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By Michael Rose
Nov. 20 — Although the Affordable Care Act's excise tax on high-value health-care plans will not take effect for more than three years, unions and employers are increasingly dealing with the issue in collective bargaining today, according to observers and stakeholders contacted by Bloomberg BNA.
Beginning in 2018, the 40 percent excise tax under the ACA will be levied on employers that sponsor “high-value” health plans, which the ACA defines as an annual coverage cost of $10,200 for individuals or $27,500 for individual-plus-one or family plans. Because the plans at issue provide such a high level of health coverage, the excise tax has frequently been dubbed the “Cadillac tax” since the time of the ACA's drafting in Congress.
The thresholds that trigger the tax are higher than those initially proposed when details of the ACA were hammered out, a change made largely to win the support of labor unions, which complained that lower limits would disproportionately affect union workers' health plans.
However, many employers are coming to realize that the excise tax will affect them and are starting to prepare, according to management-side attorneys.
Ronald Kramer, a partner with Seyfarth Shaw LLP in Chicago, in an interview Nov. 12 said although “a lot of employers don't have to worry about it, others are sitting there realizing” the costs of inaction.
Parties to collective bargaining agreements in recent years have been reluctant to negotiate changes in response to the excise tax because the year 2018 seemed so far off, Kramer said.
However, “beginning in 2015, if you negotiate a three-year contract, which is pretty standard, you're going to be in the middle of the Cadillac tax,” Kramer said. “Next year is going to be the first time people are going to sit down and look at it closely and say, we need to deal with this.”
Ideally, Kramer said, employers will “negotiate language to treat unionized employees like everyone else,” which will allow “whatever changes are necessary” to bring a health plan under the excise tax threshold. However, he acknowledged, “that's not necessarily going to be doable” because the terms of a given plan often are negotiated by the union and the employer.
“Employers need to sit down and know which changes they need to negotiate now” in order to avoid the tax, Kramer said.
One such change would be to include in an agreement a provision to reopen contract talks on health benefits before the contract term is up, Kramer said, either with an annual contract reopener or one in 2017. However, he added, this practice essentially amounts to “putting off until tomorrow what we should be doing today,” and it could result in protracted negotiations if language limiting the time frame is not included.
“If you're going to do a reopener, from the employer side, you better be sure to reopen far enough in advance to get the negotiations done” and not let them drag on, Kramer said. He also recommends that employers seek language allowing the implementation of health-care terms if the reopened negotiations take too long.
“Employers need to sit down and know which changes they need to negotiate now” in order to avoid the tax, Kramer said.
Employers generally are seeking the flexibility to revise health-care benefits in order to keep their plans under the tax threshold, Kramer said. In one instance, he said, an employer—Boeing Co.—was able to secure contract language with the International Association of Machinists allowing it to revise its health plan as necessary to keep it from triggering the excise tax.
According to a summary of the agreement, Boeing and the Machinists will meet annually beginning in 2018 to “make any necessary design changes” in order to avoid the tax. “In the event any taxes, including excise taxes, or fees are levied on the health care benefits as mandated by state or Federal legislation and design changes are not sufficient to avoid such taxes or fees, these taxes or fees will be the responsibility of the employee and the retiree,” the summary said.
Generally, when it comes to passing costs on to employees, Kramer said, increased deductibles and co-payments are the principal ways employers accomplish that goal.
On the union side, Shaun O'Brien, assistant policy director for health and retirement with the AFL-CIO, told Bloomberg BNA Oct. 29 that the excise tax is “absolutely coming up in bargaining,” although the issue comes up with some contracts and not others, because of the variations between unions and health plans.
“Certainly there is a sense that in many cases, employers are using the specter of the excise tax on high-cost health plans as just another argument to do what they've been doing all along: to promote changes in how costs are shared, and to push cost-shifting onto workers,” O'Brien said.
On top of that, he said, the Internal Revenue Service has not yet provided any guidance on the excise tax, so a lack of information contributes to a lack of understanding of the effects of the tax, he said.
“You have a situation where employers are trying to bargain over something where they have incomplete information about whether or not it's an issue,” O'Brien said. “I think this is a real challenge, and I think from the union side, bargainers are pushing back on this” by challenging employers about whether the excise tax truly presents a problem for a particular bargaining unit.
“You have a situation where employers are trying to bargain over something where they have incomplete information about whether or not it's an issue,” O'Brien said.
For example, O'Brien said, a union health plan might try to separate out dental and vision components from the core medical care components, in order to ensure that those costs are not included when calculating the total premium cost for purposes of determining whether a given plan is subject to the excise tax. He added, however, that the details of such a scenario may change in the coming years as federal agencies issue additional guidance.
