Affordable Care Act (ACA) Excise Tax in 2018 and Beyond for City and County of San Francisco Health Services Board Meeting January 8, 2015 Prepared by Consulting Health and Benefits
Affordable Care Act Compliance Excise Tax on High Cost Employer Health Care Coverage (Cadillac Tax) Effective in 2018, 40% Excise Tax will be imposed on employer health care benefits if the premiums are above a preset threshold The Excise Tax is charged to the insurer but will be passed on to employers Premiums include employer contributions and employee pre-tax contributions under cafeteria plans (employee + employer medical costs) 2018 Employee/Retiree Single Tier Coverage: $10,200 $11,850 for early retirees and high risk professions such as police and firefighters 2018 Employee/Retiree Family (regardless of size) Tier Coverage: $27,500 $30,950 for early retirees and high risk professions such as police and firefighters Proprietary & Confidential 2 2
Excise Tax starting in 2018 on High-Cost Employer Medical Plans Insurers (including employers for self-insured plans) pay a 40% Excise Tax on the total cost of employer-sponsored insurance in excess of thresholds Thresholds for actives and Medicare retirees are: $10,200 for single coverage in 2018 $27,500 for family coverage in 2018 Thresholds indexed by Consumer Price Index for All Urban Consumers (CPI-U) (plus 1% in 2019 only) $1,650/$3,450 higher thresholds for high-risk occupations such as police and firefighters, telecom workers, and pre-medicare retirees Coverage subject to tax includes medical (fully-insured and self-funded), self-funded dental, selffunded vision, Health Reimbursement Accounts (HRA), and employer (or employee salary reduction) Health Savings Account (HSA) contributions, and Health Care Flexible Spending Account (FSA) contributions No Health Care FSA elections were assumed in the calculations that follow, however there are presently 4,107 members with Health Care FSA elections. We have included tables with Health Care FSA impact in the estimate of the Excise Tax liability in the appendix At this time we have excluded the self-funded Dental PPOs, with the assumption that the Health Service Board (HSB) would consider changing the funding mechanism to fully-insured at the time of the Excise Tax implementation to avoid the tax At this time regulations have not been promulgated on the implementation of this tax. A key pending regulation will determine the extent to which HSS can blend Medicare and Pre-Medicare retiree plan costs Proprietary & Confidential 3
The HSS Perspective HSS requested that Aon Hewitt use their analytical tool kit to assess the potential tax liability for the ACA mandated 2018 Excise Tax. The assessment that follows should be looked at as the potential liability without any blending of pre and post Medicare retiree plan cost. When the US Department of Health and Human Services (HHS) provides guidance Aon Hewitt expects the tax liability per this analysis to be completely eliminated or have a marked reduction The results of the tax liability assessment follow our trend assumptions. Results are presented by vendor by employment status (Active, Pre-Medicare and Medicare Retiree) While the City Plan contributions increased significantly for 2015 and we expect enrollment in this plan to decrease dramatically over the next three years, no assumptions were made about the extent of the decrease in enrollment in nor an increase in the enrollment in the other plans Proprietary & Confidential 4
