City & County of San Francisco Affordable Care Act (ACA) Excise - - PowerPoint PPT Presentation

Prepared by: Aon Hewitt | Consulting | Health & Benefits

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

Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 2

Affordable Care Act Compliance

■ 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:

Excise Tax on High Cost Employer Health Care Coverage (Cadillac Tax)

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 3

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

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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.

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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.

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Results

■ The combined results of our projection are as follows: ■ 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.

No Blending of Pre-Medicare Retirees and Medicare Retirees

Enrollment 2018 2019 2020 Single Family Active 15,831 $0 $30,000 $1,232,000 2019 2023 Pre-Medicare Retiree 2,614 $8,828,000 $10,111,000 $11,573,000 2018 2018 Medicare Retiree 5,854 $0 $0 $0 2043 2053 Active 21,585 $0 $0 $0 2031 2034 Pre-Medicare Retiree 2,726 $2,275,000 $2,544,000 $2,920,000 2018 2029 Medicare Retiree 9,571 $0 $0 $0 2051 2061 Active 615 $105,000 $223,000 $365,000 2018 2021 Pre-Medicare Retiree 559 $241,000 $368,000 $519,000 2018 2021 Medicare Retiree 5,593 $0 $0 $0 2040 2047 64,948 $11,449,000 $13,276,000 $16,609,000 Estimated Excise Tax by Year Group Blue Shield of California Year Crossing Threshold Kaiser Permanente City Plan Total

Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 7

Results

■ 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: Blended Retirees

Enrollment 2018 2019 2020 Single Family Active 15,831 $0 $30,000 $1,232,000 2019 2023 Pre-Medicare Retiree 2,614 $0 $0 $0 2023 2030 Medicare Retiree 5,854 $0 $0 $0 2019 2033 Active 21,585 $0 $0 $0 2031 2034 Pre-Medicare Retiree 2,726 $0 $0 $0 2035 2045 Medicare Retiree 9,571 $0 $0 $0 2035 2050 Active 615 $105,000 $223,000 $365,000 2018 2021 Pre-Medicare Retiree 559 $0 $0 $0 2035 2040 Medicare Retiree 5,593 $0 $0 $0 2035 2042 64,948 $105,000 $253,000 $1,597,000 Total Estimated Excise Tax by Year—Blended Retirees Group Blue Shield of California Year Crossing Threshold Kaiser Permanente City Plan

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Results

■ 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. Blended Retirees (continued)

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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

• f $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.

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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.

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Appendix 1

■ The combined results of our projection including Health Care FSA contributions are as follows: Non-Blended Retirees with Health Care FSA

Enrollment 2018 2019 2020 Single Family Active 15,831 $312,000 $454,000 $1,665,000 2018 2021 Pre-Medicare Retiree 2,614 $8,828,000 $10,111,000 $11,573,000 2018 2018 Medicare Retiree 5,854 $0 $0 $0 2043 2053 Active 21,585 $0 $0 $0 2027 2033 Pre-Medicare Retiree 2,726 $2,275,000 $2,544,000 $2,920,000 2018 2029 Medicare Retiree 9,571 $0 $0 $0 2051 2061 Active 615 $153,000 $271,000 $419,000 2018 2020 Pre-Medicare Retiree 559 $241,000 $368,000 $519,000 2018 2021 Medicare Retiree 5,593 $0 $0 $0 2040 2047 64,948 $11,809,000 $13,748,000 $17,096,000 Total Estimated Excise Tax by Year (with FSA) Group Blue Shield of California Year Crossing Threshold Kaiser Permanente City Plan EE Only % EE only $ Family Tier % Family Tier $ 15% $1,534 10% $1,683 11% $1,236 14% $1,444 5% $1,005 7% $1,291 FSA Election Data for Actives Plan City Plan Blue Shield of California Kaiser Permanente

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Appendix 1 (continued)

■ Health Care FSA data represents the 2015 actual enrollee election amounts. ■ Health Care FSA contributions increase the tax assessment for the active City Plan and create a tax assessment for the active BSC plan, for a total increase of $360,000 in the 2018 tax assessment. ■ The HSB may consider eliminating Health Care FSAs in order to reduce the tax liability. Non-Blended Retirees with Health Care FSA

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Appendix 2

■ Applying a reasonable interpretation of blending Pre-Medicare and Medicare rates produces the following: ■ The Health Care FSA contributions increase the active Excise Tax assessment ■ Blending has no impact on the additional cost of the active Health Care FSA of $360,000, or 3.14% of the tax assessment in 2018 Blended Retirees with Health Care FSA

