Health Care Tax Faces United Opposition From Labor and Employers

JULY 21, 2015

At the paper mill in Longview, Wash., Kurt Gallow and his wife, Brenda, are worrying about his company's proposed new health care plan, which would require workers to pay as much as $6,000 toward their families' medical bills.

Mrs. Gallow's diabetic condition almost certainly will mean thousands of dollars more a year for her care alone, if the new plan is put in place, which may happen as early as next year.

“Some of the people with health problems will definitely pay more,� said Mr. Gallow, who is president of the local unit of the Association of Western Pulp & Paper Workers.

The union is now in heated negotiations with the mill's owner, KapStone Paper and Packaging, over benefits, among other issues. The couple and many other employees have been enrolled in a popular Kaiser Permanente health maintenance organization, which charged just $25 for a doctor's visit.

But that may change by January. Pointing to the looming new tax on high cost insurance plans imposed under the federal health care law, KapStone wants to replace its existing policies with plans that could prove far more expensive for workers and their families. By doing so, the company would save almost $3 million in additional taxes in just the first two and a half years.

Called the Cadillac tax, it applies to an individual policy costing more than $10,200 a year and a family policy over $27,500. The tax goes into effect in 2018.

With less than three years before the tax is imposed, KapStone and other employers are weighing their options.

“If you look into the future, it's part of the reason they want out,� Mr. Gallow said. And while companies have long been trimming their benefits as a way to lower costs, they now have another reason.

KapStone declined to comment.

For its part, Kaiser thinks its plans will continue to appeal to many employers, despite the tax. “Kaiser Permanente is confident that we can continue to offer our customers comprehensive, affordable health care coverage regardless of how this tax provision is ultimately applied,� said a spokesman, Chris Stenrud.

“As a general matter, it has become a pretty prominent part of the discussion in many of the negotiations,� said Shaun O'Brien, a policy official with the A.F.L.-C.I.O.

But the tax is also galvanizing many employers and their unions to push for its repeal. The 40 percent excise tax has always been controversial, and opposition to it is gaining traction.

“As we get closer to 2018, we're starting to hear the organic resistance out there,� said Representative Joe Courtney, a Connecticut Democrat who has proposed a bill to repeal the tax. The bill has gained nearly 130 co-sponsors, including more than 100 fellow Democrats, and with supporters ranging from the U.S. Chamber of Commerce to the A.F.L.-C.I.O.

In New Hampshire, Representative Frank Guinta, a Republican, has a similar bill that has almost 70 co-sponsors from his side of the aisle. A former mayor of Manchester, Mr. Guinta says he has been hearing from local governments about the potential impact of the tax. He says he thinks Congress can agree on the need for repeal.

“There is very significant bipartisan support,� he said.

A new coalition comprising major corporations, including Cigna and Pfizer, as well as union groups and associations, called the Alliance to Fight the 40, plans to begin a formal campaign against the tax later this month.

“Business and labor are united in their opposition and concerned about the impact of the tax,� said Katy Spangler, a health policy executive with the American Benefits Council, a member of the alliance. It is also in discussions with members of the Senate about a bill.

Because the thresholds for activating the tax are linked to overall inflation rather than the faster pace of rising medical costs, more insurance plans are likely to be affected.

Both the employer and the worker's contributions are counted toward the cost, and the tax is levied on the amount above the $10,200 threshold. A plan that costs $15,200, for example, would be taxed on the $5,000 that it was above the threshold, resulting in a $2,000 liability.

About two-thirds of employers recently surveyed by Aon Hewitt, a consultancy, estimate they will have at least one health plan that will be taxed within five years, and three-quarters think the majority of their plans will be subject to the tax after 2028. “Every employer is going to face a decision point,� said Jim Winkler, a health benefits executive at the consultancy.

While Mr. Winkler said employers had been slow so far to make significant changes, many have begun accelerating efforts to contain costs as a way to avoid the tax.

Some companies, like Cummins, the engine manufacturer, have already taken steps to reduce benefits as a way of avoiding the tax. And universities like Harvard and George Washington have also made changes to their coverage. Public employers like the City of Manchester are also scrambling to figure out how to handle the potential liability.

Over the last year, employers and unions have both been studying the impact of the tax on the plans now being offered, said Edward Kaplan, a benefits expert at Segal Consulting. “No one wants to pay it,� he said.

Proponents argue that the tax is a useful antidote to overly generous health plans, which they contend encourage people to get more medical care than they need. Supporters of the tax also see it as a way for the country to move away from the tax exclusion of health benefits, one reason there is such a heavy reliance on employers to provide health coverage.

It is also an important source of funding for the Affordable Care Act. The Congressional Budget Office estimates the tax will generate $87 billion over a decade.

But critics argue that the tax penalizes employees with plans that are expensive rather than generous. “Geography, age, gender and occupation are much more significant in how you come up with the cost of the premium,� Mr. Courtney, the Connecticut representative, said. “It's such a blunt instrument.�

Employers that have unusually high medical costs, like a premature baby whose care costs $5 million, or that have a work force with a large number of people with expensive illnesses, could also be liable for the tax.

Mr. Courtney also questions whether the tax will raise nearly as much as projected. Most of the revenue is estimated to come from taxes on the higher wages workers are supposed to get in lieu of benefits, but there is substantial disagreement over whether companies will pay their employees more.

Saving a dollar on health benefits doesn't necessarily translate to an extra dollar of wages, Ms. Spangler said. “That's just not something we're seeing with our members.�

Many employers have been taking steps like offering only high-deductible plans to their workers, said Brian Marcotte, the chief executive of the National Business Group on Health. Others are looking at less expensive plans with a much more limited network of hospitals and doctors, or are considering initiatives like on-site health clinics or programs to improve workers' overall health as a way of lowering costs.

But Mr. Marcotte emphasized that employers feel that the tax represents an unfair penalty on coverage. “Employers would rather see it repealed,� he said.

Because of the way the tax calculates the cost of coverage, employers are also splitting off their dental and vision plans and separating coverage of early retirees from active employees to lower the dollar amount counted. Health savings accounts, if funded by an employer, appear to be counted as part of the total cost, although the final rules are not yet in.

At this stage, it is unclear whether Congress will coalesce around a repeal. When the health care law was passed in 2010, many thought the provision would go away, said Timothy S. Jost, a professor at Washington and Lee University School of Law. People thought “this will never go into effect,� he said, but, with 2018 only a few years away, “It looks like it might happen.�

Representatives Courtney and Guinta say they are confident Congress will vote to repeal the tax, and foresee mounting pressure from constituents to do so.

“Members are going to hear a lot of noise,� Mr. Courtney said.