Cadillac Tax delay: What to do now

Many within the healthcare industry breathed a collective sigh of relief when one of the Affordable Care Act’s (ACA’s) most controversial provisions-the Cadillac Tax-was recently delayed until 2020. 

The delay, however, has resulted in a great deal of confusion as to what changes were made to the law; what employers, unions, insurers, and governments (affected entities) should do now to prepare; and what the future might hold for the Cadillac Tax.   

The Cadillac Tax: for and against 

The purpose of the Cadillac Tax was to stem the rising tide of healthcare costs by discouraging the provision of overly rich benefit packages. The Cadillac Tax does this by placing a 40% tax on the dollar value of coverage exceeding $10,200 for individuals and $27,500 for other coverage.  

Proponents have argued that this tax will discourage the provision of overly rich benefit packages that lead to price insensitivity and cause healthcare consumers to demand more and more expensive services.

However, critics argue that the Cadillac Tax does not effectively address this issue because it will affect far more modest plans and will result in affected entities discontinuing many important services that lead to efficient care in order to avoid the thresholds. 

Of particular significance, the Cadillac Tax thresholds are indexed for inflation based on the Consumer Price Index for All Urban Consumers (CPI–U), which is a statistical metric developed to monitor the change in the price of a set list of products for urban consumers. This creates an issue for affected entities because the cost of healthcare has traditionally risen much faster than CPI-U so if the trend continues, the Cadillac Tax will eventually affect all plans.

The legislation

The legislation delaying the Cadillac Tax made certain permanent changes that affected entities will welcome. Of particular note, the legislation makes the Cadillac Tax penalties tax deductible. This particular change is welcome news as many affected entities have argued that if ever touched by the Cadillac Tax they would need to drop benefits because of the difficulty in justifying a payment that will grow in amount every year because of the indexing of the thresholds and will provide no additional benefit to beneficiaries or tax benefits to the affected entity.

Additionally, the legislation requires that the U.S. Comptroller General and the National Association of Insurance Commissioners conduct a study on whether the Cadillac Tax uses appropriate standards in determining age and gender adjustments to the thresholds. Thus, it is possible that these recommendations may form the basis for additional legislative changes.

Next: What the delay means

The delay

While the debate on the future of the Cadillac Tax is certain to rage on for years to come, it is important that affected entities not forget that the Cadillac Tax is still on the books. Despite a perception of widespread support for repeal, the Cadillac Tax was one of the principal pay-fors of the ACA and will be difficult to repeal from a budgetary standpoint. Thus, affected entities must prepare as though the law is going into effect in 2020.

From a preparation standpoint, the two-year delay provides affected entities with additional time to create a sustainable benefit package that will stay below the Cadillac Tax thresholds. Any long-term plan to avoid the Cadillac Tax must address the way in which providers are paid and must implement population health strategies to improve the health of beneficiaries.

The good news for affected entities is that since the ACA was enacted, the Cadillac Tax and the Medicare Shared-Savings Program (MSSP) have combined to create a market where affected entities are now in a better position to offer more efficient and effective benefit packages. While the MSSP has been met with a lukewarm reception, it did begin a provider system transformation that has finally begun to operationalize the move away from fee-for-service to more accountable payment models.

These accountable services are being marketed outside of the Medicaid context and present opportunities to incorporate products such as referenced pricing and bundled payments into traditional coverages. Additionally, a boom in the telemedicine field offers an opportunity for innovative affected entities to offer lower-priced services and programs that specifically address cost drivers in their plans.

Future outlook

At this point, the long-term fate of the Cadillac Tax is uncertain. Nevertheless, the Cadillac Tax has already caused affected entities to take a close look at the benefits they offer and come up with strategies to more efficiently and effectively offer health coverage. Additionally, the Cadillac Tax has spurred a great deal of innovation both from the population health and payment reform points of view.  Therefore, even if the Cadillac Tax is eventually repealed, proponents are likely to argue that it has been a success. 

Adam C. Solander is a member of the firm in the Health Care and Life Sciences practice, in the Washington, D.C., office of Epstein Becker Green. Brandon C. Ge is an associate in the Health Care and Life Sciences practice, in the firm's Washington, D.C., office.