Employer and employee groups are urging CalPERS to “undertake all efforts” to avoid the “Cadillac Tax,” a 40 percent tax on high-cost health plans imposed in 2018 by President Obama’s health care law, a CalPERS staff report said this month.
But it’s far from clear that one of those efforts will be Gov. Brown’s proposal to give state workers the option of a low-cost plan with a high deductible, even though the administration mentions the looming penalty tax as a reason for offering the plan.
At a legislative hearing on high-deductible plans this month, which did not include a presentation of the governor‘s proposal, unions and retiree groups denounced the plans that require large out-of-pocket payments before insurance coverage begins.
Retirees fear a cut in their health insurance payments. If enough state workers choose the low-cost health plan, increasing their take-home pay, it could lower the average cost of the four highest-enrolled health plans that sets the retiree payment.
Unions fear paying the high deductible could be ruinous for low-wage workers hit by an accident or major illness, despite the governor’s plan for state contributions to a health savings account to help cover uninsured costs.
High deductibles are said to hinder doctor visits, reducing early problem detection and raising long-term costs. And if the young and healthy, less in need of health care, choose a high-deductible plan, other plans left with older members may need rate increases.
In the opposite view, advocates of the Cadillac Tax say high-cost plans insulate workers from the expense of health care and encourage the overuse of tests, hospitalization and other medical procedures.
The excise tax on health plans with annual premiums above a cost limit ($10,200 for individuals and $27,500 for families) is intended to reduce the growth of health care costs by prompting employers to cut coverage and offer more high-deductible plans.
The renewed focus on cost control also is expected to yield tax revenue needed to expand the President’s Affordable Care Act. A major tax break, employer health plans, would be reduced, and the cut in worker benefits may be offset by higher taxable wages.
A business group predicted that 38 percent of large employers would be hit by the Cadillac Tax in 2018. Because the cost limit, growing with inflation, is likely to be outpaced by health costs the average family plan is predicted to be taxed by 2031.
For state workers, a Cadillac Tax was included in the actuarial projection issued by the state controller last December showing a $72 billion debt or “unfunded liability” for retiree health care promised current employees over the next 30 years.
“The ultimate trend rate for future retirees was increased by an additional 0.14 of a percentage point to 4.64 percent on and after 2025,” said the controller’s report by Gabriel Roeder Smith & Co. actuaries.
A preliminary report by the staff of the California Public Employees Retirement System this month used the example of two high-cost plans that would be hit by an annual “Cadillac Tax” estimated to total $3.9 million.
In a review of the CalPERS health care programs covering 1.4 million active and retired persons last year, two themes emerged: employee and employer groups want CalPERS to “undertake all efforts” to lower costs and avoid the Cadillac Tax.
“CalPERS contracting agencies, the State of California, and the California State University system cannot afford to pay the (Cadillac) excise tax,” said a staff report to the CalPERS board this month.
“While the tax does not take effect until 2018, we believe that immediate action is necessary to convey that CalPERS will do everything possible to help ensure that our plans are not subject to the tax.”
The staff report suggested that CalPERS could cut costs and get some relief from the Cadillac Tax by switching members from two Blue Shield and Anthem broad provider networks (see graph) to narrower networks offered by the same organizations.
The impact on members of switching to a narrower network would be “less significant” than the risk of the tax, the staff believes. Members have the same benefits but fewer provider options. The “vast majority” retain their primary care physicians.
The CalPERS board took no action on the issue this month. The staff will do a full review of the potential cost of the Cadillac Tax and give the board a report, probably in August or September.
Brown’s proposal to offer state workers the option of a high-deductible health care plan said the current CalPERS “platinum” level of coverage “leaves the state — and employees — vulnerable to the pending Cadillac Tax.”
Whether a high-deductible health plan option, if offered, would reduce or avoid the Cadillac Tax is not clear. The governor’s proposed state budget in January only said that his plan “requires” CalPERS to offer the high-deductible option, giving no amounts.
There is room to maneuver. The CalPERS deductible is $500 per person and $1,000 per family, well below the maximum annual deductible allowed under Obamacare before insurance coverage begins: $6,600 per person and $13,200 per family.
More take-home pay could be an incentive to choose a high-deductible option, which cuts employer and employee costs. A state worker in the popular Kaiser plan pays about $278 a month, 17 percent of the premium, the Legislative Analyst’s Office said.
The governor’s plan for a state contribution to an individual Health Savings Account, tax advantaged, apparently would be an amount bargained with unions. The account would help pay for deductible health costs before insurance coverage begins.
Contributions to the savings account would count toward the Cadillac Tax premium limit. The accounts are portable, said the governor’s proposal, “meaning employees can take an HSA from one job to another and not lose its value.”
In addition to opposition from labor unions and retiree groups, another problem for the governor’s proposed high-deductible plan option was mentioned at the legislative hearing this month.
CalPERS was said to have looked at high-deductible plans, bud did not offer one due to “adverse selection.” If younger and healthier workers migrate to a high-deductible plan, other plans are left with a larger share of older workers, triggering a rate increase.
“So we’re here at the threshold of that bridge again with the proposal of the governor, but I think the same concerns continue to exist,” said Assemblyman Rob Bonta, D-Alameda, chairman of the Assembly public employees retirement committee.
An official told the hearing that over the years CalPERS, concerned about maintaining member health while controlling costs, has looked at higher “co-pays and co-insurance,” but the analyses are of limited value now because of Obamacare changes.
“However, I will note that to date the board has not concluded that high-deductible plans should be implemented,” said Ann Boynton, CalPERS deputy executive officer.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 30 Mar 15