Results No Blending of Pre-Medicare Retirees and Medicare Retirees The combined results of our projection are as follows: Blue Shield of California Kaiser Permanente City Plan Estimated Excise Tax by Year Year Crossing Threshold Group Enrollment 2018 2019 2020 Single Family Active 15,533 $0 $0 $0 2021 2025 Pre-Medicare Retiree 2,729 $7,894,000 $9,020,000 $10,317,000 2018 2018 Medicare Retiree 5,376 $0 $0 $0 2041 2052 Active 19,851 $0 $0 $0 2032 2036 Pre-Medicare Retiree 2,787 $2,073,000 $2,315,000 $2,663,000 2018 2031 Medicare Retiree 9,231 $0 $0 $0 2055 2065 Active 741 $1,683,000 $2,001,000 $2,364,000 2018 2018 Pre-Medicare Retiree 575 $1,441,000 $1,740,000 $2,083,000 2018 2018 Medicare Retiree 5,572 $0 $0 $0 2039 2046 Total 62,395 $13,091,000 $15,076,000 $17,427,000 The Excise Tax resulting from Pre-Medicare Retirees represents 87% of the estimated assessment in 2018 The Excise Tax resulting from the City Plan actives represents 13% of the estimated assessment in 2018. The City Plan contributions increased significantly for 2015, so we expect enrollment in this plan to decrease dramatically over the next three years reducing the estimated Excise Tax Proprietary & Confidential 5
Results Blended Retirees The ACA does outline an option to blend similarly situated Pre-Medicare and Medicare retirees. This has been interpreted and applied by creating a composite premium for all retirees blending Pre- Medicare and Medicare premiums by enrollment Applying a reasonable interpretation of blending Pre-Medicare and Medicare Retiree rates produces the following: Blue Shield of California Kaiser Permanente City Plan Estimated Excise Tax by Year - Blended Retirees Year Crossing Threshold Group Enrollment 2018 2019 2020 Single Family Active 15,533 $0 $0 $0 2021 2025 Pre-Medicare Retiree 2,729 $290,000 $507,000 $779,000 2018 2030 Medicare Retiree 5,376 $644,000 $1,126,000 $1,731,000 2018 2030 Active 19,851 $0 $0 $0 2032 2036 Pre-Medicare Retiree 2,787 $0 $0 $0 2037 2051 Medicare Retiree 9,231 $0 $0 $0 2037 2051 Active 741 $1,683,000 $2,001,000 $2,364,000 2018 2018 Pre-Medicare Retiree 575 $0 $0 $0 2033 2040 Medicare Retiree 5,572 $0 $0 $0 2033 2040 Total 62,395 $2,617,000 $3,634,000 $4,874,000 Blending the Pre-Medicare and Medicare rates reduces the estimated Excise Tax by 80% in 2018. 64% of the remaining Excise Tax is from the City Plan active group. We expect this estimate to decrease with enrollment. The HSB may consider eliminating City Plan for actives given the magnitude of the projected tax Proprietary & Confidential 6
Conclusion The result of the Excise Tax assessment is as follows: The total tax liability for the Excise Tax with no blending and no plan migration for 2018 is $13,091,000 The Kaiser Permanente plans have the potential of incurring a cost of $2.073 million in 2018, purely driven by pre-medicare retiree cost. If it is determined that blending is not permitted, consideration should be given to reducing benefits (increase copays) to reduce tax liability. This amount is expected to be eliminated with blending The Blue Shield of California plans have the potential of incurring $7,894,000 cost in 2018, purely driven by pre-medicare retiree cost. This amount is expected to be reduced to $934,000 by blending. In both instances, consideration should be given to reducing benefits (increasing copays) to reduce tax liability The UHC plans have the potential of incurring $3,124,00 cost in 2018, with $1,683,000 result from actives and $1,441,000 from pre-medicare retirees. We are anticipating a decrease in enrollment in the active UHC plan, which ultimately will result in lower Excise Tax liability in 2018 and beyond. The HSB may consider eliminating City Plan for actives given the magnitude of the projected tax Aon Hewitt will work with HSS to identify opportunities to reduce this tax as much as possible Proprietary & Confidential 7
Appendix: Detailed Results
