Not Your Father’s Cadillac Plan

MANAGED CARE January 2010. ©MediMedia USA

Just because a benefit package costs a lot doesn’t mean it pays for everything or improves outcomes. Many variables come into play.

Frank Diamond

Managing Editor

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.”

Mythical beast?

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.”

A better ride

They may be difficult to find in the real world, but not so difficult to define in theory. According to Paul Fronstin, PhD, director of the health research and education program at the Employee Benefit Research Institute, who wouldn’t want a Cadillac plan?

	HMO	PPO	Cadillac
Average deductible (2009)	$699	$634	$0
Average copayment for primary care visits (2009)	$18	$21	$0
Average copayment for specialist visits (2009)	$26	$28	$0
Source: Employee Benefit Research Institute (EBRI) and Kaiser Family Foundation Note: Figures for Cadillac plans are an assumption by Paul Fronstin, PhD, of EBRI

Hot topic

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.)

Why some plans appear to be Cadillacs — but aren’t

Ian Duncan

One would think that a Cadillac plan offers luxury benefits, but the Senate, rather than tackling this on a benefit basis, chooses to use a cost measure. It’s a Cadillac plan if individual coverage costs more than $8,500 per year.

However, reasons that an employer’s plan is relatively high cost are many and varied, rarely having anything to do with “luxury” benefits. Several factors might make an employer plan relatively high cost.

Old workforce

First, there is the average age of the covered lives. The average age of most employer populations is probably in the mid-40s; however, some employers (our company, for example) have a relatively old workforce. Insurance costs increase by approximately 3 percent for each year that the average age of the workforce increases, so a plan that costs $4,800 for an average member age of 40 in 2009 would cost $6,600 if the average age of the workforce were 50. Such a plan will hit the $8,500 average (assuming a 10 percent annual change) by 2015.

As no good deed goes unpunished, one reason that employer populations have a relatively high average age is their coverage of early retirees — retired employees not yet eligible for Medicare. Assume that an employer with a population of employees whose average age is 40 and with no early retirees pays $4,800 per member per year. But add just 10 percent early retirees of age 60 to the group and average costs will increase 10 percent to about $5,200.

And yes, such a plan will be deemed a Cadillac plan by 2014, assuming a 10 percent annual premium increase. Relatively few employers still offer continuation of coverage (other than through COBRA, which is another source of increased cost to most plans) to early retirees. This isn’t true, however, of union benefits, which tend to be richer on average to begin with and to be more likely to continue benefits into retirement.

Another important factor is location: Pity the poor employer in the Northeast, which is uniformly a higher-cost area for medical services. One measure of relativities is Medicare’s Geographic Practice Cost Index. The range of relative values in 2009 for the Physician Practice expense component is 70 percent: between 1.433 (San Mateo, Calif.) and 0.844 (North Dakota). Another way to view the effect of geographic differences is to look at rates across the country. A basic PPO plan in New York City costs a healthy 28-year-old woman about $6,000 per year. A similar woman in Michigan would pay about one third of this amount for a PPO plan.

Primary driver

The benefits of each plan are different, and the New York plan is richer (no deductibles; lower copayments), but the primary driver of cost differences is the underlying medical costs in each state and New York’s community rating and no-pre-existing-condition limitations.

Finally, we come to benefits. In the world of benefits you encounter two types of plans: those that are subject to ERISA pre-emption and those that are regulated by the state. ERISA plans are free to choose the type of benefits to offer members; state-regulated plans have to comply with whatever local regulation the local insurance regulators deem appropriate. A Milliman study of Texas mandates (2000) Cost Impact Study of Mandated Benefits in Texas, Report #1, estimated that state-mandated benefits added about $13 (7–8 percent) to the monthly premium. Whether these mandated benefits are “Cadillac” benefits could be debated —state insurance departments probably don’t think so, since these benefits are required for all insureds.

As an example of a cost-increasing benefit, consider drug coverage. In Massachusetts, before reform, employers were free to offer insurance without outpatient drugs (in-hospital drugs are traditionally covered by the medical benefit). Massachusetts reform now requires that all employers offer drug coverage, which probably adds between 10 percent and 20 percent to premiums. Many state-mandated benefits are harder to justify than drug coverage, however: for example, chiropractic care, physical therapy, reconstructive surgery, in vitro fertilization.

Inconsistent

But since many states require these benefits for all insureds, it seems inconsistent to include them in a list of “Cadillac” benefits. So where does that leave us when thinking about Cadillac benefits? Is an annual physical examination a “Cadillac benefit?”

What about a new movement that is gaining momentum among employee benefits professionals — value based benefit designs? Under these designs, cost-sharing for certain drugs and therapies is waived for members with certain conditions, as a way of encouraging that the member receive all recommended treatment. Such designs certainly raise the cost of coverage. In a recent study conducted for a large Blue Cross & Blue Shield plan, we found that reducing cost sharing on indicated drugs and outpatient procedures for a range of diseases would increase costs by a small amount per member per month, but also significantly increase compliance with those therapies and tests. This may seem like a small amount, but in benefit costs there are many small amounts that add up to big amounts. But ultimately the employer is making an investment in employee health with an expectation of later return on investment. One man’s Cadillac benefits, it seems, may be another’s Chevrolet.

Ian Duncan is a health care consultant with Solucia Consulting of Farmington, Conn. Reach him regarding this article at: IDuncan@ ManagedCareMag.com

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.”

Reimbursed

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.”

Look for the union label?

People assume that powerful unions such as the UAW would offer Cadillac plans. Paul Fronstin, PhD, director of health security and quality research at the Employee Benefit Research Institute, is not so sure. “We haven’t dug deep into the union plan, but we have looked at, at least on the average, the premiums for family coverage in a union plan and it’s only $500 more than the premiums in a nonunion plan. That leads me to believe that the benefits are better, but not that much better.”

On the other hand, “when you look at how much the employer pays toward the premium, there is a huge difference. If you are in a nonunion plan, on average you are going to pay 31 percent of family coverage. In a unionized plan, you are paying about 22 percent. That’s a big difference. So that’s where the benefits of a union come into play, more so than in the coverage. Because unions really look at dollars and cents. Everything is on the table.”

Unions may give on wages to get better benefits. “They see the tradeoffs,” says Fronstin. “They are explicit. Whereas average Joe worker doesn’t see the tradeoff. He doesn’t realize that his wages may have only gone up 3 percent because of the rising health care cost, when they might have gone up 3 and a half percent.”

For further reading

“Cadillacs or Ambulances? The Senate Tax on Excessive Benefits,” Dec. 3, 2009. Health Affairs. Available at http://snipurl.com/tseru [1]

“Capping the Tax Exclusion for Employment-Based Health Coverage; Implications for Workers,” January 2009. Employee Benefit Research Institute. Available at http://snipurl.com/tser0 [2]

“No Room to Stand,” September 2009. Milliman Health Reform Briefing Paper. Available at http://snipurl.com/tsepf [3]

Senate Bill 1796. America’s Healthy Future Act of 1009.

Managing Editor Frank Diamond can be reached at FDiamond@ManagedCareMag.com [4]

“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.