The Patient Protection and Affordable Care Act, commonly known as Obamacare, was signed into law on March 23, 2010. This legislation makes the most significant government expansion and regulatory overhaul to the U.S. health-care system since 1965, when Medicare and Medicaid legislation was passed into law.

What is the “Cadillac Tax”?

SEC. 4980I of the PPACA modified Chapter 43 of the Internal Revenue Code of 1986 to create the so-called “Cadillac Tax,” an excise tax on high cost employer-provided health plans. Under this provision, employers must pay a 40 percent tax on every premium plan dollar per employee that exceeds the statutory threshold. Currently, the statutory threshold is $10,200 for individuals and $27,500 for families. Below is an example of how the tax works:

Table No.1: Hypothetical “Cadillac Tax” Scenario

Originally, the tax was to be implemented on Jan. 1, 2018. However, in December 2015, President Obama included in his annual tax package a two-year delay in the effective date of the tax, making it effective in 2020. The package also included provisions to eliminate billions of dollars in PPACA health insurer fees that would be due in 2017; to make the “Cadillac” plan tax deductible; and a request to U.S. Government Accountability Office to research the practicality of adjusting the “Cadillac” plan tax high-cost benefits threshold to reflect the age and gender of the insured. The package also creates several reporting requirements for the Health and Human Services secretary to account for spending to the public.

Cadillac Tax proposed modification

One of the criticisms of the tax is that it does not take into account the cost-of-living differences across the United States. However, that may change soon. On Feb. 9, 2016, President Obama released his $4.1 trillion budget proposal for the 2017 fiscal year. In it, he included a proposal to modify the “Cadillac Tax” by modifying the threshold for the tax. Currently, the threshold is $10,200 for individuals and $27,500 for families. The proposal would modify the threshold to be equal to either the current law threshold or the average premium for a marketplace gold plan in each state, whichever is greater. This modification is aimed at ensuring the tax remains applicable to only the highest-cost health plans and would take into consideration geographic differences in the cost of those health plans. This proposal still needs to be approved by Congress, who can approve all or parts of the president’s budget proposal.​​​​​​​

Further modifications were proposed in both the House of Representatives and the Senate in the spring of 2016. On March 16, 2016, the Preserving Consumer Health Accounts Act of 2016 (S.2698) was introduced in the Senate by Sen. John Thune R-S.D. Soon after, on March 22, 2016, a companion bill entitled Health Savings Protection Act (H.R.4832) was introduced in the House by Rep. Charles W. Boustany Jr. R-La.. The legislation seeks to exclude employer and employee contributions to health-savings accounts and flexible-spending accounts from the calculation to determine the cost of coverage to trigger the “Cadillac Tax.” Furthermore, Sen. Orrin Hatch R-Utah, Sen. Marco Rubio R-Fla. and Rep. Erik Paulsen R-Minn., introduced the “The Health Savings Account Act of 2016,” which is a separate but related bill that seeks to remove tax penalties imposed on HSA’s for administrative errors. This proposal could possibly lead to a modification of the bill, which would exclude HSAs completely from the tax.

There also are several bills pending in Congress to repeal the tax in its entirety.

What is the medical-loss ratio?

Sec. 1001 of the PPACA imposes a federal minimum requirement on MLR for fully funded health plans. Beginning in 2011, covered insurers are required to submit annual reports to the Department of Health and Human Services describing the proportion of premium dollars spent on medical benefits compared to the amount allocated for administrative expenses and profits. Of all the revenues received, small group and individual plans must spend 80 percent on care and may allot only 20 percent on administrative expenses. For large group plans this number rises to 85 percent and 15 percent on administrative expenses.

This requirement is intended to bring down the cost of health care and provide “greater transparency and accountability” to how insurers spend the premiums they collect. Companies that do not meet the MLR requirement are required to issue rebates to policyholders and could face federal penalties.

How does MLR affect producers?

Unfortunately, agent compensation is considered by HHS to be an administrative expense of the insurer and is thus included in the “small slice of the pie.” Therefore, insurers looking to comply with the law and avoid having to pay penalties are attempting to limit administrative expenses, including cutting agent compensation.

The MLR today

A new report by A.M. Best states health insurers have had more time to adapt to the new Affordable Care Act environment and have more frequently been meeting the minimum loss- ratio requirements with every passing year. The large-group market has been the most stable, with an average of 56.4 percent of insurers by state meeting the 85 percent requirement in 2011, steadily increasing to 63.5 percent of insurers in 2014. For the small-group market, states averaged 63.4 percent of insurers meeting the 80 percent MLR requirement in 2014, steadily increasing from 50.6 percent in 2011. The individual market has performed the worst, with states averaging only 44.8 percent of insurers meeting the MLR requirement in 2011. Overall, insurers' expenses related to health-care quality improvement accounted for 7.7 percent of total expenses among insurers that filed the Supplemental Health Care Exhibit in 2014.

There are several bills pending in Congress seeking to remove producer compensation from the MLR calculation.