Cadillac Tax Delayed, but Not Dead

No administrator of an employee health plan will have to pay the so-called Cadillac tax earlier than 2020, but arguments against the "frightfully complicated" and unpopular provision of the healthcare reform law will continue, says a legal specialist.

The provision of the Patient Protection and Affordable Care Act known as the Cadillac tax (and also known as the as high-cost plan tax, or HCPT) threatens to jolt employers and employees alike.

The tax is meant help curb the growth of healthcare costs, but in doing so, threatens the future of flexible spending accounts and will impose a 40% hike on high-value health insurance plans. An analysis by the Kaiser Family Foundation estimates that more than a quarter of employers will offer HCPTs by 2018.

Catherine Livingston is a partner at Jones Day, a Washington, DC- based law firm. She specializes in healthcare law, specifically, the Patient Protection and Affordable Care Act. Livingston spoke with me recently about Cadillac tax and other regulatory developments stemming from the PPACA and their potential impact on employers. The transcript of our conversation has been lightly edited.

HLM: What does the December 2015 Omnibus Appropriations Bill change regarding the Cadillac tax?

Livingston: The December legislation delayed the effective date on the Cadillac tax from January 1, 2018, to January 1, 2020. That means that no insurer and no administrator of an employee health plan will have to pay any tax earlier than 2020.

It also ordered a study because the tax is supposed to have adjustments. The tax works by taxing the excess over specified thresholds, which are supposed to be adjusted for certain age and gender factors. Another thing the legislation does is order a study on whether or not the thresholds should be changed in order to make them appropriate, suitable, and sensible.

HLM: What are your thoughts on the future of the Cadillac tax?

Livingston: I think we're likely to see significant debate about the Cadillac tax once the presidential election is over. It's been raised by multiple candidates as something they would like to review, if not repeal. It's certainly not popular with a wide and varied array of constituencies, from organized labor to large employers.

There's a significant-sized coalition lobbying for its repeal called the Alliance to Fight the 40, which has a very diverse set of members. All of those different forces will no doubt prompt debate about the future of the Cadillac tax.

There is a revenue cost associated with repealing it completely, and given concerns over federal deficits and the budget, it remains unclear whether a full repeal could be achieved in the broader context of budgetary concerns. There may be a series of delays because those have a lower budget cost—they were able to do [the December] delay because they only had to pay for turning off the tax for two years.

Another significant possibility is that the mechanism gets changed. The Cadillac tax is unpopular not only because of the economic incidence of the tax, but also because it's frightfully complicated and there are many unanswered questions about how the mechanism works.

Another option that has been floated by different voices in the policy debate is to replace the Cadillac tax with a cap on the exclusion for employer-provided healthcare. That's a much more straightforward mechanism. Certain questions would still have to be answered, such as how you determine what the cost of coverage is, so that it would be known when the cap is exceeded.

But that is already underway in the guidance process that the Treasury Department and the IRS have initiated, and many other questions that arise with the Cadillac tax could be avoided.

I am confident there will be much discussion, and there are a variety of different options for how that discussion could ultimately play out. Of course, there are voices speaking up firmly to say that the Cadillac tax is one of the most important mechanisms, if not the most important in the entire PPACA for trying to control the overall growth and cost of healthcare.

So, if it were repealed entirely, would there be any mechanisms left to meaningfully control costs? That's another element to the ongoing debate.

HLM: What activity can we expect around state applications for PPACA waivers?

Livingston: There will certainly be a number of states that will seriously work to develop proposals. As of summer 2015, there were at least half a dozen that launched initiatives in one form or another regarding the possibility of pursuing a waiver. But, to submit a waiver application requires a significant amount of work, not only to conceive of what the state would like to do to deliver health coverage, but also to do the economic analysis to demonstrate that what's being proposed is budget-neutral.

There are also two levels of required notice and comment. One that has to happen at the state level before the state submits its proposal, and another that happens at a federal level once the proposal is submitted. So, it remains to be seen how many states will actually run the full gauntlet.

One would also expect that states that have a heavy investment in their own state-based exchanges are far less likely to pursue the waivers. The waivers offer an infinite amount of flexibility. The state can waive everything from the individual mandate to the employer mandate to redeploying the funds that would otherwise go into the premium tax credit and other kinds of subsidies.

They don't have to use an exchange at all to determine eligibility for subsidies or deliver subsidies. It would seem that a state that's made a heavy investment in standing up and operating a successful exchange would be far less interested in the time cost and controversy that could potentially ensue with pursuing a state waiver.

HLM: What other PPACA or health insurance-related legislation do you think we can expect this year?

Livingston: I think we've hit a point in the evolution of health reform where there has been heavy investment of time and effort in understanding what the new law requires and understanding the many complicated mechanisms it puts in place to deliver what it offers, whether that be the mechanism of the exchange or the subsidies that come with it, or the Pioneer ACOs, or the new requirements for group health plans, or the premium stabilization programs, each of which has a huge array of details, and very complicated infrastructure.

So, at this point, I think people are looking around and saying, 'OK. We see what this law has given us, we're seeing most of it in operation.' But we—whether 'we' are the public at large or employers—are still asking why healthcare comes across as so expensive, and for some people, unaffordable.

I think that's going to push the debate toward looking at some of the drivers of underlying costs, which would include prescription drugs, and the continuing evolution from fee-for-service to value-based payment arrangements.

Certainly, consumers are increasingly interested in lower-cost options for access to care, such as telemedicine and retail clinics. It's not clear whether those topics will become the subject of legislation, but they will certainly be the subject of lots of discussion and the continuing public concern and frustration about being able to afford actual healthcare—not just coverage, but care.

The employer concern about the continued growth in cost is likely to ultimately arrive at legislative proposals. It's unclear whether that will be a 2016 phenomenon, or something that will wait until after the presidential election.