Cadillac hybrid health plans
By Robert Hopper
Hopper Insurance Services
Public and private unions have worked hard to negotiate excellent benefits for their members; they often provide what are termed Cadillac health plans with low deductibles, low co-pays, and higher premiums. Naturally, unions would be opposed to new proposals that will tax these plans, and they are also leery of limiting the employer tax deductibility for these plans, as well.
There is a way for union members to keep their Cadillac health plans while also supporting changes in the tax rules. They should make the switch from traditional Cadillac health plans to the Cadillac "hybrid" health plans.
In the auto industry, a hybrid car uses an electric motor for city driving and a gas motor for highway driving. That's currently the most fuel-efficient way to operate a car. In the health insurance world, a hybrid health plan uses a health savings account (HSA) for routine and expected medical bills, and a high deductible insurance plan for the big bills. It's the most cost effective way to pay for health care expenses. And it is one of the few ways to bend the health care spending curve. Health economists agree that if you use your own tax-free HSA dollars to shop for health care services, you will be a prudent buyer of health care services.
Step 1: Recognize the problem
A medical director for a large medical group in California once told me he could tell the difference between a person who had a rich HMO plan and a person who had a PPO plan with a higher deductible. He said something to this effect: If I have the choice of doing an inexpensive, moderate or expensive test, the person with the HMO will often choose the most expensive test because tests are covered at 100 percent with the office visit co-pay. He then mentioned one patient in such a situation who had expressed an interest in doing all the tests, just to see the how the test results differed.
When individuals have a higher deductible, they will ask which test is the least expensive while still providing the necessary data. This makes sense because they are paying the full cost up to the deductible. It's just human nature. If someone else is paying for the meal, we will be tempted to choose more expensive entrees than if we were paying the bill ourselves.
The medical director went on to say that this most often occurs with city, county and state workers and teachers, all of which are represented by unions. Surprisingly, while unions have negotiated rich health benefits, they could do even better for their members.
Step 2: The Cadillac Hybrid health plan -- the best plan on the market
A sample Cadillac hybrid health plan might have a $2,000 deductible; once a person reaches deductible, he or she has also met the out-of-pocket maximum. The plan also includes a free annual exam. The employer also puts $2,000/year into each member's health savings account. Thus, in any given year, the most an employee can pay is the $2,000 deductible/out-of-pocket maximum. And during that year, $2,000 goes into the health savings account. That means there is zero financial risk to the employee in any given year.
If the employee is healthy, there is a financial reward of $2,000 that rolls over to next year. At the end of 10 years of good health, that employee could have $20,000 in his or her HSA. Employees can also use payroll deduction to make additional contributions to their health savings account as a way to plan and save for the future, including those expenses not covered by Medicare during retirement. The traditional Cadillac plans simply cannot match these long-term benefits!
The differences in premium between Cadillac plans and the high deductible health plans are substantial in the individual and small group marketplace. Any insurance agent can illustrate a 20 percent to 50 percent difference in premiums using the premium rate books published by insurance companies. In the large group market, insurance companies don't seem to offer a substantial savings when switching from a rich benefit plan to a high deductible health plan; some experts have criticized their pricing practices.
Step 3: Unions hold the solution
If unions would simply switch from traditional Cadillac plans to hybrid Cadillac plans, they would still get full tax deductibility. The premium is fully tax deductible, and the HSA contribution is also tax deductible. Union members would have zero financial risk in any given year. And since the money in the HSA is theirs to keep, union members will be prudent buyers of health care services; they will not automatically choose the most expensive test. Rather, just like any other products or services, they will shop for the best values, and try to spend less. This in turn will reduce health care spending without any adverse health impact, and in the process, bend the health care spending curve.
Simply stated: A Cadillac kybrid health plan has the potential to take away financial risk, provide rewards for good health, and allow members to plan and save for their futures. That's a whole lot better than the current Cadillac plans!
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