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Obamacare 'Cadillac tax' could hit hard for health plans in high-cost Alaska

  • Author:
  • Updated: September 28, 2016
  • Published October 18, 2015

Alaska's high cost of health care may extend deeper into employer's pocketbooks once the Affordable Care Act's looming "Cadillac tax" kicks in in 2018, if no legislative changes are made to the tax on high-priced health insurance plans.

Compared to the rest of the nation, there's "no doubt that we're clearly more vulnerable," said Mouhcine Guettabi, assistant professor of economics with the Institute of Social and Economic Research at the University of Alaska Anchorage.

The 40 percent annual excise tax is meant to apply to the highest-cost plans, hence the term "Cadillac tax." It applies to employer health care premiums above a certain threshold -- $10,200 for an individual, $27,500 for a family -- that's the same across all 50 states, regardless of cost of living.

Nationwide, 28 percent of employers may be affected when the tax rolls out in 2018, according to the Kaiser Family Foundation. In Alaska, though, the numbers are shaking out differently.

Premera Blue Cross is the largest provider of group health care plans in Alaska, covering more than 1,000 employers. Roughly 60 percent of these plans will be hit with the excise tax in 2018, according to Blue Cross spokesperson Melanie Coon, if employers don't change their plans.

In 2013, the average cost of an employer plan in Alaska was already hovering at the Cadillac tax threshold, according to the Institute of Social and Economic Research.

Jennifer Bundy-Cobb, vice president of consulting firm The Wilson Agency, said that of about 300 employer clients surveyed, between 80 and 90 percent of Alaska employers were headed toward the threshold. For clients in Washington state, that number dipped to between 30 and 40 percent.

Additionally, "Healthcare costs in Alaska are higher than anywhere in the country … This means companies in (Alaska) will need to make more significant changes to their benefit packages than those in other states," Coon wrote.

Alaska's legislators have joined Congress' bipartisan refrain to repeal the tax -- but some policy analysts say the tax shouldn't be axed without first finding a solution to the nation's health care costs.

What the Cadillac tax means for Alaskans

The tax is the final piece of the Affordable Care Act to be implemented. Its purpose is two-fold: First, the tax is meant to rein in the costs of health insurance, which in turn is expected to reduce money spent on health care nationwide. The Congressional Research Service estimates it will save the nation between $40-60 billion by 2024.

The secondary purpose of the tax is to help fund the Affordable Care Act, expected to bring in $91 billion by 2025, according to the Joint Committee on Taxation. That may sound like a lot, but all told, the tax represents just 3 percent of total funding for the ACA, a 2011 analysis by the National Bureau of Economic Research says.

"This is a drop in the bucket," ISER's Guettabi said.

At its core, the tax encourages a shift away from high-cost plans. Many employers were already moving in that direction, Guettabi said, but the tax "puts more pressure on them to essentially pivot … faster," he said.

To reach this goal, the cost burden will shift to the workers. That could be through higher deductibles, ending or capping Health Savings Accounts, or charging for dependents, among other options. Coon wrote that such shifts are part of "a trend we've already started to see."

In turn, the hope is that workers' wages will get a boost, Guettabi explained. A stagnation of wages over the last two decades was "largely a result of the ever-increasing payroll portion going toward the employee's health care costs," Guettabi said.

With funding freed up, the thinking is that competition between businesses for employees will drive up wages, Guettabi said.

But it's possible that a wage increase won't offset those increased health care costs.

"It's certainly not a one-to-one translation," Guettabi said.

The overall outcome, he said, is unclear,"because if we give them a higher deductible with a higher wage, are they better off?"

Bundy-Cobb was skeptical that employers would increase wages as hoped.

"It doesn't even make sense to me," she said.

"Maybe wages indirectly will go up over time … but a direct impact on Day One seems hard to believe," Bundy-Cobb said.

But if wages do in fact increase, income tax increases alongside it, Robert Grannum, a partner at the accounting firm Moss Adams, told the audience at the State of Reform health care conference on Oct. 8 in Anchorage.

That means that as employers move away from the health insurance tax, the nation may collect more money from income taxes -- and the government is counting on that revenue, Grannum said.

Looking into the crystal ball

There's reason to believe that at least some components of the tax will be tweaked before its implementation in 2018, Bundy-Cobb said, given the bipartisan opposition in Congress. In September, Alaska legislators Dan Sullivan and Lisa Murkowski co-sponsored legislation to repeal the tax, while Democratic presidential candidates Bernie Sanders, I-Vt., and Hillary Clinton have both come out against the tax.

Economists and policy analysts from universities and research institutes penned a letter telling Congress that the tax creates cost-effective plans, encourages employers to limit costs, and will help reduce the federal budget deficit.

"We unite in urging Congress to take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth," the letter says.

While Premera has already been working with clients to tweak its insurance plans, other companies are holding off, for now.

Moda Health, which provides insurance for 300 employers -- many of which are small businesses, according to spokesperson Jason Gootee -- is currently holding off on any changes. The company will look at the regulations next year.

Until then, "We're not going to do much one way or the other," Gootee said.

Bundy-Cobb agreed; her company won't be making changes internally until the regulations are closer. And right now, clients aren't asking for help in changing their plans either, she said.

Still, "it's naïve to believe that this is going to go away," Bundy-Cobb said.

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