from 11% to 13% among large employers in 2015. 

Private exchanges are gaining momentum fast: 6% of large employers already use a private exchange for active employees or will by next year’s open enrollment, a 50% increase in just one year. An additional 27% of large employers are considering switching to an exchange within five years.

In 2013, 21% of employers with 50 to 499 employees said they were likely to drop their plans within the next five years; this number fell to 15% in 2014 and to just 7% this year. Among employers with 500 or more employees, just 5% say they are likely to drop their plans, essentially unchanged from 4% last year.

A plan’s actuarial value—the percentage of a member’s health care expenses it can be expected to cover—is not the only factor that can drive up cost above the excise tax threshold. Health plan costs vary significantly by geographic region, the degree of competition in the provider market, and workforce demographics, Mercer notes.

Based on their current premiums, Mercer estimates that 23% of large employers have at least one plan with costs that will exceed the excise tax threshold in 2018 if they make no changes between now and then. That’s down from 33% last year, because employers continued to make changes to slow cost growth. However, due to the way the excise tax threshold is indexed, the percentage of employers at risk will rise every year that medical inflation exceeds the general consumer price index (CPI). By 2022, 45% of employers are estimated to be liable for the tax unless they make changes.

It will be harder for some employers to avoid the tax than others. Those with very rich plans have room to maneuver. But among large employers, only 44% of the plans expected to reach the excise tax cost threshold in 2018 have an actuarial value (AV) of 90% or higher, which is the definition of a Platinum plan, the most expensive plan on the public exchanges. Another 45% have an AV of 80% to 89% and would be considered Gold-level plans, like a typical employer-sponsored plan today. But more than one in 10 would be considered just Silver-level plans, or even Bronze-level—the lowest-value plan on the exchange.

“For employers that want to maintain current benefit levels for their employees, there are a range of strategies to explore that can help control cost over the long term,” says Watts. “But for employers with high-cost plans that aren’t what most would consider ’Cadillac’, that 2018 deadline is a tough challenge.”

The full report on the Mercer survey, including a separate appendix of tables of responses broken out by employer size, region and industry, will be published in April 2016. For more information, visit www.mercer.com/ushealthplansurvey.