	Background

		Excise Tax on High-cost Employer-sponsored Health Insurance

PPACA’s excise tax on high-cost employer-sponsored health insurance is  imposed when the value of employees’ health coverage exceeds a  threshold, referred to as the tax’s applicable dollar limit. The Consolidated  Appropriations Act, 2016 delayed the tax’s implementation until 2020. Experts Cited Benefits and Limitations of the FEHBP BCBS Standard Plan Data and Identified Alternative Data Sources, Which Also Have Limitations

The BCBS Standard plan has many characteristics that experts cited as  important when considered for use as the basis of the age and gender  adjustment. Experts identified  alternative cost data sources, but these data sources also have  limitations. Experts Noted That the BCBS Standard Plan Is a Large and Convenient Source of Cost Data, but Underlying and Changing Member Demographics Limit Its Strengths

According to industry and actuarial experts we interviewed and  stakeholders that commented on IRS’s notices for the age and gender  adjustment, BCBS Standard plan data have several benefits when  considered for use as the basis of an age and gender adjustment, as  stipulated in the law. Be convenient. Finally, it is convenient in that it is  already available and familiar to the federal government, and BCBSA  already provides summary cost and enrollment data to OPM on an annual  basis. Officials from OPM noted, and our review of two years of cost data  confirm, that members in the BCBS Standard plan generally have higher  health care costs than their counterparts in BCBS Basic and that this is  particularly true for younger members. Experts and stakeholders noted that the selection bias within the FEHBP  of more young members with higher health care costs in the BCBS  Standard plan may result in an age and gender adjustment that is not  adequate. For example, in part because the BCBS Standard plan  disproportionately covers young members with higher health care costs,  the ratio of the average claims costs of the older age groups to the  average claims costs of the younger age groups is smaller than it would  be in a plan that did not have that particular selection bias issue. Declining enrollment. Finally, OPM, IRS, and  Treasury officials all noted that any one plan offering could be  discontinued. However, because of its noted limitations, its use could result in  adjustments to the tax threshold that are not as effective as they could be  for certain employers—in particular, for employers with older employees. As stipulated by PPACA, the age and  gender adjustment would increase the applicable dollar limit by  “…an amount equal to the excess of aa) the premium cost of the [BCBS  Standard plan], if priced for the age and gender characteristics of all  employees of the individual’s employer, over bb) the premium cost of the  , if priced for the age and gender characteristics of  the national workforce.”
This could be achieved by establishing a dollar value for the adjustment  by taking an employer-specific premium cost and subtracting a national  premium cost, both priced using the BCBS Standard plan costs applied to  the national and employer-specific workforces, respectively. The BCBS Standard plan is a relatively expensive  plan within the FEHBP and covers members with higher health care costs  compared to other less expensive plans, including the BCBS Basic plan. We found that combining the data from these two plans could mitigate  this selection bias. 1.) Using combined FEHBP data as the basis for the age and gender  adjustment to include a broader selection of younger members could  result in a different adjustment that could increase the adjustment amount  for some employers. Standards for internal control suggest that effective information is vital for  an entity to achieve its objectives. Although the current law specifies the  use of premium cost data from the BCBS Standard plan, relying on BCBS  Standard plan data alone does not provide IRS with the comprehensive  information it may need to determine an appropriate and adequate age  and gender adjustment. Conclusion

The age and gender adjustment was designed to increase the applicable  dollar limit of the tax for employers with employees that are expected to  be costlier than average so that taxes are owed based on the plan design  and not based on member costs. Recommendation for Executive Action

We recommend that, in implementing the age and gender adjustment, the  Commissioner of Internal Revenue consider taking steps to mitigate the  limitations of the BCBS Standard plan premium cost data—such as by  combining data from multiple FEHBP plans. In its written comments, IRS neither  agreed nor disagreed with our recommendation, but stated that it would  consider the recommendation as it continues to review comments  received in response to an agency notice and work with the Department  of the Treasury to issue guidance on the age and gender adjustment.
Why GAO Did This Study

Some stakeholder groups have questioned the use of the BCBS FEHBP Standard plan premium costs as the basis of the age and gender adjustment, as stipulated by PPACA. The Consolidated Appropriations Act, 2016 includes a provision for GAO to report on the suitability of using these data for this purpose.
This report examines: 1) the benefits and limitations of using FEHBP BCBS Standard plan data as the basis of the age and gender adjustment, and what alternatives to these data could be considered; and 2) how any limitations to BCBS Standard plan data could be mitigated. GAO reviewed IRS documentation; interviewed industry experts and officials from IRS, the Office of Personnel Management (OPM), the Department of Treasury, and other agencies; reviewed comment letters submitted in response to IRS notices; and analyzed 2010 and 2015 cost and enrollment data from OPM.

What GAO Found

The Patient Protection and Affordable Care Act (PPACA) included a revenue provision for a 40 percent excise tax on high-cost employer-sponsored health coverage to be administered by the Internal Revenue Service (IRS). The tax would be imposed when an employee's annual cost of coverage exceeds an established dollar limit. This limit could be adjusted upward if an employer's workforce—based on its age and gender characteristics—was likely to have higher health costs than the national workforce, on average. This adjustment, known as the age and gender adjustment, is based on the premise that older individuals and younger females tend to have higher health care costs than other individuals. It is designed to lower the tax burden so that taxes are owed based on the plan design and not based on the health care costs of its members. PPACA stated that this adjustment would be made based on the premium costs of the Blue Cross and Blue Shield (BCBS) Standard plan under the Federal Employees Health Benefits Program (FEHBP).
The BCBS Standard plan has benefits and limitations for use as the basis of the adjustment. The benefits include that it is a large, national, decades-old, convenient data source, in that it is already known by, and available to, the federal government. However, there are some specific limitations to its use.
The BCBS Standard plan has selection bias within FEHBP because members have a choice among many plans, and, compared to other options available to federal employees, it is a relatively expensive plan that covers members with higher health care costs. GAO's analysis of OPM data found that these higher costs are particularly true for younger members.
The plan's enrollment has declined in recent years. Furthermore, officials noted that any one plan offering could be discontinued.
The selection bias in the BCBS Standard plan may result in an age and gender adjustment that is not adequate. For example, because the BCBS Standard plan covers young members with higher health care costs, the ratio between the average claims costs of the younger and older members in that plan is smaller than it would be in a plan that did not have that particular selection bias issue. Therefore, the age and gender adjustment could be too small. While experts GAO spoke with identified several potential alternative sources of cost data for use as the basis of the adjustment, those alternatives also had limitations, such as not being convenient sources of data and potentially not being representative of the national workforce.
To mitigate limitations of the BCBS Standard plan, these data could be supplemented with data from other FEHBP plans, such as the BCBS Basic plan, which is known to have younger members with lower health care costs and increasing enrollment. GAO found that using combined data from these two sources could result in a different adjustment for some employers—in particular, for those with older employees. Standards for internal control suggest that effective information is vital for an entity to achieve its objectives. Relying on BCBS Standard plan data alone does not provide IRS with the comprehensive information it may need to determine an adequate age and gender adjustment.

What GAO Recommends

GAO recommends that, in implementing the age and gender adjustment, IRS consider taking steps to mitigate the limitations of the BCBS Standard premium cost data, such as by combining data from multiple FEHBP plans. IRS neither agreed nor disagreed with GAO's recommendation, but stated that it would consider the recommendation as it works to implement the age and gender adjustment.