Cadillac tax could make individual plans more attractive

As we near the end of 2015, we’re only a couple years away from the start of the “Cadillac tax,” a 40% excise tax on “high valued health plans.” While that may seem like a long time, large employers are already starting to make plans to help them deal with this budget-killing provision of the Affordable Care Act.

Employers that offer health insurance and other benefits to attract and retain quality employees usually try to offer coverage that would be somewhat better than the plans their employees would be able to purchase in the individual market; that’s part of what makes it a “benefit.” However, the ACA’s Cadillac tax seeks to eliminate some of the more comprehensive health plans being offered by employers. They’re still permitted, but insurance companies and self-insured plans must pay this excise tax on coverage above a certain dollar threshold for individuals and families, and everyone expects carriers to pass on the cost to the end user in the form of higher health insurance premiums.

What’s interesting is that employer contributions to tax-advantaged accounts like HSAs and FSAs are also factored in when determining the cost of health insurance, so a number of recent articles have warned of the demise of these plans.

The Cadillac tax will apply to individual market coverage as well, but there’s good reason to believe that the overall effect of this new tax will be to make individual plans more attractive relative to group plans. That’s because employers, wanting to avoid the excise tax, will start watering down their benefits by increasing the deductible and out of pocket even more than they already have, reducing their provider networks, tightening up their drug formularies, and reducing contributions to tax-favored accounts. In other words, the plans available through employers as an employee benefit will begin to look much more like the plans currently being purchased in the individual market.

As we see this reduction in benefits, it will become less and less clear to employees why their company is offering a plan that A) isn’t as good as it used to be and B) blocks them and their families from receiving a premium tax credit in the individual market. By 2018, we have to assume that even more people will be familiar with how the tax credits work and may start asking their employers to drop the group plan so they can apply for government assistance.

But, again, 2018 isn’t actually the date we need to be looking at. As previously mentioned, large employers are already making plans to deal with the Cadillac tax, and some of the resulting plan changes will kick in as early as 2016.

If you want to get ahead of the wave and offer employers an alternative to this scary new tax, consider setting up an individual private exchange site. Every time premiums go up, the “play or pay” calculations lean a little more toward not offering group health coverage. Even after paying any applicable penalties, many employers would have money left over to pay for ancillary benefits for their employees, and the employees and their family members could get a better plan for less money in the individual market : a win-win.

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