Health Service System City & County of San Francisco Affordable Care Act (ACA) Excise Tax in 2018 and Beyond for City and County of San Francisco Board Forum: November 12, 2015 Prepared by: Aon Hewitt | Consulting | Health & 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) ■ Thresholds are as follows: 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 Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 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 are indexed by Consumer Price Index for All Urban Consumers (CPI-U) (plus 1% in 2019 only) — An additional $1,650 / $3,450 for single / family may apply for high- risk occupations such as police and firefighters, telecom workers, and pre-Medicare retirees Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 3
Excise Tax Starting in 2018 on High-Cost Employer Medical Plans (continued) ■ Coverage subject to tax includes medical (fully insured and self-funded), self- funded dental, self-funded 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 3,443 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. Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 4
The HSS Perspective ■ HSS requested that Aon Hewitt use their analytical toolkit 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 and by employment status (Active, Pre-Medicare and Medicare Retiree). ■ The City Plan Excise Tax liability has reduced significantly due to the reduction in premiums adopted by the HSB at the May 14, 2015 meeting. Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 5
Results No Blending of Pre-Medicare Retirees and Medicare Retirees ■ The combined results of our projection are as follows: Estimated Excise Tax by Year Year Crossing Threshold Group Enrollment 2018 2019 2020 Single Family Active 15,831 $0 $30,000 $1,232,000 2019 2023 Blue Shield of Pre-Medicare Retiree 2,614 $8,828,000 $10,111,000 $11,573,000 2018 2018 California Medicare Retiree 5,854 $0 $0 $0 2043 2053 Active 21,585 $0 $0 $0 2031 2034 Kaiser Pre-Medicare Retiree 2,726 $2,275,000 $2,544,000 $2,920,000 2018 2029 Permanente Medicare Retiree 9,571 $0 $0 $0 2051 2061 Active 615 $105,000 $223,000 $365,000 2018 2021 City Plan Pre-Medicare Retiree 559 $241,000 $368,000 $519,000 2018 2021 Medicare Retiree 5,593 $0 $0 $0 2040 2047 Total 64,948 $11,449,000 $13,276,000 $16,609,000 ■ The Excise Tax resulting from Pre-Medicare Retirees represents 99% of the estimated assessment in 2018. ■ The Excise Tax resulting from the City Plan Actives represents 1% of the estimated assessment in 2018. The January 8, 2015 Board report estimated the Active Excise Tax at $1,683,000 and the Early Retiree estimate at $1,441,000. Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 6
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: Estimated Excise Tax by Year—Blended Retirees Year Crossing Threshold Group Enrollment 2018 2019 2020 Single Family Active 15,831 $0 $30,000 $1,232,000 2019 2023 Blue Shield of Pre-Medicare Retiree 2,614 $0 $0 $0 2023 2030 California Medicare Retiree 5,854 $0 $0 $0 2019 2033 Active 21,585 $0 $0 $0 2031 2034 Kaiser Pre-Medicare Retiree 2,726 $0 $0 $0 2035 2045 Permanente Medicare Retiree 9,571 $0 $0 $0 2035 2050 Active 615 $105,000 $223,000 $365,000 2018 2021 City Plan Pre-Medicare Retiree 559 $0 $0 $0 2035 2040 Medicare Retiree 5,593 $0 $0 $0 2035 2042 Total 64,948 $105,000 $253,000 $1,597,000 Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 7
Results Blended Retirees (continued) ■ Blending the Pre-Medicare and Medicare rates reduces the estimated Excise Tax by 99% in 2018. ■ 100% of the remaining Excise Tax is from the City Plan Active group. This tax is at a much lower amount than the previously estimated amount of $1,683,000 which was presented on January 8, 2015 to the HSB. Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 8
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 $11,449,000. — The Kaiser Permanente plans have the potential of incurring a cost of $2,275,000 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 (e.g., increase copays) to reduce the tax liability. This amount is expected to be eliminated with blending. — The Blue Shield of California (BSC) plans have the potential of incurring $8,828,000 cost in 2018, purely driven by pre-Medicare retiree cost. This amount is expected to be eliminated by blending. In both instances, consideration should be given to reducing benefits (e.g., increasing copays) to reduce the tax liability. Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 9
Conclusion (continued) ■ The result of the Excise Tax assessment is as follows (continued): — The UnitedHealthcare (UHC) plans have the potential of incurring $346,000 cost in 2018, with $105,000 resulting from actives and $241,000 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 the City Plan for actives given the magnitude of the projected tax. ■ Aon Hewitt will continue to work with HSS to identify opportunities to reduce this tax as much as possible. Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 10
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