Health law's 'Cadillac tax' worries Sonoma County officials

SEAN SCULLY
THE PRESS DEMOCRAT

Sonoma County taxpayers could face $4.5 million a year in penalties under the so-called "Cadillac Tax" set to go into effect in 2018 as part of the Affordable Care Act, say county officials.

Under one scenario, the potential penalties could wipe out most of the savings from pension changes and other benefit reductions the county negotiated with its unions in 2013. Those changes were supposed to save the county about $6 million per year.

The tax is part of the sprawling health care reform package passed in 2010. It is intended to raise revenue to pay for various aspects of the plan, including federal subsidies for people who cannot afford health insurance, and also to help keep down the rate of medical inflation by discouraging the unnecessary use of costly medical tests and procedures that can be a product of high-end, luxury policies.

Supervisors suggested last week that they would look at ways to hold down the value of the health plans to avoid having to pay the tax.

"We need to offer something other than these Cadillac options," said Supervisor Shirlee Zane. Yeah, the benefits are great, but it's really expensive."

Nationally, counties are just beginning to grapple with the possible cost, said Paul Beddoe, deputy legislative director of the National Association of Counties. Counties, both unionized and non-union, look at health plans as a valuable recruiting tool when competing with private employers who may pay more generous salaries.

Despite the attention the issue is receiving, Beddoe said the full scale of the problem is unclear. The association is surveying its members and is hoping to have better data on how many counties might be affected by the tax by later this summer.

"I really do worry about the (Cadillac) tax, what that really means, and I think it's been glossed over," in most discussions of the Affordable Care Act, Chairman David Rabbitt said last week after hearing the staff estimate. "If we got hit with a $4.5 million bill today, what the heck would we do?"

The national health care overhaul places a 40 percent tax on insurance premiums above a set level - in its first year likely to be $10,200 for a single employee and $27,500 for a family, though that would adjust for inflation in later years.

The average family plan in the U.S. cost $16,351 last year, according to the latest annual survey by the Kaiser Family Foundation and the Health Research & Educational Trust.

Premiums for the most expensive family plan available to Sonoma County employees exceed $33,000 per year, though the vast majority of workers opt for a cheaper plan offered by Kaiser Permanente, which cost just more than $22,000 for a family.

About 56 percent the cost of Sonoma County work force health plans is paid by workers under a 2008 plan in which county government pays $6,000 per year no matter what plan an employee selects. The county pays a total of $18.1 million per year for health premiums while employees pay $23 million. The county also pays about $4 million per year in other health care allowances for members of some of the unions representing county employees.

If the tax were imposed today, only about 300 county employees covered by a county-run insurance system would be above the threshold, county Risk Manager Marcia Chadbourne said. The remaining 2,900 covered employees are in the Kaiser plan, which currently falls below the threshold.

If, however, one assumes a 7 percent medical inflation rate for health premiums, a figure suggested by the county's benefits consulting firm, The Segal Company, all county employees will exceed the threshold when the tax is imposed in 2018, Chadbourne. That would trigger an average of $800 per year in taxes for each Kaiser-enrolled employee and about $2,900 each for the more expensive county-run plan.

"That tips you off it will likely be the county health plan that will need some plan design alignment," Chadbourne said in presenting her estimate.

Unions that negotiate salaries, health insurance and other benefits for county employees quickly dismissed Chadbourne's estimate, saying her projections were little more than guesswork.

"There is no basis for those numbers," said Bill Robotka, a representative of the Engineers and Scientists of California, Local 20, which represents more than 200 counselors and other professionals in county government. "She is doing a kind of speculative calculation."

Indeed, after decades of steep increases in the cost of medical care, the rate of medical inflation began dropping in 2010 was about 1 percent between mid-2012 and mid-2013, according to the Commerce Department, the slowest rate of growth in four decades.

Robotka said labor leaders have been cooperating in helping to keep health premium costs under control, and will continue to do so as they go into negotiations in 2015 for new contracts.

"We've got a lot of talking to do," he said. "If it looks like costs are getting out of control, as we have already done, we will grapple with it, labor and county together."

Chadbourne admitted that her projection is dependent on a large number of unpredictable factors, but she said it is her job to warn Supervisors of possible risks, particularly since the Cadillac Tax would be paid by employers, not employees.

"I have to talk about the worst-case scenario," she said. "The reality is, it may be a little bit better."

Chadbourne said it is clear that without changes in the law or in the cost of the county's two health plans, Sonoma County will be on the hook for millions of dollars in taxes that year.

The tax is part of the complex funding mechanism to pay for the health care reform act. The Congressional Budget Office has estimated that the tax, intended to touch only the wealthiest of companies and plans, will offset about $80 billion of the cost by 2023, about $5 billion when it first goes into effect in 2018, according to the non-partisan Robert Wood Johnson Foundation.

Critics, however, say that the rate of medical inflation will push many moderate plans over the threshold, just as Chadbourne's estimates suggest in Sonoma County.

The City of Santa Rosa, with about 1,200 full time employees, has lower health premiums than the county, in part because city's retirees are covered under separate insurance, city Risk Manager Lynne Margolies said. It does not appear that any city employees would be subject to the Cadillac Tax if it were imposed today, but she plans to keep a close eye the tax since an unexpected spike in medical costs could push the city over the threshold as well.

While Sonoma County supervisors had heard previously about the possibility of exposure to the Cadillac Tax, also known as an excise tax, they seemed startled last week by Chadbourne's estimate.

"We're all hoping that $4.5 million will go away or become much less," Supervisor Mike McGuire said, holding out ope for changes in the federal law or unexpectedly low medical inflation.

Public and private unions are agitating at the federal level to change or eliminate the Cadillac Tax because health benefits have been an important way to enhance members' compensation without making employers increase salaries, said Victor McKnight, a Petaluma insurance broker and a consultant on Affordable Care Act implementation.

Employers, including governments, are only just beginning to confront the potential cost of the tax, he said.

"Everybody knows about it in the industry. We're basically trying to deal with all the other issues right now," he said. "And we're not talking about it as much as we should be."

Rabbitt said employees, both public and private, will be surprised to find the value of their health plans decreasing as the 2018 tax deadline approaches.

"What's going to happen in 2017 is going to be very, very interesting, and mind-blowing for a lot of people, He said. "We're all going to have our insurance plans dropped to a lowest-common-denominator and deal from there," he predicted.

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