By Mike Turpin, USI Executive Vice President
“You think healthcare is expensive now? Wait until it is for free…”
In early 2011, The Boston Globe shared the findings of a 20-page report from the Boston Foundation and Massachusetts Taxpayers Foundation—a report that somberly concluded that cities and towns must substantially increase the amounts their employees are required to pay in out-of-pocket expenses for services and to significantly increase their deductibles. Jeffrey D. Nutting, Franklin, MA town manager, complained his town was still facing costs that wildly outpaced declining tax revenues or even the CPI. “Every dollar we spend on health care insurance is a dollar we don’t spend on jobs,’’ he said. “This is all about saving jobs. When insurance costs go up I have [to] cut police, firefighters, or teachers.’’
Nutting said about 10 percent of the town’s $88 million budget now goes to health care costs, and he was facing a double-digit increase for next year. That was 2011.
In 2014, the healthcare conundrum is worsening. Despite the passage of the Affordable Care Act, the gross per capita cost to provide health benefits for public employees is averaging as much as $20,000 per worker. This is almost twice the national figure for most commercial health plans – eclipsing by a decent margin private sector, bargained plans. The mounting evidence is irrefutable – low co-pay plans with maximum amounts of reimbursement do little to improve member health or mitigate chronic illness — and often times lead to overconsumption of services, poor consumerism and limited accountability for personal responsibility around healthcare.
While the private sector has been busy cutting benefits, implementing high-deductible plans, health savings accounts, cost sharing, mandatory biometric testing, and plans designed to promote better consumerism, towns and their employees are still bickering over changing a $10 drug co-pay to a $15.
In the months ahead, we will hear more about a little known provision within the Affordable Care Act (ACA) called “The Cadillac Tax”. After overcoming rare joint opposition from unions and business, the ACA included a provision to impose a 40% excise tax on employers (public and private) for any benefit plans offered to workers that exceed $10,200 per individual and $27,500 per family. It’s estimated that in 2018, a large percentage of the bargained plans offered to employees of cities and counties will exceed this allowable limit and trigger the tax on excess amounts. Many cities and counties eclipse this threshold today – four years ahead of the tax. The $3.2M question? (I’m just taking a wild stab at $4,000 excise tax per public employee for a town of 800 workers) — Are our public officials making provisions to deal with this now or are they tearing a page out of Washington’s self preservation playbook preferring to wait until the crisis is imminent before declaring fiscal martial law?
It’s estimated in a recent survey by Consultant Towers Watson that by 2023, 82% of all plans, public and private, will be impacted by the Cadillac Tax – which makes the term “Cadillac Tax” a misnomer. It is really a stealthy first step toward capping or eliminating the last of the two sacred cows of tax exemption – the mortgage interest deduction on your home and the deductibility of employer-provided employee benefits. In the private sector, employers are sobering to this future liability and are planning to either explicitly reduce the cost of their plans, pass on the tax to their employees or simply give employees a stipend of taxable dollars and encourage them to purchase coverage through a public or private insurance exchange.
For communities across the U.S., the issues stand to become highly polarizing. Many town Board of Education and town employee plans are not integrated, still clinging to generous plan designs that offer first-dollar coverage with limited co-insurance and out-of-pocket costs and have not embraced the notion of consumer or personal health accountability.
Workers rightfully argue that the cost of healthcare represents a significant economic threat and these benefits insulate them from financial risk. The question is whether such rich plans result in healthier workers or actually drive costs higher by eliminating incentives to be good consumers or take personal responsibility for one’s health? The belief that having comprehensive, low-cost benefits insures good health is belied by the consistently high levels of chronic illness and gaps in care that arise in many populations — conditions that arise out of poor lifestyle choices and from those who do not actively manage their chronic conditions. Aside from being poor consumers on the behalf of plan sponsors, people covered under rich benefit plans do not have incentives to change. Change in health lifestyles typically comes from one of two areas: a pain in one’s chest or a pain in one’s pocketbook. Employers are recognizing the need for a bilateral social contract for personal health with employees and are requiring more from participants. Bargained plans have historically been opposed to any revisions or Big Brother oversight from taxpayers. As for public officials caught in the middle, the debate is a “third rail” issue – “You touch it and you die!” It is proverbial line of death.
With the 2010 passage of the ACA, Congress heard from public employees that they needed time to renegotiate the terms of their collective bargaining agreements to determine who would absorb any potential tax penalty. Congress delayed implementation of the law until January 1, 2018. In the interim, there is very little evidence that any public officials are actively moving to discuss the potential for a 40% excise tax on as much as 40% of their benefits costs. The quickest road to being voted out of office is to wait until 2018 and attempt to sell taxpayers on the need to finance a 40% tax that could have been averted by planning and negotiation. The Cadillac Tax will pit tax payers and public workers against one another unnecessarily if leaders don’t act now to project the real costs, monetize these differences and renegotiate wages in good faith adjustments to make up for inevitable reductions in benefits that will get plans more in line with costs – costs that will rise at twice the rate of private plans if left with rich, low co-pay plans and limited out-of-pocket costs.
In defense of many public workers, public officials for years have often negotiated extensions of rich benefits for retirement or medical benefits in lieu of wage increases. Workers were essentially trading modest cost-of-living wage adjustments for critical security — the promise of generous medical and retirement benefits. Public officials were obligating future generations of taxpayers to the net present value (NPV) of an obligation that they would not be accountable for – and might actually be a benefit from as a retiree. Workers were smart in understanding that annual medical inflation is multiples of the CPI and that guarantees on limited cost sharing and low out-of-pocket costs for healthcare were worth more than modest wage adjustments. The public officials appeared fiscally conservative to their constituents for balancing budgets while presiding over dramatic unfunded NPV increases in medical and pension liabilities. 2018 is the year of reckoning. Once U.S. plans calculate the potential excise tax, most will conclude that the additional taxes are simply unacceptable.
A recent article in the Washington Post cited the Government Accountability Office (GAO) warning that “health-care spending represents the single greatest threat to state and local government long-term fiscal health. In 2014, the GAO expects local government spending on health care to stand at 4.1 percent of the country’s gross domestic product; by 2060, that number is expected to jump to 7.2 percent.” The article goes on to share that by mid-century, a whopping 50% of local tax dollars would need to go to financing healthcare.
Most Americans don’t understand the elements of the Affordable Care Act and tend to judge the legislation on very philosophical or personal experiences. If you have directly or indirectly benefited from the legislation – possibly due to a dependent or loved one previously unable to secure affordable coverage to a pre-existing condition, it’s a god send. Perhaps you were uninsured and now have coverage provided through an exchange at a cost proportionate to your ability to pay, you may be quick to defend the merits of the law. You may be opposed – confused by the Congressional Budget Office’s math, which suggested the law would cut the deficit, costing $800B over ten years but offset by $940B in taxes, fees and penalties. A big part of the $940B is expected revenues raised by the Cadillac Tax. As with any corporate tax, these costs inevitably find their way to consumers. As it relates to the public sector, it remains to be seen how we choose to handle the bill.
One thing for sure, the tab for the party is coming due. The big question, is who is going to pay and do our local and state officials have the right stuff to facilitate a balanced dialogue with our valued public employees over how we are going to work together to absorb this tidal wave of taxation.
Michael Turpin is a part-time columnist, speaker and a thirty-three year veteran of healthcare – having served both as regional CEO of a major insurer and as an executive advising employers on healthcare design and financing.