Enrollment 2018 2019 2020 Single Family Active 15,831 $312,000 $454,000 $1,665,000 2018 2021 Pre-Medicare Retiree 2,614 $0 $0 $0 2023 2030 Medicare Retiree 5,854 $0 $0 $0 2019 2033 Active 21,585 $0 $0 $0 2027 2033 Pre-Medicare Retiree 2,726 $0 $0 $0 2035 2045 Medicare Retiree 9,571 $0 $0 $0 2035 2050 Active 615 $153,000 $271,000 $419,000 2018 2020 Pre-Medicare Retiree 559 $0 $0 $0 2035 2040 Medicare Retiree 5,593 $0 $0 $0 2035 2042 64,948 $465,000 $725,000 $2,084,000 Total Estimated Excise Tax by Year (with FSA)—Blended Retirees Group Blue Shield of California Kaiser Permanente City Plan Year Crossing Threshold

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Appendix 3—Excise Tax Calculation

Non-Blended Retirees and No FSA

Option Name Status Tier Estimated Enrollment Annual 2018 Member Premium Aggregate Premium Estimated Excise Tax in 2018 Estimated Excise Tax in 2019 Estimated Excise Tax in 2020 Estimated Excise Tax in 2021 Single 7,147 $9,882 Family 8,684 $23,856 Single 1,576 $22,904 Family 1,038 $35,428 Single 3,954 $5,089 Family 1,900 $10,622 Single 10,125 $7,422 Family 11,460 $18,027 Single 1,816 $14,982 Family 910 $23,474 Single 6,778 $4,265 Family 2,793 $8,774 Single 506 $10,720 Family 109 $23,976 Single 427 $13,259 Family 132 $26,584 Single 4,234 $3,921 Family 1,359 $7,635 Excise Thresholds:

For active employees and post-65 retirees, the thresholds used for this calculation were $10,200 for individual coverage and $27,500 for family coverage. For pre-65 retirees, the thresholds used for this calculation were $11,850 for individual coverage and $30,950 for family coverage.

Excise Tax (Not Tax Deductible) $2,392,000 $0 $0 2018 Estimated Coverage Cost $11,573,000 $12,996,000 $1,232,000 BSC Active Active $277,793,000 $0 $30,000 BSC ER Pre-65 $72,871,000 $8,828,000 $10,111,000 BSC Medicare Post-65 $40,302,000 $0 $0 $0 $0 Kaiser Permanente Active Active $281,736,000 $0 $0 Kaiser Permanente ER Pre-65 $48,569,000 $2,275,000 $2,544,000 $2,920,000 $3,320,000 $0 $0 Kaiser Permanente Medicare Post-65 $53,416,000 $0 $0 City Plan Active Active $8,038,000 $105,000 $223,000 City Plan ER Pre-65 $9,171,000 $241,000 $368,000 $11,449,000 $519,000 $682,000 $365,000 $536,000 $13,276,000 $16,609,000 $19,926,000 City Plan Medicare Post-65 $26,979,000 $0 $0 $0 $0 TOTAL 64,948 $818,875,000

Aon Hewitt | Consulting | Health & Benefits HSB Forum | Excise Tax in 2018 and Beyond | November 12, 2015 15

Appendix 4—Excise Tax Calculation

Blended Retirees and No FSA

Option Name Status Tier Estimated Enrollment Annual 2018 Member Premium Aggregate Premium Estimated Excise Tax in 2018 Estimated Excise Tax in 2019 Estimated Excise Tax in 2020 Estimated Excise Tax in 2021 Single 7,147 $9,882 Family 8,684 $23,856 Single 1,576 $10,166 Family 1,038 $19,386 Single 3,954 $10,166 Family 1,900 $19,386 Single 10,125 $7,422 Family 11,460 $18,027 Single 1,816 $6,530 Family 910 $12,386 Single 6,778 $6,530 Family 2,793 $12,386 Single 506 $10,720 Family 109 $23,976 Single 427 $4,777 Family 132 $9,312 Single 4,234 $4,777 Family 1,359 $9,312 Excise Thresholds:

For active employees and post-65 retirees, the thresholds used for this calculation were $10,200 for individual coverage and $27,500 for family coverage. For pre-65 retirees, the thresholds used for this calculation were $11,850 for individual coverage and $30,950 for family coverage.

$0 Kaiser Permanente Active Active $281,736,000 $0 $0 BSC Medicare $0 BSC ER Pre-65 $36,144,000 $0 Post-65 $77,029,000 $0 $0 $0 $0 Kaiser Permanente ER 2018 Estimated Coverage Cost $0 Excise Tax (Not Tax Deductible) $1,232,000 $2,392,000 BSC Active Active $277,793,000 $0 $30,000 City Plan ER Pre-65 $3,269,000 $0 $0 City Plan Active Active Kaiser Permanente Medicare Post-65 $78,855,000 $8,038,000 $223,000 $0 $0 Post-65 $0 $32,881,000 $0 $105,000 $0 $0 $0 $0 $0 $365,000 $536,000 $0 $0 $0 $0 Pre-65 $23,130,000 $0 $0 $0 TOTAL 64,948 $818,875,000 $105,000 $253,000 $1,597,000 $2,928,000 City Plan Medicare

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Appendix 5—Excise Tax Calculation

