Paul Fronstin, PhD, knows what he means when he talks about a Cadillac health plan. “I would define it as one that has no deductible, no coinsurance, no copayments, no formulary — which means no restrictions on the drugs that are covered — and no network restrictions, meaning I could see any doctor I want and it doesn’t cost me anything,” says Fronstin. “Covers everything at no cost. That’s a Cadillac plan.”
Fronstin, the director of the health research and education program at the Employee Benefit Research Institute, admits that this is an extreme example of first dollar coverage with no restrictions, and adds: “I don’t know if those plans exist.”
Cadillac plans are in the news these days because of a provision in the Senate health care legislation that seeks to tax high-cost plans as a way to encourage the use of less expensive health plans and to pay for reform. As of this writing, that bill (it may be a law by the time you read this; one never knows) uses a premium threshold, noting that anything that costs above $8,500 per individual and $23,000 per family per year is a high-cost plan — a Cadillac plan. Insurers offering such benefit packages will pay a 40 percent excise tax on them.
MANAGED CARE wanted to see what all the fuss was about. We wanted to know the relationship of plan richness — its Caddyness — to health. We wanted to define what such plans cover and describe what percentage of insured people have Cadillac plans.
We wanted, it appears, too much.
“I don’t think there is a relationship between the plan richness and health, other than providing first dollar coverage for certain services like testing (lipid testing, diabetes testing, and medications for example) to make the threshold lower for persons to access those services, which in turn should reduce — depending on the population — the complications from untreated disease,” says the consultant Jaan Sidorov, MD, who sits on our Editorial Advisory Board. “Right now it looks like Caddyness is a function of yearly cost, which is ironic because cost is very vulnerable to regional variation. It is assumed that the higher the yearly cost, the richer the benefit and the greater the Caddyness. However, cost is a function not only of the benefit, but the local health systems’ expense and the population’s utilization.” (For more on what variables might make a plan cost a lot, see “Why Some Plans Appear to Be Cadillacs — But Aren’t,” below.)
The common compensation plan gives the executive the same health coverage as every other worker in the company, says Fronstin. “They are subject to the same deductible, the same copayments, and everything else, with one exception: They are often reimbursed on an after-tax basis for any out-of-pocket expenses incurred.”
Still, for the most part, legislators preempted a discussion about Cadillac benefits before one ever truly got under way. “It is now being referred to as an excise tax,” says Fronstin. “They are referring to it as such because the premium doesn’t necessarily represent the Cadillac-ness of a plan.” As far as he can tell, no organization tries to describe a Cadillac plan except in terms of premium costs.
Fronstin can understand how legislators see promise in Cadillac plans. “Revenue to pay for subsidies related to expanding coverage has to come from somewhere. In theory, the high-cost health plans are thought to be very good plans, so the temptation is to tax them as a way to raise revenue or to reduce the comprehensiveness of coverage to reduce use of health care, which could bring down the cost of health care.”
According to a Milliman paper titled “No Room to Stand,” the “threshold amounts are indexed to the Consumer Price Index for Urban Consumers (CPI-U) as determined by the Department of Labor beginning in 2014.”
It adds: “The fixed-dollar indexing of the tax threshold will cause the application of the excise tax to quickly dip substantially further into the mainstream of health plans.”
Ian Duncan, a health care consultant at Solucia Consulting, says that if you assume an annual health care increase of 10 percent between 2009 and 2015, it means that a Cadillac plan would have cost about $4,800 in 2009.
“To give a sense of how many Americans could be affected, $4,800 is approximately the average annual cost of the Commonwealth Care program for low income earners in Massachusetts, where I serve on the board of the Connector Authority that is responsible for this program. Assuming that Commonwealth Care benefits hit $8,500 per person in 2015 and continue to rise at a 10-percent rate in 2016, the excess benefit will be $850. Assuming further that there are 200,000 members enrolled (approximately the current enrollment level) Commonwealth Care’s total tax bill will be $68 million!”
Cadillac plans came up a lot during the financial meltdown on Wall Street, with their accompanying accounts of executive perks and golden parachutes.
