Health Care Reform Blog : Health Care Law Reform : McDermott Will & Emery Law Firm

The Facts

On January 14, 2010, congressional leaders and the White House announced that they had reached a compromise with labor unions to proceed with the excise tax on so-called Cadillac, or high-cost, health plans. The excise tax was included in the Patient Protection and Affordable Care Act (H.R. 3590) passed by the Senate. The provisions of that bill called for a 40 percent excise tax on insurance companies and plan administrators for any employer-sponsored health coverage whose value exceeded $8,500 per year for individuals and $23,000 for families. The tax was to take effect in 2013.

The compromise reached last week with the labor unions dictates that the thresholds for the tax will be slightly higher than in the Senate bill—$8,900 for individuals and $24,000 for families. These threshold levels would be increased based upon age, gender and geography to prevent the tax from disproportionately affecting people in high-cost groups. Additionally, starting in 2015, dental and vision coverage will not contribute to the thresholds. Most importantly for the labor unions and their employers, the new compromise exempts collectively bargained health plans and state and local government employees from the tax until 2018. This exception was made to accommodate for the fact that many unions negotiated better health benefits for their members at the expense of wage increases.

The tax is expected to raise $90 billion in revenue over the next 10 years. By contrast, the original Senate bill would have raised $149 billion over 10 years.

What’s at Stake

Businesses with high-cost health care plans hiring non-union employees would feel the effects as early as 2013 under this compromise proposal. Businesses with collectively bargained health care plans are likely to benefit from the exemption from the excise tax until 2018, which gives unions time to renegotiate their agreements with employers.

Steps to Consider

Businesses should evaluate their health care plans to determine to what extent they will be affected by this tax. Insurers should assess the impact of the tax on the coverage they offer.

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The Facts

Both the recently passed Senate and House health care reform bills contain provisions that affect retiree health benefits. Both bills remove the tax exemption for Medicare Part D subsidies received by employers who provide retiree prescription drug coverage. In addition, the House bill prohibits employers from changing a retiree’s available benefits once the individual has retired, and the Senate bill contains a 40 percent excise tax on retiree health benefits that exceed certain thresholds ($9,850 for single coverage and $26,000 for family coverage). Both bills decrease the Medicare prescription drug coverage gap by $500 (with the House bill completely eliminating the gap by 2019) and provide a 50 percent discount on brand-name drugs to retirees affected by the coverage gap.

What’s at Stake

These provisions have the potential to decrease employer-provided retiree health and prescription drug benefits. Employers will find it much more expensive to provide these benefits without the tax exemption for the prescription drug coverage subsidy and with the threat of a 40 percent excise tax on health coverage beyond the stated threshold. This extra cost may serve as a deterrent to providing such benefits. In addition, the inability to alter the benefits offered to retirees provides an incentive to decrease or eliminate retiree benefits so employers are not obligated to provide such coverage indefinitely. Further, the reduction in the Medicare coverage gap and discount on drugs will influence employers to eliminate prescription drug coverage because these increases bring the Medicare drug benefit to a level closer to that of employer-provided coverage. 

Steps to Consider

• Review the progress of the proposals to determine next steps, such as plan redesign.
• Consider weighing in with your congressional delegation explaining the impact of the various provisions and indicating your views on them.     
• Evaluate the impact of the final law on retiree health and prescription drug benefits, and consider adjusting benefits accordingly.

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