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Taxing “luxury:” Preparing for the Cadillac tax with a private exchange

Grace Pastore
Grace Pastore, Sales Operations Associate, Array Health

The Cadillac tax is a lightning rod of the Affordable Care Act. Since it was included in the bill, it has been hotly debated, revised and now faces a barrage of repeal efforts. The tax carries significant financial implications for stakeholders across the health insurance ecosystem – from individual consumers to employers to solution providers to insurers – making it critical to understand what exactly the Cadillac tax is, expected outcomes once it is introduced and, most importantly, ways that key players can offset the effects of the tax in a way that preserves financial solvency.

As its luxury-evoking name implies, the Cadillac tax is a 40 percent excise tax planned to be levied in 2018 on high-cost health plans with annual premiums over $10,200 for individuals or $27,500 for families. Various industry groups have researched and developed projections around the potential impacts of this upcoming tax. Opinions vary, but a wealth of data points to likely downsides. A study conducted by the American Health Policy Institute in December 2014 stated that the tax is anticipated to hit 17 percent of all American businesses, and 38 percent of large employers. Because the threshold for the tax is calculated using Consumer Price Index growth and not medical inflation, by 2031 typical family plans could be subject to the 40 percent tax. The independent organization Kaiser Family Foundation has predicted similar eventualities. These troubling projections are leading many to question whether or not this is really a tax on luxury, as it was initially positioned, or instead a burden on average employers and consumers.

With the tax scheduled to take effect in 2018, it may seem early to be discussing its implications. However, those who take shelter in the notion that three years seems comfortably distant would be well-served to consider the seismic changes produced in the ACA’s five-year life span – and take steps now to plan for a possible new reality. If the tax survives, those potentially affected will need to move quickly, meaning they should spend time now seriously contemplating how the tax will affect their budgets and the steps they can take to minimize its impact. Reducing benefits is one path for savings, but it shouldn’t be the only option, and it doesn’t always make good business sense. Stakeholders should pay attention to market progressions, which over time will demonstrate that efforts to cut costs, the growing popularity of consumer-directed health plans (CDHPs) and the growing consumer engagement movement will all lead to an insurance era defined by the private exchange.

A buzzword in the health insurance world, a private exchange allows insurers to operate a proprietary channel, showcasing their branding and product shelf to employers and individuals. With the introduction of the public exchanges post-ACA and the upcoming tax on high-cost plans, private exchanges will not only be an alternate channel, they’ll be a vital way to mitigate costs, grow engagement and adapt to a shifting health insurance economy.

Exchanges offer benefits to employers and their employees, as well as to insurers. While keeping an eye on the bottom line, employers are looking to expand the breadth of options they offer to employees. With exchanges, employees may not always have as rich a plan as before, but they can take advantage of additional choices to create a benefit package that more closely matches their needs. Private exchanges reduce confusion for members and limit cumbersome administrative costs relating to member onboarding, maintenance and enrollment, for example – and most importantly, help consumers find the plan that is right for them.

As private exchanges increase in popularity (an Accenture projection reports that 40 million people will be enrolled through private exchanges by 2018), and approximations around enrollments by year become more accurate, the industry is starting to see a change in mindset. While private exchanges offer compelling administrative benefits and greater cost predictability for employers, they also help consumers “right size” their benefits to temper the impact of losing a Cadillac plan. The e-commerce marketplace gives consumers substantial autonomy; they’re selecting the plans that make sense, and cost is often a huge factor. The act of shopping for and purchasing insurance automatically gives the consumer more awareness of their spending, a plus for employers looking to navigate away from the Cadillac tax. This cost-consciousness would likely be lost without the choice and transparency a private exchange can provide.

So what does this all mean? The tax presents insurers and employers with high stakes – slash budgets and trim plans or pay a penalty. Many are calling for the tax’s repeal, but if it remains, the lessons learned will create invaluable cost-saving strategies for the future. Private exchanges and CDHPs have the potential to lower costs, while offering consumers a greater choice of benefits and a nimble e-commerce experience. In the long term, there are some exciting developing prospects: with employee engagement and awareness comes a deeper understanding of the entire health insurance experience. A person empowered with tools to optimize how he or she uses insurance might seek preventative care, catching issues early and limiting expenses down the line. This whole person-oriented approach, which is often bolstered by wellness incentives, is emerging as one significant advantage of the private exchange route. A healthy, satisfied member can often lead to lower costs. New approaches will drive the market by saving money for insurers and employers. Whether or not the Cadillac tax is repealed, they’re measures that will retain their relevance as our industry continues to evolve.