Cities in a bind over looming tax on health coverage

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NEW YORK -- Cities and towns across the country are pushing municipal unions to accept cheaper health benefits in anticipation of a component of the Affordable Care Act that will tax expensive plans starting in 2018.

The so-called Cadillac tax was inserted into the Affordable Care Act at the advice of economists who argued that expensive health insurance with the employee bearing little cost made people insensitive to the cost of care. In public employment, though, where benefits are arrived at through bargaining with powerful unions, switching to cheaper plans will not be easy.

Cities including New York and Boston, and school districts from Westchester to Orange County, Calif., are warning unions that if they cannot figure out how to rein in health care costs now, the price when the tax goes into effect will be steep, threatening raises and even jobs.

"Every municipality with a generous health care plan is doing the math on this," said J.D. Piro, a health care lawyer at a human resources consultancy, Aon Hewitt.

But some prominent liberals express frustration at seeing the tax used against unions in negotiations.

"I think it was misguided all along," Robert B. Reich, the former labor secretary, said in an email. When the law was being written, he said, he worried that the tax was "a blunt instrument that could too easily become a bargaining chit for cutting back benefits of workers."

"Apparently, that's what it's become," said Mr. Reich, a professor of public policy at the University of California, Berkeley.

Under the tax, plans that cost above a certain threshold in 2018 -- $10,200 annually for individual plans and $27,500 for family plans, with slightly higher cutoffs for retirees and those in high-risk professions like law enforcement -- will be taxed at 40 percent of their costs in excess of the limit. (The thresholds will rise with inflation after 2018.)

State and local governments across the country tend to offer more expensive health plans than private businesses do, and workers often accept smaller wage increases to retain their benefits. Because of this, state and local government employees are expected to be disproportionately represented among those whose plans will be subject to the tax.

New York City expects its two most popular employee health plans to reach taxable Cadillac levels by 2018 or shortly after. This year, the city projects that it will pay a total of $7,128 for individuals and $18,249 for families in its most popular plan, including the costs the city pays into union welfare funds to cover prescription drug benefits. That is above the national average for employer-sponsored health care coverage, which last year was $5,615 for single coverage and $15,745 for family coverage, according to a 2012 Kaiser Family Foundation survey.

The total health care cost for the city's nearly 300,000 municipal employees, pre-Medicare-age retirees and their dependents is expected to approach $8 billion by 2018.

In a letter in April to the head of a labor coalition, Caswell F. Holloway IV, deputy mayor for operations, said the Cadillac tax would cost New York City $22 million in 2018, increasing to $549 million in 2022. (This year, the total city budget, excluding federal and state aid, is just over $50 billion.)

"We know that, on the current trajectory, we're going to be hit with that tax and it would increase very steeply," Mr. Holloway said.

So the administration of Mayor Michael R. Bloomberg, in its final months in office, is asking municipal unions to agree to seek new bids for the city's health insurance business, hoping to lower premiums. It has already achieved one small victory, getting the city's current primary insurer to freeze premiums for one year if it keeps the city's business, the mayor said on Friday.

But lower-cost plans are likely to involve greater out-of-pocket costs and more limited networks of doctors, and so far, the response from labor has been cool.

Ninety-five percent of city employees and 93 percent of retirees are in the two largest plans, which require employees to pay nothing toward their premiums. According to a 2012 survey by the Kaiser Family Foundation, the average contribution by public employees throughout the country is 12 percent for individual plans and 23 percent for family plans.

Harry Nespoli, the chairman of the Municipal Labor Committee, the labor coalition that negotiates with the city on health care, said that he was concerned about the tax, but also that the burden of any cuts would fall largely on workers at the bottom of the pay scale.

Mr. Nespoli said his staff was looking over the request for proposals that the city had written, but he said he was skeptical that the process of seeking new health insurance could be completed before the next administration.

"We're not going to turn around and do a $7 billion contract that affects our members for the next 10 years out without looking at it very carefully," he said.

Most of Boston's 20,000 employees are currently in plans that by 2018 would exceed the tax threshold. The city and its unions are preparing a request for proposals for new insurance coverage.

"The tax is going to be a hit, and, if you're not expecting it, it's going to be very shocking," said Meredith Weenick, the chief financial officer for Boston.

Municipal unions opposed the inclusion of the tax in the health care law, and it was partly their efforts that succeeded in delaying its effective date until 2018.

Steven Kreisberg, the director of collective bargaining and health care policy at the American Federation of State, County, and Municipal Employees, said the term Cadillac tax was misleading, because it "connotes a certain aspect of luxury in these health plans that is just factually incorrect."

The announcement last month that the Obama administration would delay by a year the mandate that larger employers offer coverage to their workers does not affect the timing of the excise tax, although it may provide encouragement to those who hope that the assessment will be delayed or scrapped altogether.

"Some skeptics, and I'm not one of them, say that that's why the tax was put into effect in 2018 -- that it's far enough away that people can consider whether or not they really want it to go into effect," Mr. Piro, the health care lawyer, said.

Jonathan Gruber, an economist at the Massachusetts Institute of Technology who was a paid consultant to the Obama administration on health care policy, said forcing state and local governments to rein in health care costs was exactly what the law was intended to do.

"This is intended to shift compensation away from excessively generous health insurance toward wages," he said.

In New York, if the Bloomberg administration does not succeed in getting new health insurance before the end of the year, the problem will fall in the lap of the next mayor.

Mr. Holloway said the Bloomberg administration, like many city governments, had long been concerned about the rising cost of health care and its impact on the budget. But the 2018 tax "adds a sense of real urgency to getting a handle on this," he said.

"We've got to start thinking about this now," he continued. "Why is it that my plan is so expensive per person? What are the ways that we could get that under control?"

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