John August, associate director of the Healthcare Transformation Project at the Cornell University School of Industrial and Labor Relations and the former executive director of the Coalition of Kaiser Permanente Unions, told Bloomberg BNA Oct. 31 that the excise tax itself is tied into the overall question of how to expand health-care accessibility and affordability.
“The real issue is that we have to figure out how to contain the cost of health care by improving its quality and improving the health of the population,” August said. “This very much does drive bargaining strategies, because employers and unions understand that the cost of health care is what has to be contained, as opposed to finding extraordinary ways to pay for it.”
Echoing some of what O'Brien said, August said employers were “coming to the bargaining table with actuarial projections saying that we expect somewhere between 30 and 40 percent of health plans” to hit the excise tax threshold. But, he added, “that's based, by and large, on actuarial projections that are unrealistic and way too high.”
Employers, August said, may seek to cut health benefits by establishing higher co-payments for workers, or to move them into defined contribution health-care plans, which include health savings accounts, rather than defined benefit plans, in order to counteract the effects of the excise tax.
“The labor movement is outraged over that,” August said. “Where unions don’t have a lot of bargaining power, employers are going to try to move people into that [type of plan] to use the excise tax as a kind of scare tactic.”
Larger unions and health and welfare funds “are effectively resisting the excise tax threat because they're emphasizing in bargaining, ‘we don't think your projections are right, and we have the means to show that,'” August said.
Union health and welfare plans, along with employers, increasingly are turning to “value-based purchasing” as a way to contain health-care costs, August said. In order words, the health plans may seek to “direct purchasing of health care to providers they know have a record of actually doing it at a better cost, and with better quality,” he said.
For example, union health plans could negotiate lower rates for certain health-care services and work with pharmaceutical suppliers to reduce the cost of prescription drugs.
By some estimates, August said, some $700 billion per year in health-care spending is “just wasted on unnecessary services, administrative costs and missed preventative opportunities. I think the value-based purchasing concept is the way to drive all of that to improve standards.”
Mitra Behroozi, the executive director of the 1199SEIU Benefit and Pension Funds in New York, told Bloomberg BNA Nov. 3 that her plan, which is largely funded by employers, would successfully avoid the excise tax, according to actuarial projections. The fund was cited by August as a good example of one that was able to use its leverage to drive down health-care costs.
Members of 1199SEIU Healthcare Workers East recently ratified an agreement with the League of Voluntary Hospitals and Homes of New York covering some 70,000 workers. The contract preserved the union's health plan, which Behroozi described as a “no-copay, no-deductible, no-coinsurance” plan, although it allows the parties to negotiate changes to the structure of the health plan for the next contract. The plan's board of trustees is made up of both employer and union representatives.
Behroozi said the 1199SEIU plan provides workers with generic drugs free of charge, but if they request a brand-name medication when there is a generic equivalent they pay close to the full cost, unless they obtain a medical justification from a doctor. In that way, she said, the fund saves money.
In addition, she said, the fund has arrangements with “exclusive providers” of laboratory or radiology services, which helps reduce costs.
“Those kinds of things where we use our purchasing power on behalf of our members to get the best deal, then make those available to members in a way that can be zero-cost to them” help to keep the fund in good shape, Behroozi said.
As for collective bargaining, Behroozi said occasionally, when contracts are negotiated, “management will say, ‘we can't keep doing this.'” But employer representatives, “especially those who serve as trustees” of the union health plan, “see how our plan is actually cheaper than a lot of others, because we're able to drive all the spending in one way.”
“This doesn't mean it's always smooth and easy at the bargaining table,” Behroozi said, but employer representatives “come to these trustee meetings and roll up their sleeves, and everyone's looking for the same thing: to preserve the [plan's] dollars and preserve access for members.”
Wellness programs and disease management programs, both of which are often suggested by employers as ways to reduce health-care costs, also may come up during bargaining, but August, of Cornell, drew a contrast between them.
“You'll hear a lot about wellness programs, but the fact is that there is very little evidence that those wellness programs actually work to reduce costs,” he said. By contrast, disease management programs, which “incentivize people to have their cholesterol checked, have their blood pressure checked” and take other steps to manage health conditions, can help keep costs in check, he said.
Kramer, of Seyfarth Shaw, agreed that wellness programs have not been proven to effectively lower health care costs. Despite the fact that unions may agree to participate in a wellness program during bargaining, the issue with the programs “is you don't know whether you have any savings,” Kramer said.
In addition, Kramer pointed to recent actions by the Equal Employment Opportunity Commission on wellness programs as a reason employers might think twice about adopting one or proposing one in bargaining.
The EEOC recently contended that a wellness program at Honeywell International Inc., where many workers are union-represented, was unlawful under the Americans with Disabilities Act because it compels employees to submit to health examinations that are not job-related.
“A lot of people are concerned with wellness programs, but there's not enough data to prove they save any money,” Kramer said.
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