CadillacOne of the mandates of the Affordable Care Act is that employers pay a 40% excise tax on the value of high-cost health plans – the ‘Cadillac Tax’. Scheduled for implementation beginning 2018, the tax is calculated as 40% of the excess of total per employee per year (PEPY) health care costs above threshold limits of $10,200 for individual coverage and $27,500 for family coverage.

As the regulation now stands, it is anticipated that 15% of active employer plans will incur the tax in 2018. Many companies are already making plan modifications in an attempt to mitigate its impact – reducing benefits, increasing premium contributions and implementing population health and plan management strategies to keep costs down, while maintaining coverage levels.

While the intent of the mandate is to provide a source of funding for other aspects of ACA by taxing the benefit-rich plans that insulate workers from the high cost of care – thereby encouraging overuse resulting in unnecessary testing, hospital visits and the like – the regulation is seriously flawed.

Dollar tax thresholds for families and individuals do not take into account the variances in cost of care associated with geographic location (i.e. hospital costs in Boca Raton, FL vs. Butte, MT), nor do they consider the health risk of the population (i.e. older workers are more likely to face a catastrophic illness). This means that employers with older workers or workers facing greater risk are more likely to incur the tax, as well as those companies located in cities with typically higher hospital and physician rates.

If nothing else, the mandate has generated one positive outcome by giving politicians from both political parties something they can actually agree on – that the Cadillac Tax is flawed.