Tax will affect state, local governments and most employers, experts say

The “Cadillac tax” — a federal tax that will be imposed on employers who provide “exceptional” health insurance — raised the ire and concern of a legislative committee that met in Lovell last week.

During an Aug. 24 meeting in Lovell, the Wyoming Legislature’s Joint Labor, Health and Social Services Interim Committee learned about problems the tax will pose for Wyoming employers, including the state and local governments, beginning in 2018.

The Affordable Care Act, or Obamacare, aims at providing access to health insurance for people who had none. But the Cadillac tax  — a phrase coined years ago when terms of the act were first outlined — aims at the other side of the equation: employers who provide expensive health insurance benefits for their employees.

Nationally, “the anticipated tax that will be pulled from this — the revenue — is right now being estimated at $87 billion,” Denise Burke, senior policy analyst for the Wyoming Department of Insurance said. “This excise tax was intended to be the funding mechanism that would support the other programs within the ACA.”

Effects in Wyoming

Beginning in 2018, employers will have to pay a 40 percent excise tax on health insurance premiums that exceed a federal threshold.

For individual policies, the threshold is set at $10,200. For family coverage, it is $27,500. An estimated 10 percent of all health insurance plans will exceed those thresholds in 2018, and, if there are no changes, increasing to 30 percent in 2025.

But in Wyoming, the picture is quite different. Wyoming Insurance Commissioner Tom Glause said virtually all employers in Wyoming who provide good health insurance eventually will be affected by the tax. That is because health care in Wyoming is more expensive than in other states, and, consequently, insurance premiums are higher as well.

The state of Wyoming could have to pay a $4.3 million tax on the insurance it provides to state employees in 2018, he said.

But Burke emphasized that’s just an estimate, because “we don’t have all the rules yet.”

“Trying to gather some solid numbers is a little more difficult than you might think,” she said.

Rep. Lloyd Charles Larsen, R-Lander, did a double-take.

“I want to make sure that I’m understanding right,” Larsen said. “The ACA, as it was passed, is intended to help provide insurance for all citizens of the United States. So, now, if you’ve got an employer that is providing an exceptional insurance plan, they will be taxed for providing insurance to citizens of the United States. Is that correct?

“That is correct,” Burke replied.

“Makes perfect sense,” Larsen quipped, prompting laughter from committee and audience members.

Committee Co-chair Charles Scott, R-Casper, said later he believes the Cadillac tax was put in the law to force the country to move toward a single-payer health care system, and its onset delayed until 2018 “to fool people about how much (the ACA) was costing.”

“They set the cost 10 years down the road to show the 10-year cost was neutral,” he said.

Sen. Ogden Driscoll, R-Devils Tower, asked if the state’s budget needs to be increased, or employee benefits reduced, because of the tax.

Ralph Hayes, manager of the Wyoming State Group Insurance Program, said rate projections show the state will hit the Cadillac tax thresholds in 2018 and will have to pay about $4.3 million. 

He said the ACA does not take into account the average cost of care or the average age of the population within each state.

Unavoidable

Hayes said the state’s insurance program, which includes coverage for school and college districts, is very efficient. “We are self-funded for a reason,” he said.

Nonetheless, because of the high cost of care in Wyoming and limitations on how much cost sharing can be pushed onto employees, “we will hit (the threshold), regardless,” he said.

“Should we be looking at suing over this?” Driscoll asked. “This really changes my opinion. ... This money is going to come from somewhere. ... This is no longer a Cadillac tax. It’s an actual mandate.”

That would be a policy decision that can’t be made by the employees’ group insurance office, Hayes replied.

Driscoll asked how rates are set, and whether school districts would be affected as well.

Hayes said, “Ultimately, we have to collect enough premiums to pay the medical benefits of the participants out there ... and Wyoming is the most expensive place to get health care.”

Demographics in school districts are similar to state employees, and they’re dealing with the state’s higher health costs as well, Hayes said. “We anticipate that, for the most part, they are going to end up in the same boat that we are.”

Scott suggested adjusting the state’s health insurance benefits or changing deductibles to make the plan less generous, perhaps by encouraging the use of health savings accounts.

“Why couldn’t we do something like that?” he asked.

Hayes replied that contributions employees make to their health savings account are added to the threshold.

“This Cadillac tax really was aimed at a revenue-generating device to pay for the individual market subsidies, and it is going to accomplish that.”

Discouraging employers?

Committee Co-chairwoman Rep. Elaine Harvey, R-Lovell, asked what the penalty is for employers who don’t provide insurance.

“Are we driving employers away from providing health insurance?” she asked.

Glause said the penalty starts at $2,000 for employees who do not meet essential health benefits, but the first 30 employees are excluded from that penalty.

“It’s possible ... it could have the impact that you’re suggesting,” Glause said.

“That’s one of the reasons that’s the worst piece of legislation that I could ever imagine,” Scott said.

He said Wyoming residents “ought to be concerned, because if they’re getting employer-based insurance, it will be a major obstacle and increase costs, prompting companies to drop insurance.”

“I’m still concerned about what has to be done to avoid being hit with this tax. So you can’t use the health savings account because they count the employees’ contribution. ... If you drop your coverage, you miss one of their 10 essentials. If you go to higher deductibles and higher copayments, does that theoretically get you out from under?”

Hayes said that could minimize some of the taxes, “but I do not anticipate we can avoid them.”

Hayes said government entities in the state of Wyoming will be among the first to hit the Cadillac tax thresholds.

“Wyoming employers, as a whole, will hit this much sooner than we will see in other states,” he said.

Scott said the Cadillac tax “will be an increasing problem.”

“This one is going to rise up and bite a lot of (state residents),” he said. “You would think that, with something that is causing so much trouble, Congress would fix it; but it’s a major part of how to pay for the ACA system. It’s so much of how their financing works, so they probably can’t fix it with Obama in office.”

Health care costs in Wyoming are higher than those in any other state, according to testimony at last week’s Joint Labor, Health and Social Services Interim Committee in Lovell.

A recent study showed that Wyoming costs for health care are 20 percent higher than the average health care costs, Ralph Hayes told the committee.

However, costs in metropolitan areas such as Denver “are dramatically lower,” he said.

Sen. Charles Scott, R-Casper, who is also the committee co-chair said Wyoming’s higher cost for health care is due to three principal factors.

“One is discrimination by the Medicare program against Wyoming hospitals, causing higher cost shifts,” he said. “That’s beyond our control.

“Second is, we have failed to implement any kind of meaningful tort reform,” which would set a dollar limit on malpractice lawsuits and reduce the cost of defensive medicine, he said.

“That is linked to the fact that we’re largely a fee-for service state, because we’re too small for managed care to have an effect, and those two incentives for higher costs are mutually reinforcing.”

Both of those problems would have to be solved to have any effect, he said.

“Third is that we are so small in terms of numbers that you can’t manage care with a big group of providers against another to try to ratchet costs down,” he said. “Our provider numbers are small enough so that they essentially can veto any effort that way. ... You can’t provide the service and get any providers.”

Scott said the lack of tort reform also hurts physician recruitment in the state.

“It’s a very difficult problem for us, and some of the solutions are beyond our reach,” he concluded.