“If you go to Goldman Sachs documents, you might see that they name five executives and each one has $40,000 next to his name for health benefits,” says Fronstin. “Nobody knows what that dollar amount represents. We don’t know if it is a premium being paid to an insurance company. If those five executives are in a self-insured plan — typically you are not self-insured if you are a small company, but if you are an executive you never know — easily what could have happened is one of those five used $200,000 in health care expenses and the other four used none. And that doesn’t mean it is a Cadillac plan. All you need is one of them to have cancer and you’ve got a $200,000 bill.”
The common executive compensation plan gives the executive the same health coverage as every other worker in the company. “They are subject to the same deductible, the same copayments, and everything else, with one exception: They are often reimbursed on an after-tax basis for any out-of-pocket expenses incurred.”
The Milliman study states that “an actuarial view quickly reveals that the high cost of these plans has as much to do with the characteristics of the covered population as it does with benefit richness.”
Fronstin cites a small company he knows of that has 15 employees. The average age is 53. “That company has two strikes against it in buying insurance: It’s small and old. As a result the premium for a family PPO is over $24,000 a year. It has nothing to do with the Caddyness of the company’s plan, but has everything to do with its age and size.”
Fronstin adds that other aspects of reform would benefit such a company greatly. “The insurance exchange will benefit a small firm and its employees. If the firm moved workers into the exchange, the workers would have more choice of health plan. The firm could benefit by fixing its contribution and tying to something like the average plan cost or the lowest plan cost.” (Duncan: “Although it does so by raising the cost of everyone else in the pool.”)
Fronstin also notes that the Rand health experiment in the 1970s keeps coming up in discussions about Cadillac plans. Rand found that an increase in deductibles resulted in less use of health care, but both discretionary and nondiscretionary services were cut.
Gary Claxton, vice president and director of the health care marketplace project at the Kaiser Family Foundation, worries that the Rand study might not be as relevant as it once was. “The Rand health experiment suggests that you can cut back on generosity — i.e., put in more cost sharing — without impact on health, with the exception for the poor who have health problems,” says Claxton. “That said, there are more preventive services for chronic conditions now than when the experiment was done, so some attention to how cost sharing is constructed for those services may be important. Still, reducing the highest value plans moderately would not seem to have big health consequences, assuming it is done smartly. Also, the highest cost plans probably are in the hands of relatively affluent people, so access to services probably is not tremendously compromised. People will use less care though, and some people would forgo care we probably think they should get.”
In the small group market these days a $1,000 deductible is becoming more common.
“Does that mean anything less than a $1,000 deductible is now considered a Cadillac plan?” asks Fronstin. “Two years ago we wouldn’t have considered a $200 deductible a Cadillac plan. Today we might. That’s the way the market’s moved. It’s become a judgment call.”
Burden on the middle-aged
He returns to the example of the health coverage purchased by that small company with an older workforce. “It costs $24,000 a year for a PPO. That company is also fortunate to be able to offer an HMO as well, which is cheaper. Most small businesses can’t do that. There may be a company across town, same exact health plan, same insurance company, same contract, which lays out a deductible, the copayments, coinsurance, the network, the formulary, everything. The only difference is that its premium is $12,000 for the same exact product because the average age of its workers is 25.”
Ironic, but irony seems to be embedded in the Senate effort, according to the Milliman report: “The current proposal seems to view the excise tax as both a carrot — an incentive for insurers to design cheaper plans — and a stick — a penalty for richer plans — to encourage movement to less rich health care plans. However, the excise tax is also used as a significant source of tax revenue. Can it simultaneously serve both roles? This is a classic catch-22, similar to the tobacco taxes that are designed both to discourage smoking and raise revenue.”
For further reading
“Cadillacs or Ambulances? The Senate Tax on Excessive Benefits,” Dec. 3, 2009. Health Affairs.
“Capping the Tax Exclusion for Employment-Based Health Coverage; Implications for Workers,” January 2009. Employee Benefit Research Institute.
“No Room to Stand,” September 2009. Milliman Health Reform Briefing Paper.
Senate Bill 1796. America’s Healthy Future Act of 1009.
“The fixed-dollar indexing of the tax threshold will cause the application of the excise tax to quickly dip substantially further into the mainstream of health plans.” – Milliman
“Reducing the highest value plans moderately would not seem to have big health consequences, assuming it is done smartly,” says Gary Claxton of the Kaiser Family Foundation.