Looking to Replace That Cadillac With a Lower Priced Model 

Joe Kra, a partner in Mercer’s Health & Benefits consulting business, and Bev Willson, a senior associate in the firm’s Workforce Communication and Change consulting business, help employers sort through the issues around replacing a high-cost health plan with a lower-cost plan to avoid triggering the ACA’s excise tax.

Many employers at risk for triggering the ACA’s excise tax in 2018 are at least considering dropping their highest-cost medical plan as one possible strategy. Before taking the leap, however, it’s important to understand how likely you are to achieve your objectives — and to think about possible unintended consequences. Even if you get the numbers to work, the success of this strategy will depend on how and what you communicate to employees.

The “Cadillac tax,” which beginning in 2018 will be imposed on “high-cost” employer-sponsored plans that exceed $10,200 for individual coverage or $27,500 for family coverage and will not be tax-deductible. In response, employers are looking at eliminating high-cost plans in order to reduce premiums below the thresholds. Results from Mercer’s latest survey on health care reform indicate that 17% of US employers have already taken action to drop a high-cost plan as a means to avoid or minimize the impact of the excise tax; another one-third are considering it.

However, there remain a number of unknown variables and differing assumptions that employers will need to apply to calculations to truly understand where their costs fall in relation to the threshold. Therefore, a projection of exposure now could be presented as a likely range rather than a forecast of one specific number.

When weighing the merits of eliminating a high-cost plan, employers should keep in mind these important considerations:

Expensive employees are still going to be expensive.

When employees who have significant medical issues and high health care utilization move from a high-cost plan to a low-cost plan, it will invariably drive up the rates of the low-cost plan.

Consider that according to Mercer’s survey, for employers offering both a low-cost and a high-cost plan, the average actuarial value (the estimated percentage of covered expenses paid by the plan, taking into account the deductible and other employee cost-sharing provisions) was 77% for the lowest-cost plan and 83% for the highest-cost plan.

However, even with just a 6% differential in value between the two, rates could vary by as much as 20% or more when experience is considered because the claims differential is typically much greater (those that expect significant medical costs generally opt for richer plans than those that expect to incur little cost). So, although getting rid of a high-cost plan will likely reduce the Cadillac tax liability, it may not reduce it as much as employers expect, nor eliminate it altogether.

Lowering utilization can make a difference.

A strategy that helps improve employee health and mitigates health care costs minimizes the excise tax exposure. There are many potential strategies, but the effectiveness will vary by organization and their specific cost drivers.

Plan designs that encourage consumerism are often part of the solution. There isn’t one perfect plan design that will deliver the ideal level of health care utilization. It’s more about the extent of the jump — in other words, where employees are coming from and where are they going. For example, if by moving to a lower-cost plan, employees go from having first-dollar coverage to a $500 deductible followed by coinsurance, the degree of shift will motivate some employees to reconsider their health care use, such as by waiting a day before seeing a doctor or to find out how much an MRI costs at various locations. On other hand, if employees have an $800 deductible and are moved into a $1,300 plan so they can qualify for HSA funding, they might perceive an incremental benefit change, but the shift may not influence utilization as much.

Supporting tools and resources are important complements for motivating employees.

If you want employees to more carefully consider which doctor to see or think twice about having a certain test, it makes sense to offer transparency tools that allow cost and quality comparisons among providers and access to information or coaches that can help accurately determine an employee’s situation and needs. Employers who embrace this strategy should seek to motivate employees through financial steerage (i.e., through lower-cost plans) and then empower them to become better consumers through tools and resources.

Actuarial alternatives: Eliminating a high-cost plan is not the only game in town.

Be sure to consider alternative strategies for mitigating excise tax exposure, such as restructuring a plan’s coverage tiers and premium rate relativities. Similarly, there may be an opportunity to revisit how rate differentials are set between plans. The cost from the excise tax may be minimized through some straightforward changes in how rates are set.

With great change comes great (communication) opportunity.

If you do eliminate a high-cost plan, a number of clear, honest, and strategically timed communications will be needed to cultivate buy-in and help employees understand the technical aspects of the new plan as it is rolled out.

However, it’s also a perfect time to make the connection between what you’re doing with your benefits, how you run your business, and the success of your company. Some employers will need to increase compensation or other benefits to continue to attract and retain employees. Employees will easily be confused by everything that’s changing and the rationale. Be sure to take advantage of the opportunity to articulate key messages, potentially shifting away from a “paternalistic” approach to benefits to more of a partnership approach, highlighting savings and tax advantages and reinforcing wellness messages.

Last, it’s critical that messages get physically into employees’ homes, even if your company traditionally sends out benefits-related communications electronically. And if you’re providing transparency tools and resources, be sure to locate them online in a single hub to make it easy for employees to find and use them.

Although the excise tax is providing a strong incentive, many employers were already looking to move employees to lower-cost plans well before health care reform took center stage — not only to save money, but also to create better consumers of health care, influence utilization, and ultimately reduce the overall size of the health care bubble. These can all be part of a good long-term strategy that makes sense with or without the ACA.