The week that President Obama signed the Health Care and Education Reconciliation Act into law (the companion "fixes" legislation to the Patient Protection and Affordable Care Act) a group of benefits professionals and thought-leaders gathered in Orlando, Fla., to ponder a benefits world under the new legislation.

The forum, sponsored by the Institute for Health and Productivity Management, provided a glimpse into how the new law, especially the 40% excise tax that takes effect in 2018, may influence employers' strategies in managing their health plans costs.

Projecting costs

The law imposes a 40% excise or "Cadillac" tax on employers that provide high-end insurance coverage. Employers with health plans that have premiums of $10,200 or more for singles and $27,500 for families are subject to the tax.

For qualified retirees (age 55 who are not yet eligible for Medicare) and individuals in certain high-risk professions, the thresholds are increased to $11,850 for individual coverage and $30,950 for family coverage.

As costs likely will continue to rise over the next eight years before the tax becomes effective, companies fear that the rising costs of health care will eventually place them in the excise-tax category.

According to Thomson Reuters, the rate of health care inflation jumped in 2009 for employers, increasing from 6.1% in 2008 to 7.3% in 2009. The research firm analyzed medical claims data from 144 companies that provide health benefits to 9.5 million people from 2007 to 2009.

Conversely, the overall U.S. inflation rate, as measured by the Consumer Price Index, declined by 0.4% in 2009. The 7.3% increased experienced by U.S. employers means their net health care payments for active workers jumped from $3,113 to $3,341 in 2009, report researchers at Thomson Reuters.

Under the health reform law, the 2018 threshold will be increased by inflation plus 1% for 2019, and indexed to reflect inflation without the additional 1% thereafter.

Chevy today, Cadillac tomorrow

Randall K. Abbott, a senior practice leader at Towers Watson, said during one session that a number of employers may already own a Cadillac plan and don't even know it.

"Health [care] reform has to be the only circumstanceswhere you can buy a Chevrolet today and pay it off five years and then get a Cadillac," Abbott said.

To avoid the Cadillac syndrome, "employers are going to become much savvier at determining what parts of their benefits they want to keep and those that they want to let go," said Sandra Morris, senior manager of employee health care benefits at Proctor & Gamble.

This will mean companies will determine which plan designs truly provide a shared value to both the company and the member, Morris explained during a panel discussion on value-based health design.

Although insurers and third-party administrators - not employers - would pay the excise tax, benefits analysts explain that because the excise tax is not deductible for federal income tax purposes, insurers and TPAs will pass the costs of the tax on to employers.

For example, a TPA with a 35% income tax rate could effectively increase the costs for employers from 40% of the excess value over the threshold to around 61.5%, report analysts from PricewaterhouseCoopers.

Even now, the excise tax can create an administrative burden for employers. They now have to keep in the corner of their minds the cost of the tax as they project future health care costs and measure plan obligations for financial reporting purposes.

"We are going into a world where larger employers will have to be more acutely conscious of the costs associated with their health plans in order to stay within the excise tax parameters," Abbott said.

Consequently, the "finance folks will start to take more control over health plan designs than in the past simply because of the new business imperatives under health care reform. More key decisions on health plan designs will come out of the hands of HR/benefits professionals and into those at the company's finance department," he added.

The excise tax provision excludes dental, vision, employer-sponsored long-term care insurance and other ancillary coverage. Depending how the 2010 midterm elections shape up, some are hoping that Congress will reconsider the excise tax, which excludes dental and vision benefits.

"There's no disagreement that we have to figure out how to make the health reform law work, but we have to do it in a way that addresses the fundamental issue of costs if we intend to provide coverage to the millions of uninsured individuals," said Grace-Marie Turner, president of the Galen Institute, at a public policy dinner at the conference.

Health economists report that health care costs have increased from $1.4 trillion in 2000 to $2.3 trillion in 2008, and now represent 16% of the gross national product.

"We have to become much more efficient in our care of delivery, much better at taking advantage of health IT, and using paraprofessionals in the medical community," Turner said. The solutions to our health care problems "will come from the bottom up and not from Washington, D.C., saying, 'This is what you are going to do to spread innovation.'"

Other options

Although the IHPM conference occurred on the heels of the enactment of the health reform law, employers were not wedded to the topic. Mitigating health cost trends by successfully implementing consumer-oriented plans and managing population health was also discussed.

About 54% of large employers currently offer a consumer-driven health plan, whereas in 2005 only 21% provided the plan, according to a survey by Towers Watson and the National Business Group on Health. In 2011, 61% of employers will offer a CDHP.

Still, if an employer places 100% of its workforce into a consumer-oriented plan, they will still struggle with health care costs, said Tami Graham, global benefits manager at Intel Corporation. Over the last five years, up to 58% of the company's employees have migrated over to a consumer-oriented plan option.

Graham believes it's the combination of more than half of the workforce moving into consumer-oriented plans and the other 40% becoming better engaged in managing their health risks that has resulted in the company's health care cost trends remaining flat in 2008 and 2009.

Through the health reform law, U.S. policymakers have announced that the nation is now committed to a public policy agenda that makes healthier behavior a top priority.

Yet if policymakers want Americans to become healthier, then public-health objectives must involve the workplace, said Dr. Catherine Baase, corporate medical officer at Dow Chemical Co., during her presentation at the conference.

"The workplace has a huge impact on employees' behavior," she said. "We can reach a large segment of the population at the worksite, especially those who have no interaction on an annual basis with the health care system."

In early 2010, Baase testified before the Senate during the debates over the health care legislation. "The worksite offers an opportunity to reach people that we sometime can not reach from a public health effort alone," she added.

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