Results with Health Care FSA (Non-Blended Retirees) The combined results of our projection including Health Care FSA contributions are as follows: Blue Shield of California Kaiser Permanente City Plan Estimated Excise Tax by Year (with FSA) Year Crossing Threshold Group Enrollment 2018 2019 2020 Single Family Active 15,533 $563,000 $656,000 $775,000 2018 2021 Pre-Medicare Retiree 2,729 $7,894,000 $9,020,000 $10,317,000 2018 2018 Medicare Retiree 5,376 $0 $0 $0 2041 2052 Active 19,851 $0 $0 $0 2021 2032 Pre-Medicare Retiree 2,787 $2,073,000 $2,315,000 $2,663,000 2018 2031 Medicare Retiree 9,231 $0 $0 $0 2055 2065 Active 741 $1,790,000 $2,110,000 $2,476,000 2018 2018 Pre-Medicare Retiree 575 $1,441,000 $1,740,000 $2,083,000 2018 2018 Medicare Retiree 5,572 $0 $0 $0 2039 2046 Total 62,395 $13,761,000 $15,841,000 $18,314,000 The following data was provided around Health Care FSA elections using the 2015 maximum election ~ $2,500 FSA Election Data for Actives Plan EE Only Family Tier City Plan 15% 7% Blue Shield 11% 14% Kaiser 4% 7% Health Care FSA contributions increase the tax assessment for the active City Plan, and create a tax assessment for the active Blue Shield plan, totaling $670,000 increase in the tax assessment in 2018 The HSB may consider eliminating Health Care FSAs in order to reduce the tax liability Proprietary & Confidential 9
Results with Health Care FSA (Blended Retirees) Applying a reasonable interpretation of blending Pre-Medicare and Medicare rates produces the following: Blue Shield of California Kaiser Permanente City Plan Estimated Excise Tax by Year (with FSA) - Blended Retirees Year Crossing Threshold Group Enrollment 2018 2019 2020 Single Family Active 15,533 $563,000 $656,000 $775,000 2018 2021 Pre-Medicare Retiree 2,729 $290,000 $507,000 $779,000 2018 2030 Medicare Retiree 5,376 $644,000 $1,126,000 $1,731,000 2018 2030 Active 19,851 $0 $0 $0 2021 2032 Pre-Medicare Retiree 2,787 $0 $0 $0 2037 2051 Medicare Retiree 9,231 $0 $0 $0 2037 2051 Active 741 $1,790,000 $2,110,000 $2,476,000 2018 2018 Pre-Medicare Retiree 575 $0 $0 $0 2033 2040 Medicare Retiree 5,572 $0 $0 $0 2033 2040 Total 62,395 $3,287,000 $4,399,000 $5,761,000 Health Care FSA contributions increase the active Excise Tax assessment Blending has no effect on the additional cost of the active Health Care FSA of $670,000, or 20% of the tax assessment in 2018 Proprietary & Confidential 10
Excise Tax Calculation (Non-blended Retirees and no FSA) 2018 Estimated Coverage Cost Excise Tax Estimated Estimated Estimated Estimated Estimated Aggregate 2018 Option Name Status Tier 2018 Excise Tax in Excise Tax in Excise Tax in Enrollment Premium Premium 2018 2019 2020 Blue Shield of California Single 6,936 $ 9,445 Active $260,392,000 $ 0 $ 0 $ 0 Active Family 8,597 $ 22,668 Blue Shield of California Single 1,632 $ 21,906 Pre-65 $73,027,000 $7,894,000 $9,020,000 $10,317,000 Pre-Medicare Retirees Family 1,097 $ 33,981 Blue Shield of California Single 3,626 $ 5,575 Post-65 $40,472,000 $ 0 $ 0 $ 0 Medicare Retirees Family 1,750 $ 11,575 Single 8,777 $ 7,251 Kaiser Permanente Active Active $258,894,000 $ 0 $ 0 $ 0 Family 11,074 $ 17,631 Kaiser Permanente Pre- Single 1,859 $ 14,638 Pre-65 $48,543,000 $2,073,000 $2,315,000 $2,663,000 Medicare Retirees Family 928 $ 22,986 Kaiser Permanente Single 6,532 $ 4,079 Post-65 $49,386,000 $ 0 $ 0 $ 0 Medicare Retirees Family 2,699 $ 8,427 Single 630 $ 15,589 City Plan Active Active $13,685,000 $1,683,000 $2,001,000 $2,364,000 Family 111 $ 34,808 City Plan Pre-Medicare Single 437 $ 18,273 Pre-65 $13,053,000 $1,441,000 $1,740,000 $2,083,000 Retirees Family 138 $ 36,723 City Plan Medicare Single 4,239 $ 4,118 Post-65 $28,187,000 $ 0 $ 0 $ 0 Retirees Family 1,333 $ 8,051 TOTAL 62,395 $785,639,000 $13,091,000 $15,076,000 $17,427,000 Excise Thresholds: For active employees and Medicare retirees, the