It’s been a tough seven years for the American Bottom 40, the four in every ten Americans at the low end of the nation’s compensation scale. Between 2007 and 2014, they endured cuts in both wages and benefits. Meanwhile, for those higher on the scale, better benefits eased the impact of slower wage growth while the top 10% saw both wages and benefits go up.
The American Bottom 40 continues to bear the economic brunt. Wages and salaries increased just 0.2% for all civilian workers during the second quarter, the slowest pace on record. Private industry compensation was even more sluggish; benefits declined 0.2% while wages and salaries increased 0.2%, stalling total compensation growth at zero.
Cadillac Tax Driving High Deductibles Now
Targeted at the top of the compensation scale, the ACA’s Cadillac tax on high spending health plans should not affect anyone else, especially not the American Bottom 40, but it already is. Employers are rapidly adopting high deductible health plans to avoid the 40% tax on health plan costs above $10,200 for an individual and $27,500 for a family.
Although the excise tax does not apply until 2018, the timing is as immediate as tomorrow for employers making benefit plan changes. As many as 36.9% of people under 65 with private insurance coverage were enrolled in a high deductible plan last year, reports the National Center for Health Statistics.
When PwC recently surveyed employers, 85% said they have implemented or are considering greater employee cost sharing. Since 2012, the percentage of employers offering only high-deductible plans for employees has nearly doubled from 13% to 25%.
40% Lack Assets to Pay High Deductibles
The Kaiser Family Foundation warns that nearly 40% of U.S. households do not have enough liquid assets to meet individual and family deductibles of $1,200 and $2,400 respectively. Doubling the deductible levels increases to 49% those who do not have enough liquid assets.
Nevertheless, in one telling example, all 30,000 employees of the Carolinas Healthcare System will have only one health coverage option next year – a high deductible plan. It will require individuals to pay up to $5,600 and families up to $11,200 a year out of pocket in deductible, copays and coinsurance. The maximums are just below the Accountable Care Act limits of $6,600 and $13,200.
The Health Account Catch
Health Reimbursement Accounts (HRA), Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) could help employees shoulder the extra costs, but there is a catch. Any pre-tax funds an employer deposits in an HRA or HSA, or an employee socks away in an HSA or FSA, will be included in calculating the “cost of applicable coverage” and thus any Cadillac tax liability.
Already, employers wary of crossing the cost threshold are planning to reduce or eliminate their HSA pre-tax contributions to avoid the Cadillac tax, according to the American Bankers Association HSA Council. Although the council forecasts most HSAs will not trigger the tax, employers are playing it safe anyway by avoiding HSAs or reducing their contributions.
HSAs and HRAs had been growing, more than doubling in participation and increasing nearly fourfold in assets since 2008. Last year, $22.1 billion in assets filled 10.6 million HSA and HRA accounts. According to the Employee Benefits Resource Institute (EBRI), 27 percent of employers with 10–499 workers and 48 percent of employers with 500 or more workers offered either an HRA- or HSA-eligible plan. These plans covered about 26 million people in 2014. Accounts with an employer contribution had an average higher balance.
Bottom 40 Skipping Health Care
Faced with higher deductibles, stagnant wages and the prospect of limited savings opportunities, the American Bottom 40 are cutting back on health care. PwC found that the cost of care led 28% of those with employer coverage to skip seeing a doctor. In addition, 24% skipped medications, 20% skipped seeing a specialist, 20% skipped seeing a specialist and 16% skipped a procedure.
In theory, the money employers save by reducing excessive health spending to avoid the Cadillac Tax would go back to employees in the form of higher wages, enabling them to shop intelligently for health care. It is not happening, so what’s to be done?
Fixing the Cadillac Tax
Unions and employers want to eliminate the Cadillac tax. That will be a heavy lift. Despite its infirmities, the Cadillac tax is destined to be a major funding source for the Accountable Care Act. In any event, there is some merit to incenting employers to scale back overly rich health benefit plans, which drive up healthcare costs for everyone.
This week, the New York Times acknowledged problems with the Cadillac tax, but stopped short of calling for its repeal. Instead, it called for unspecified “smart ways” to modify the levy. Quick with a suggested solution are the financial institutions who administer HSAs. Not surprisingly, they want Congress to exempt HSAs from the Cadillac tax. The Business Roundtable is more generous. Along with HSAs, it would also exempt HRAs and FSAs.
If the American Bottom 40 had a lobby, they might suggest a different approach. Keep the Cadillac tax, but restore its focus on high end health spending. Do not exempt all HSAs, HRAs and FSAs from calculating coverage cost and tax liability.
Instead, exempt only accounts of employees who are not considered highly compensated employees (HCE) under IRS regulations for 401(k) savings plans. For 2015, that would be anyone earning less than $120,000. Alternatively, start with the low end of the scale, use a percentage of the federal poverty level as a demarcation point, and exempt the savings plans of those below it.
A modest but targeted reform, this should persuade employers to halt the retreat from health accounts, making it easier for the American Bottom 40 to pick up that prescription and put food on the table. Now, that would be huge!
But now I’m crusin’
And I ain’t looking back
I still got the blues
But I got’em in my Cadillac
Johnny Bassett and the Blues Insurgents