CDHPs Continue Growth to Avoid Cadillac Tax

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Traditional preferred provider organizations (PPOs) are fast becoming relics of the past, like Model Ts.

Employers are switching to consumer-directed health plans (CDHPs)—high deductible health plans (HDHPs) with a health savings account and/or health reimbursement account—in droves to reduce costs and avoid the health care reform law’s Cadillac tax, which takes effect in 2018.

According to a September 2014 survey of chief HR officers at Fortune 500 companies by the Darla Moore School of Business at the University of South Carolina, the No. 1 employment action taken by companies as a direct result of the Affordable Care Act (ACA) is moving employees to CDHPs. More than half those surveyed—56 percent—said they have moved employees to CDHPs in response to the Affordable Care Act, and 17 percent said they have plans to do so.

“I don’t see HDHPs going away any time soon,” Paul Hamburger, an attorney with Proskauer in Washington, D.C., told SHRM Online. “To the contrary, I see more employers looking at HDHPs, particularly as ways to address Cadillac tax implications.”

‘The Future’

Employers prefer CDHPs to PPOs for cost containment reasons.

An HDHP “shifts more of the costs of health care to employees and the costs shifted are the ‘first dollars’ expended for medical care. That is significant because, generally speaking, they are the most expensive costs—i.e., costs that everyone incurs. Higher-cost medical items are much less frequently incurred, so if more of the first dollar costs can be shifted to employees, employers can save significant amounts,” he said.

Employees are also incentivized to become better and smarter health care consumers, Hamburger added. “They might be more inclined to shop around for medical procedures that are commoditized—i.e., a specialist is not necessarily required.”

Chris Condeluci, an attorney at CC Law & Policy in Washington, D.C., agreed, calling HDHPs “the future” because they are one way to manage health care costs, which have been rising for two decades, and they help employees think of health care “almost as a commodity. As more think of it as a commodity, they become better shoppers.”

Society will have to “accept the fact that sicker people will spend more” on health care “or figure out a way to cushion the blow,” Condeluci added.

“The net effect of these types of changes can also help employers lower their exposure to the ACA ‘Cadillac tax’ for plans that are too generous,” Hamburger noted.

ACA’s Influence

“There will continue to be changes as there have always been over the years, as employers try to address increases in costs of health care and balance cost-control against a desire to continue to provide robust benefit packages,” Hamburger predicted.

A relatively new factor “is the extent to which the availability of the marketplace coverage under the ACA will spur employers to HDHPs or other cost-shifting designs,” he said. “The reason is that if an employer knows that employees can always purchase more generous coverage on an insurance marketplace, there is less pressure for the employer to provide that type of coverage. The employer could provide HDHP coverage and let employees go elsewhere in the marketplace if they want something more generous or comprehensive.”

Employees are hesitant to switch to HDHPs “because of the increase in out-of-pocket costs,” he observed. “In some instances, employers therefore will force the change on all employees or, perhaps, new hires. Then, employers might phase in the change—give a choice to employees at first—and then migrate all employees in subsequent years.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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