thresholds used for this calculation were $10,200 for individual coverage and $27,500 for family coverage. For pre-medicare retirees, the thresholds used for this calculation were $11,850 for individual coverage and $30,950 for family coverage. Assumptions Non-single coverage combined and underwritten as family ("other than self-only coverage"). Pre-Tax equivalent assumes that the medical vendors will be assess a 0% tax liability on the penalty which may be passed on to the plan sponsor Estimated costs include the following expenses: medical, prescription drugs, health FSA, HRA (if any), and HSA employer seedings (if any). Plan costs are estimated by trending 2015 premium equivalent rates. Assumed no plan design, network, or other changes affecting expected costs (besides trend) between 2015 and 2018. Enrollment based on 2014 data and Rates based on 2015 information. High risk professions: law enforcement, fire protection, out-of-hospital emergency medical care, construction, mining, agriculture (not including food processing), forestry, fishing, or those employed to repair or install electrical or telecommunication lines. Proprietary & Confidential 11
Excise Tax Calculation (Blended Retirees and no FSA) 2018 Estimated Coverage Cost Excise Tax Option Name Status Tier Aggregate Estimated Estimated Estimated Non FSA Premium and FSA Excise Tax in Excise Tax in Enrollment Participants Contribution 2018 2019 Blue Shield of California Single 6,936 $ 9,445 Active Active Family 8,597 $ 22,668 $260,392,000 $ 0 $ 0 Blue Shield of California Single 1,632 $ 10,644 Pre-65 Pre-Medicare Retirees Family 1,097 $ 20,208 $39,539,000 $290,000 $507,000 Blue Shield of California Single 3,626 $ 10,644 Post-65 Medicare Retirees Family 1,750 $ 20,208 $73,960,000 $644,000 $1,126,000 Kaiser Permanente Active Single 8,777 $ 7,251 Active Family 11,074 $ 17,631 $258,894,000 $ 0 $ 0 Kaiser Permanente Pre- Single 1,859 $ 6,418 Pre-65 Medicare Retirees Family 928 $ 12,152 $23,208,000 $ 0 $ 0 Kaiser Permanente Single 6,532 $ 6,418 Post-65 Medicare Retirees Family 2,699 $ 12,152 $74,721,000 $ 0 $ 0 City Plan Active Single 630 $ 15,589 Active Family 111 $ 34,808 $13,685,000 $1,683,000 $2,001,000 City Plan Pre-Medicare Single 437 $ 5,441 Pre-65 Retirees Family 138 $ 10,741 $3,860,000 $ 0 $ 0 City Plan Medicare Single 4,239 $ 5,441 Post-65 Retirees Family 1,333 $ 10,741 $37,380,000 $ 0 $ 0 TOTAL 62,395 $785,639,000 $2,617,000 $3,634,000 Estimated Excise Tax in 2020 $ 0 $779,000 $1,731,000 $ 0 $ 0 $ 0 $2,364,000 $ 0 $ 0 $4,874,000 Excise Thresholds: For active employees and Medicare retirees, the thresholds used for this calculation were $10,200 for individual coverage and $27,500 for family coverage. For pre-medicare retirees, the thresholds used for this calculation were $11,850 for individual coverage and $30,950 for family coverage. Assumptions Non-single coverage combined and underwritten as family ("other than self-only coverage"). Pre-Tax equivalent assumes that the medical vendors will be assess a 0% tax liability on the penalty which may be passed on to the plan sponsor Estimated costs include the following expenses: medical, prescription drugs, health FSA, HRA (if any), and HSA employer seedings (if any). Plan costs are estimated by trending 2015 premium equivalent rates. Assumed no plan design, network, or other changes affecting expected costs (besides trend) between 2015 and 2018. Enrollment based on 2014 data and Rates based on 2015 information. High risk professions: law enforcement, fire protection, out-of-hospital emergency medical care, construction, mining, agriculture (not including food processing), forestry, fishing, or those employed to repair or install electrical or telecommunication lines. Proprietary & Confidential 12