Public Employers Seek to Soften Impact of Obamacare Fees and Taxes

In the next few years, states and localities will face new fees and taxes on the health plans they offer. One of their biggest challenges may be keeping employees informed even though the feds are leaving them in the dark.

In just a matter of weeks -- Oct. 1 to be precise -- health insurance exchanges will open in every state. But it's another set of dates that government employers are counting down to: 2014 and 2018. The former marks the start of a three-year transitional reinsurance fee under the Affordable Care Act, while the latter is the first year of the so-called "Cadillac tax."

The transitional reinsurance fee will require state and local government employers to pay $63 per covered individual each year. The fee is intended to help stabilize insurance premiums in the individual market.

On the other hand, the Cadillac tax (which will be permanent) imposes a 40 percent excise tax on health insurance issuers and self-funded plans with annual premiums that exceed a certain threshold that’s tied to the rate of medical inflation. Although the tax is being levied on health insurance companies, many are operating under the assumption that the cost will be passed directly to consumers. And since many state and local governments offer more expensive benefits packages than private businesses, they’re expected to be disproportionately represented among those subject to the tax.

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In 2018, the threshold for single coverage is $10,200 and $27,500 for family coverage (with a higher threshold for retirees and those in high-risk professions like law enforcement). Only the portion of the premium that exceeds the threshold will be subject to the tax. For example, if a single person has an $11,200 premium, only $1,000 will be taxed at 40 percent.

The Cadillac tax is intended to both rein in the cost of health care and encourage employers to favor wages over benefits when compensating their workers. Some, however, say the Cadillac tax is an indication that public employees are receiving lavish benefits at the taxpayer’s expense. Regardless of the reason, there’s near certainty that both the tax and the fee will impact municipal coffers and individual employees.

The impact the fee and tax will have and how that will be handled varies between and even within union and nonunion environments. Some public employers may be able to pass the fee and tax onto their workers, while others may be prevented from doing so by the terms of union contracts. Municipalities are scrambling to work with unions to figure out how the tax and fee might fit into future contracts.

McHenry County, Ill.

In McHenry County, Ill., which employs roughly 990 and insures about 2,500 taking dependents into account, the transitional reinsurance fee will cost about $160,000 a year, according to Robert Ivetic, the county director of human resources. Ivetic and his colleagues have been discussing the best way to fund this extra cost.

“Do we just put an excise tax on all people in the plan and say we’re collecting an extra $5 per month to help pay for it? Or is the county going to pay for the first year and then look for creative solutions down the road? It’s kind of a dilemma when you stop to think about how you fund this.” Adding to McHenry County’s struggle are 11 different union contracts that have no mention of the transitional reinsurance fee. “My guess is that [the unions] would want to negotiate it,” Ivetic says.

While $160,000 isn’t much to a larger municipality, if the cost fell entirely to McHenry County, it could have a significant impact. “If we do not come up with a way of at least having some cost-sharing with employees, it would come out of our reserve, which is not an ideal situation because when you’re self-funded, you need that for high claims.”


In Boston, where a portion of its more than 15,000 active employees are represented by 36 bargaining units, Chief Financial Officer Meredith Weenick says they’re focusing on the Cadillac tax. Boston has a cost-sharing agreement with its unions, but a majority of that tax would fall to the city. “The city would pay, depending on the product, between 72.5 and 82.5 percent of that tax, and employees would pay the balance,” she says. While this is simply a model based on a number of assumptions, it’s triggered many discussions within the city’s Public Employee Committee (PEC), a group of representatives from the city and each union responsible for bargaining health insurance.

The discussion, according to Weenick, has centered around how to bring health insurance premiums under the threshold. Ideas have included offering a wider variety of insurance products for lower-income employees who are more cost-sensitive and ending some of the overlap that exists in the six current insurance plans for active employees. The PEC is working on developing a benefits plan that will be in place for at least a full year before the Cadillac tax kicks in to allow time to help the city better understand what the actual cost and impact might be. “Growing at a rate that is outpacing revenue growth, health insurance is already squeezing every other expenditure on its natural path,” says Weenick, so the city will be closely watching how the new benefits play out.

Keeping Employees In The Know

What has seemingly been most difficult for employers is keeping their employees informed. Because of the complicated nature of the law, information has been slow to flow from the federal government down to states and municipalities.

“They aren’t helping the cause of getting out good information because they aren’t giving it,” says Ivetic. “Everyone knew these fees were coming, but you can’t say ‘Hey, you’re going to be paying more, but we don’t know how much it is or when.’” Without having all of the proper information at hand when you speak to employees, Ivetic says, you run the risk of creating panic.

And the media’s coverage of Obamacare hasn’t helped. Weenick’s PEC has a standing agenda item called “Things You May Be Hearing.” During this time, the group discusses and explains things they’ve heard either from coworkers, employees or the news. The PEC tries to filter the complicated press coverage of the federal health reform law without hiding anything.

“[Employees are] relying on us to talk about the materiality of the impact, either financially or operationally. You have to make it make sense to people who are not as familiar with health insurance,” Weenick says.

Troubles for Another Day?

The other factor hindering communication to employees is the Cadillac tax’s effective date. For some, it’s difficult to be concerned about a tax that will be imposed five years from now. And with the postponement of some of Obamacare’s mandates -- employers, for example, are not required to offer health insurance until 2015 -- it would be easy for an employee to assume that the 2018 date might be pushed later as well. But Ivetic says it’s certain that in the interim years, it’s going to take a lot of education on the part of government to prepare employees for what might be coming.

“Traditionally, in the government arena, and especially in municipalities, people took a little less in wages because they had a better benefits program. You can’t suddenly tell folks, ‘Well, guess what, we’re going to institute a high deductible program here, but don’t worry about it. One thousand [dollars] out of pocket for you, $2,500 for your family, you can afford it. But for someone making $30,000 per year, that’s pretty expensive.”


Next month, we'll be taking a look at governments' use of social media networks. States, localities and their agencies seemed to jump on the bandwagon pretty quickly a few years ago, but where are they now? Is your department or agency doing something interesting? Or has social media ultimately fizzled out for you? Can it have a place in government or is it just a waste of time? Email Heather at and share your experience.

Caroline Cournoyer is GOVERNING's senior web editor.