Non-Blended Retirees with FSA

Option Name Status Tier Estimated Enrollment Annual 2018 Member Premium Aggregate Premium Estimated Excise Tax in 2018 Estimated Excise Tax in 2019 Estimated Excise Tax in 2020 Estimated Excise Tax in 2021 Single 7,147 $9,882 Family 8,684 $23,856 Single 1,576 $22,904 Family 1,038 $35,428 Single 3,954 $5,089 Family 1,900 $10,622 Single 10,125 $7,422 Family 11,460 $18,027 Single 1,816 $14,982 Family 910 $23,474 Single 6,778 $4,265 Family 2,793 $8,774 Single 506 $10,720 Family 109 $23,976 Single 427 $13,259 Family 132 $26,584 Single 4,234 $3,921 Family 1,359 $7,635 Excise Thresholds:

For active employees and post-65 retirees, the thresholds used for this calculation were $10,200 for individual coverage and $27,500 for family coverage. For pre-65 retirees, the thresholds used for this calculation were $11,850 for individual coverage and $30,950 for family coverage.

Excise Tax (Not Tax Deductible) $3,099,000 $0 $0 2018 Estimated Coverage Cost $11,573,000 $12,996,000 $1,665,000 BSC Active Active $277,793,000 $312,000 $454,000 BSC ER Pre-65 $72,871,000 $8,828,000 $10,111,000 BSC Medicare Post-65 $40,302,000 $0 $0 $0 $0 Kaiser Permanente Active Active $281,736,000 $0 $0 Kaiser Permanente ER Pre-65 $48,569,000 $2,275,000 $2,544,000 $2,920,000 $3,320,000 $0 $0 Kaiser Permanente Medicare Post-65 $53,416,000 $0 $0 City Plan Active Active $8,038,000 $153,000 $271,000 City Plan ER Pre-65 $9,171,000 $241,000 $368,000 $11,809,000 $519,000 $682,000 $419,000 $595,000 $13,748,000 $17,096,000 $20,692,000 City Plan Medicare Post-65 $26,979,000 $0 $0 $0 $0 TOTAL 64,948 $818,875,000

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Appendix 6—Excise Tax Calculation

Blended Retirees with FSA

Option Name Status Tier Estimated Enrollment Annual 2018 Member Premium Aggregate Premium Estimated Excise Tax in 2018 Estimated Excise Tax in 2019 Estimated Excise Tax in 2020 Estimated Excise Tax in 2021 Single 7,147 $9,882 Family 8,684 $23,856 Single 1,576 $10,166 Family 1,038 $19,386 Single 3,954 $10,166 Family 1,900 $19,386 Single 10,125 $7,422 Family 11,460 $18,027 Single 1,816 $6,530 Family 910 $12,386 Single 6,778 $6,530 Family 2,793 $12,386 Single 506 $10,720 Family 109 $23,976 Single 427 $4,777 Family 132 $9,312 Single 4,234 $4,777 Family 1,359 $9,312 Excise Thresholds:

For active employees and post-65 retirees, the thresholds used for this calculation were $10,200 for individual coverage and $27,500 for family coverage. For pre-65 retirees, the thresholds used for this calculation were $11,850 for individual coverage and $30,950 for family coverage.

$0 Kaiser Permanente Active Active $281,736,000 $0 $0 BSC Medicare $0 BSC ER Pre-65 $36,144,000 $0 Post-65 $77,029,000 $0 $0 $0 $0 Kaiser Permanente ER 2018 Estimated Coverage Cost $0 Excise Tax (Not Tax Deductible) $1,665,000 $3,099,000 BSC Active Active $277,793,000 $312,000 $454,000 City Plan ER Pre-65 $3,269,000 $0 $0 City Plan Active Active Kaiser Permanente Medicare Post-65 $78,855,000 $8,038,000 $271,000 $0 $0 Post-65 $0 $32,881,000 $0 $153,000 $0 $0 $0 $0 $0 $419,000 $595,000 $0 $0 $0 $0 Pre-65 $23,130,000 $0 $0 $0 TOTAL 64,948 $818,875,000 $465,000 $725,000 $2,084,000 $3,694,000 City Plan Medicare

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Appendix 7—Excise Tax Calculation Assumptions

■ Non-single coverage combined and underwritten as family ("other than self-

• nly coverage").

■ Pre-Tax equivalent assumes that the medical vendors will be assessed a 0% tax liability on the penalty which may be passed on to the plan sponsor. ■ Estimated costs include the following expenses: medical and prescription drugs. ■ Plan costs are estimated by trending 2016 premium equivalent rates. ■ Assumed no plan design, network or other changes affecting expected costs (besides trend) between 2016 and 2018. ■ Enrollment and Rates based on 2016 information. High risk professions: law enforcement, fire protection, out-of-hospital emergency medical care, construction, mining, agriculture (not including food processing), forestry, fishing, or those employed to repair or install electrical or telecommunication lines.