Making Workers Pay as the Cadillac Tax Looms

To trim costs, more companies are offering health-savings accounts

Illustration by Peter Oumanski

By Margaret Collins

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Companies seeking to rein in medical spending and worried about the “Cadillac tax” on expensive health insurance expected in 2018 are turning to coverage that shifts more costs to workers. As an alternative to traditional insurance, businesses are offering health-savings accounts, or HSAs, which let workers set aside funds to pay medical bills. These are paired with insurance coverage with a high deductible—at least $2,400 per year for a family—that typically must be spent before insurance kicks in to pay claims.

Employers see HSAs as a way to hold down costs and prepare for changes in health-care law, says Helen Darling, president of the National Business Group on Health, an association of big companies. The health reform bill signed by President Obama last year will apply a 40 percent levy on health benefits above $27,500 for families. The only way to avoid “the Cadillac tax is if they control costs starting now,” Darling says.

The number of people with such coverage has risen 87 percent since 2008, to more than 11.4 million in January, according to America’s Health Insurance Plans (AHIP), a trade group representing insurers. The National Business Group on Health found in an August survey that almost three quarters of companies plan to offer an HSA-type plan next year, up from 61 percent this year. In 2012, 17 percent will make such plans the only coverage available.

Workers may opt for HSAs because premiums are relatively low and the accounts have tax advantages. In January the average annual premium for family coverage through a high-deductible plan and HSA was $10,248, AHIP data show, 26 percent below the average for all health plans, according to the Henry J. Kaiser Family Foundation. Contributions of up to $6,150 per family can be made with pretax dollars, funds may be rolled over from year to year, and accounts are portable if workers change jobs. Earnings and withdrawals are tax-free if used for qualified medical expenses. After age 65 or becoming disabled, account owners may take money out for nonmedical reasons with no penalty, though they do have to pay income tax.

A downside is that big deductible, which has some advocates worried that people might delay care because they’ll have to pay out of pocket. That could cause an illness such as a child’s ear infection to become more severe and more costly to treat, says Kathleen Stoll, director of health policy for Families USA, a consumer advocacy group. “In the end, we all grow older and sick and we may find we’ve shot ourselves in the foot” with a broad shift to savings accounts, Stoll says. Another concern is fees for HSAs that may “neutralize any tax advantage,” says Mila Kofman, a research professor at Georgetown University and former superintendent of insurance in Maine. “There are all sorts of hidden fees, and not so hidden, that you need to be aware of,” she says.

The shift is similar to the move to 401(k) retirement plans from company-funded pensions. Bank of America, JPMorgan Chase, Wells Fargo, Fidelity Investments, and other financial-services companies see it as an opportunity to sell more mutual funds or stocks to account holders. “This product has had tremendous growth,” says Elizabeth Ryan, head of Wells Fargo’s health benefit services. “We plan to again double our assets over the next three years.”

RSM McGladrey, a tax and financial consulting firm with 6,800 employees across the U.S., offers employees two types of high-deductible plans with HSAs. More than half of workers enrolled in McGladrey’s health benefits have chosen them, says Kathy Johnson, senior director of employee benefits at the company. “We’re doing what we can to encourage them all to move to high-deductible plans,” Johnson says.

Elda Di Re, 49, who leads the personal financial-services practice for Ernst & Young in New York, says she switched to an HSA this year. She’s saving more than $300 a month on premiums compared with the traditional plan, and funds in the account can be invested and increase tax-free. “I think of it like a retirement savings account,” she says. “I like the ability to grow this side fund for future medical expenses.”

The bottom line: Worried about rising costs and the “Cadillac tax” on insurance, more than 60 percent of large companies now offer health-savings accounts.

Collins is a reporter for Bloomberg News.