The “Cadillac” Redesign: A Role for Clinical Nuance & V-BID
Originally Produced: October 2013. Updated: December 2015
Beginning in 2020, the Patient Protection and Affordable Care Act (PPACA) will levy an excise tax on certain generous health plans. Specifically, if a plan’s benefits exceed a designated cap, the insurer or plan sponsor must pay a 40 percent excise tax on each dollar above the cap. These insurance products, often referred to as “Cadillac” plans, have high premiums and offer a rich menu of benefits with limited deductibles and cost-sharing. Cadillac plans are popular among enrollees who appreciate broad provider networks and an expansive list of generously covered services, regardless of clinical evidence, quality, or cost. Due to the limited cost-sharing at the point of service, these plans do little to engage consumers in making cost-conscious choices, and are susceptible to inappropriate utilization — thereby exposing consumers to unnecessary health risks and payers to wasteful expenditures. Further, because health insurance benefits are tax-exempt, employers have had little incentive to stem generous benefits. Combined, these adverse incentives impose a costly burden on our health delivery system.
To respond to these inefficiencies, the “Cadillac tax” on high-cost health plans was intended as an attempt to hold payers more accountable for the benefits provided, lessen the tax-free inducement for employers to offer increasingly generous plans, and diminish the resulting incentive for enrollees to use health care services with practically no restrictions. An additional impetus for the tax was to raise revenue to finance PPACA’s expansion of insurance coverage. The Congressional Budget Office (CBO) originally estimated that the excise tax would raise 12 billion dollars in its first year of implementation.1 However, due to the recent slowdown in the growth of health costs and responses from plan sponsors, CBO revised its projection to 5 billion dollars in year one.2
Despite the downward revision in the estimated number of plans affected by the tax, employers and plan sponsors are justifiably concerned. In 2021, the Internal Revenue Service (IRS) will update the threshold cap by the consumer price index (CPI) plus one percent, and in each successive year by the CPI. Since the update to the threshold cap grows more slowly than health insurance premiums, the Cadillac tax will affect an increasing number of plans as years pass. As a result, some estimates suggest that up to 75 percent of plans may be subject to the tax a decade after its implementation.3 Thus, plan sponsors are already responding to the potential future tax by altering plan options. In one survey of single-employer plans, 17 percent of employers said they had already taken action to avoid the excise tax, and another 54 percent said they were considering or planning means to avoid the tax.4 In all likelihood, efforts to revise plan offerings to avoid the penalty will increase as the implementation of the Cadillac tax draws near.
Clinical Nuance and V-BID: Redefining “Luxury”
Clinical Nuance and V-BID: Redefining “Luxury”
As payers maneuver to avoid the Cadillac tax, they should aim to maximize population health through the efficient reallocation of medical spending. Rather than unpopular indiscriminate benefit reductions or “one-size-fits-all” cost-sharing increases frequently used to control utilization and lower costs, the basic tenets of “clinical nuance” must be considered as insurance benefits are redesigned. These tenets recognize that: 1) medical services and providers differ in the benefit provided; and 2) the clinical benefit derived from a specific service depends on the consumer using it, who provides it, and where it is delivered.
To encourage consumers to take better advantage of high-value services and actively participate in decision-making about treatments that are subject to misuse, private- and public-sector payers began to implement a concept known as Value-Based Insurance Design (V-BID) more than a decade ago. The basic V-BID premise calls for a clinically nuanced benefit structure that reduces consumer cost-sharing for beneficial services and high-performing providers. In a recent analysis of health care reform proposals from seven national policy centers and stake-holder coalitions, V-BID was unanimously included. Compared to plans without such clinically nuanced cost-sharing, incentive only (“carrot”) V-BID programs that lower cost-sharing for targeted services have consistently demonstrated improved adherence with no net increases in aggregate expenditures. More recently, V-BID programs have incorporated nuanced disincentives (“sticks”) to discourage use of low-value care. Key stakeholders – such as the large and growing number of medical professional societies participating in the Choosing Wisely initiative – agree that discouraging the misuse or overuse of identified low-value services must be part of the spending reallocation strategy.
In a Cadillac plan redesign, cost-sharing is applied only to those low-value services whose use would be questioned from a clinical evidence perspective. Thus, by reducing the use of low-value care, the new plan is just as luxurious as a Cadillac in terms of its rich coverage for evidence-based services (e.g., seat belts and anti-lock breaks), but it no longer includes unlimited access to services of unproven clinical value (e.g., power trunk or heated leather seats). It is important to note that the V-BID program does not determine what is covered and what is not. Instead, V-BID alters the amount of consumer cost-sharing based on the health benefit provided by a specific clinical service – not the price of that service. Enrollees continue to have access to services of questionable value, but are responsible for paying a higher portion of the costs.
The ultimate test of health reform will be whether it provides coverage that promotes access to care, improves health, and addresses rapidly rising costs. Instead of focusing exclusively on how much is spent, attention should be turned to how well we spend our health care dollars. By using clinical nuance to intelligently redesign a health plan that better engages consumers in making cost-conscious health decisions, plan sponsors may avoid the excise tax while still providing “Cadillac-quality” benefits. As such, value-driven strategies that encourage the use of clinically-effective care and discourage the use of low-value services can help contain costs, improve enrollee health outcomes, and permit payers, purchasers, taxpayers, and consumers to attain more health for each dollar spent.
- Elmendorf DW. CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010: before the Subcommittee on Health Committee on Energy and Commerce U.S. House of Representatives. March 30, 2011. Available: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/121xx/doc12119/03-30-healthcarelegislation.pdf
- Congressional Budget Office. Updated Budget Projections: Fiscal Years 2013-2023. May 2013. Available: http://www.cbo.gov/sites/default/files/cbofiles/attachments/44172-Baseline2.pdf
- Herring B, Lentz LK. 2012. What can we expect from the “Cadillac tax” in 2018 and beyond? Inquiry. 2011-12 Winter; 48 (4): 322-37.
- Health Affairs and Robert Wood Johnson Foundation. 2013. Health Policy Brief: Excise tax on “Cadillac” Plans. September 12, 2013. Available: http://healthaffairs.org/healthpolicybriefs/brief_pdfs/healthpolicybrief_99.pdf