Maria Todd discusses the effect of the Cadillac tax on high-value health plans and what it means to employer paid cross border medical travel going forward
The Affordable Care Act's high-cost plan tax (HCPT), popularly known as the “Cadillac tax,” is a 40 percent excise tax on employer plans exceeding $10,200 in premiums per year for individuals and $27,500 for families. This caused employers and labor unions who were operating self-funded health benefit plans (Employer Sponsored Insurance ("ESI")) to take note of the price arbitrage available by buying similar healthcare services in a different marketplace to save money. To do this, some ESI programs were beginning to allow or encourage health benefit plan participants to travel for healthcare. Doing so would help the employer (and the employee) to reduce overall healthcare spend and thus reduce the per capita spend across the board. As such, it was one way to contain premium increases and keep them under the thresholds listed above.
The the program, employer and employee premium contributions would count against the threshold, as would most employer and (pretax) employee contributions to health savings accounts (HSAs), Archer medical savings accounts (MSAs), flexible spending accounts (FSAs), and health reimbursement accounts (HRAs).
If you are a new medical tourism facilitator in the USA or outside the USA and you are not familiar with the terms in the previous paragraphs, or about about these account based healthcare funding mechanisms, this article is going to be over your head. Search the internet to learn what they are and how they work to grasp the context of this particular blog article before reading further. Guidelines for determining which coverage is taxed are partly subject to interpretation by the Internal Revenue Service (IRS); the information provided there reflects the most up-to-date guidance. One place I would recommend you also do some reading to get up to speed on these terms would be the commonwealthfund.org website.
In the USA, almost 70% of non-retiree health insurance is provided by employers and labor unions. Many choose to "self fund" their healthcare benefit plan rather than throw money away on premiums each month to an insurer who accepts the transfer of risk associated with payment of claims. These plans are operated under the rules of the Internal Revenue Service and the US Department of Labor and are framed around two Acts, namely the Employee Retirement Income Security Act of 1974 ("ERISA"), and the Taft-Hartley Act.
An excise tax of 40% would be levied on ESI plans that exceeded a stated premium threshold
There were several issues associated with the Cadillac Tax, but one was that an excise tax of 40% would be levied on employer plans if they designed health benefit plans that were high-cost. Well, as most of us are aware, premiums go up when richer benefit plans offer coverage for higher cost medical services. Economic theory suggests that the tax exclusion encourages people to buy more generous plans than they otherwise would rather than to try to save cash. By increasing plan generosity, the tax exclusion could lead to higher spending through greater demand for medical care.
If one cannot change the preference for rapid intervention in a high cost healthcare setting, then the effect of richer benefits in a market where healthcare prices are higher is that the effect of meeting the threshold is likely to vary according to regional differences in wages, input prices, and other factors that affect premiums, many of which are beyond the control of employers and employees. The ripple effect is huge. The tax would probably also disproportionately affect workers with high health care costs and those who have negotiated generous benefit packages, such as public-sector union workers.
One way to circumnavigate this risk would be to buy lower cost health services that could be scheduled electively "someplace else" and change that variable. One way to do that is implement an elective medical travel benefit, for certain high cost procedures. By directing or encouraging the plan participants to either choose a lower cost supplier within the USA or a lower cost supplier outside the USA, both parties might save significantly on employer paid and out of pocket health expenses. Many employers were considering adding either a domestic or cross-border health travel as a preemptive strategy to hold down costs, and therefore hold down premium expense associated with certain surgeries and other high cost healthcare expenses.
Another way that employers and their plan participants could circumnavigate the risk of hitting the threshold was to place more emphasis on these account based health plans (HSA, MSAs, HRAs, etc.). In contrast to the effect of the general tax exclusion, favorable tax treatment of savings vehicles such as account based health savings programs encouraged people to choose less generous health insurance with higher coinsurance and deductibles. This is certainly the case for MSAs and HSAs, which can be used only in conjunction with high-deductible plans, and may also be true of FSAs, which do not impose such restrictions. At the same time, among people with similar coverage, those with savings accounts are likely to use more services than those who do not have such accounts. The rules of IRC 2013D (Publication 502), which defines what you can spend those savings dollars on without a penalty, didn't foreclose traveling outside the USA to obtain medically necessary healthcare that were permitted under IRC213D. You could also pay for certain expenses associated with the travel to access the healthcare using those funds. That might be a next step under the Trump Administration, is to enter three measly little words into IRC213D that say that care must be sourced "within the USA" - there you have it 3 words. That would still allow people to travel to access healthcare and deduct the travel and pay with account based funds - as long as the care was sourced in the USA.
For now, the Cadillac Tax has been suspended as part of the deal that ended the shutdown of the federal government, at least temporarily. It will now be delayed until 2020 - two years from now. Now that that risk is suspended, will the employer maintain interest in medical travel as a solution to hold down costs if the threat of the 40% excise tax is no longer a threat?
I also see a silver lining for US healthcare providers in rural or lower cost markets. If the employer or labor union is still willing to explore medical travel for price arbitrage, direct-with-employer negotiations (e.g., Delta Airlines, Lowes, Boeing, Dillards, Walmart, PepsiCo and others) with companies who already permit and encourage their employees to travel for care to Centers of Excellence within the USA may be a great way to grow revenues from outside their local marketplace. The program setup takes a little infrastructure on both sides, but the suspension of the Cadillac Tax may mitigate the flyover risk to other countries that were a reality only last week.