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PEBB May Be Able to Avoid Excise Tax Without Increasing Costs to Families

Mercer consultant Emery Chen proposed taking $17 million of the $101 million in tax savings PEBB would make by restructuring its health benefit plans, and using it to offset the increased cost to employees with families for six years.
January 21, 2015

Oregon’s Public Employee Benefits Board’s consultants have devised a plan which may delay making state workers with families pay for an increase to their healthcare premiums, which could come from plan changes meant to avoid a looming 2018 federal excise tax.

PEBB’s premium structure favors families over single people, but the Affordable Care Act is compelling the state to make employees with families pay a premium that more accurately reflects their costs, and to lessen the burden on individuals. Without any change, PEBB will be on the hook for an annual tax of $15 million to $19 million in 2018, which will grow to $21 million to $51 million by 2027.

But in a kind of bait-and-switch that would still meet the requirements of the federal healthcare law, Mercer actuarial consultant Emery Chen laid out a proposal in which PEBB would restructure its plans to adhere with the law by increasing the amount paid by families and reducing the amount paid by single people -- and then offsetting the increased costs to families by giving them a subsidy to pay the difference.

That subsidy, which works out to about $20 a month per family, would be paid for three years starting in 2016, then decreased by $5 a year for three years starting in 2019.

Only 5 percent of the cost of their healthcare premiums is deducted from public employee paychecks -- individuals currently pay about $57 a month in premiums for their healthcare, while families -- which includes a spouse and children -- pay $79 a month.

Single employees would still see savings from conforming to the Affordable Care Act plan structure, with premiums reduced from $57 a month to $42 a month by 2018. Without the subsidy, the family plan premium would rise from $79 to $113 in the same time frame. Families will still see some rise in their premiums because of inflation with the subsidy, putting their share of the premium at $93 in 2018.

Chen said offering the subsidy to employees with families would not affect cost controls imposed by the Legislature, since he interpreted those to apply only to the rise in the cost of healthcare claims. He and others, such as PEBB chairman Paul McKenna, said the subsidy was justifiable because making the shift to conform to the Affordable Care Act will save PEBB at least $101 million through 2021, while the subsidy to families impacted by the shift will cost PEBB $17.2 million over the same time.

“The whole idea of this phase-in is to get ahead of the curve,” McKenna said.

PEBB vs OEBB

PEBB is already better poised to diminish the impact of the federal excise tax than the Oregon Educators Benefit Board, which will pay some tax regardless of what action it takes. But if PEBB restructures its premiums and stays true to the budget caps promised by Gov. Kitzhaber -- it can avoid paying the tax indefinitely.

OEBB, on the other hand, will pay at least $600,000 a year, according to consultants at Towers Watson, even if it does everything it can to restructure its plans and reaps the savings that Kitzhaber anticipates. OEBB’s tax is also harder to manage since it provides healthcare coverage to roughly 200 different school districts and other organizations across Oregon, all of which must restructure their health plans individually to reduce the overall organization’s tax, while PEBB manages healthcare coverage primarily for state and university employees.

The budget ordered by the Legislature caps the growth in healthcare costs at 3.4 percent a year for PEBB as well as OEBB -- the same optimistic growth rate imposed upon the coordinated care organizations, which operate the state Medicaid program. The excise tax from the Affordable Care Act is linked to the rise in the consumer price index, which has traditionally shown 3 percent inflation.

Kitzhaber’s budget goals depend on the assumption that the new PEBB contract (and a new OEBB contract to come) will coordinate care better, so that public employees get more thorough care without redundant and over-use of high-cost care options, like trips to the emergency department.

Dr. Jeanene Smith, the chief medical officer for the Oregon Health Authority and the vice-chairwoman of the PEBB board, noted at one point in Tuesday’s board meeting that the new contracts are designed so that the insurers share in some of the risk and reward for the health and the cost of treating state workers. If the state saves money, these insurers would share in that reward.

Smith made the point to argue against paying for new health engagement programs for public employees. Rather, she said, the insurers should offer these for free since a healthier workforce will be cheaper to insure in the long-run.

“We should not be adding costs. [Insurers] should be doing them because [they’re] held accountable,” Smith said. But that logic is a progressive leap, and it might be one that makes the insurers who spend money operating these programs bluff.

Chris can be reached at [email protected].

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