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The Truth About Consumer Driven Health Plans and HSAs

Let's Review Quickly

Will these plans provide long terms cost savings? The answer is no. The cost has just shifted to the consumer. If your company is fully insured there may be an initial premium savings. It depends on what your plan design was before and is after you institute an HSA plan. Rate increases will be as usual. Cost savings will also depend on whether the employer contributes to the HSA account.

The rate of increase in terms of trend is actually higher with a high deductible plan due to leveraged trend. If you don't understand leveraged trend, contact us for an example.

 Statistics show that 20% a group's members cause 80% of the claims. Those people will still do that. Those are the big claims that drive your cost. In an HSA plan, the deductible will be raised on many people who hardly ever use the plan. That could cause an employee relations problem simply due to their perception of the plan being offered. A study has been cited by BC/BS of Ohio that says that on average 92% of their insureds use less than $1,000 in benefits per year and Principal Financial released data that showed that 86% of their members failed to meet a $500 deductible. Our own experience at S&S Benefits shows that rate increases are not less on high deductible plans. What does this mean?

If you are fully insured, you may get great rates by switching to a high deductible plan.  In talking with knowledgeable colleagues, we agree that sooner or later the insurance companies will figure out that they have under-priced high deductible plans. The 20%/80% reality mentioned above will soon catch up. If the plan is self-funded, you won't see much change. In fact, if the employer contributes to the HSA, costs may actually go up! In addition, any amount the employer funds in place of the deductible will not count towards the specific or aggregate deductibles. Specific stop loss underwriters give little to no credit for high deductible plans. Why? Because those people who are causing the majority of the claims will still do so. 

The new HSA plans-The Basics

Voted into law effective January 1, 2004, Health Savings Accounts (HSAs) are very different from Health Reimbursement Accounts (HRAs). Still, the reality is that these accounts will not lower health care costs, but rather just shift them to the consumer.

HSAs are essentially FSAs on steroids. With HSAs, employer and employee money can be contributed (Section 125 testing has yet to be decided by the IRS). In HRAs only employer money can be contributed. Plus, in HSAs, unlike FSAs, the leftover money can be rolled over from year to year. In addition, the money can be invested and grow interest free and can be withdrawn for non-medical expenses (but with a 10% excise tax penalty if withdrawn before age 65 unless the account holder is disabled or deceased). Since the money can be rolled over and there is no "use it or lose it" provision, the amount that can be withdrawn is limited to the actual amount in the account. Upon inception, the contribution limit to the HSA was set at the lesser of the annual deductible or $2,650 in 2005 for single coverage and the lesser of the deductible or $5,200 for family. In 2008, the limits will be $2,900 for individual and $5,800 family. If either spouse has family coverage in any plan, the contribution limit for the two is equal to the lowest deductible for either spouse divided equally between the two. What are the chances both employers having high deductible plans?

Plan Design Essentials

Let's get this part clear. In order to offer one of these programs, chances are the plan design you offer will have to be changed. This will be true for about 99% of employers. Why? The deductible must be at least $1,100 for individuals with out of pockets capped at $5,600 for an individual in 2008. For family, the deductible must be a minimum of $2,200 and no more than $11,200 in out of pocket expenses in 2008. Higher deductibles and out of pockets are allowed for out of network coverage. Drug card copays are not allowed unless it is implemented after the deductible is satisfied.  Preventive expenses can be covered for deductibles below the minimum (or no deductible at all), but co-payments for doctor office visits for illness are not allowed! Some plans have implemented preventive care benefits for drug expenses, but there has been no definitive ruling on which drugs are considered to be preventative, so this could be a dangerous position to take with regard to Rx expenses.

Also, almost all non-HSA plans currently have an embedded deductible. In other words, someone with family coverage may have a $1,100 deductible per individual that counts towards the $2,200 family deductible. This is NOT allowed in HSA plans unless the individual deductible is at the minimum deductible for family coverage. The family deductible amount is the minimum deductible in an HSA when there is family coverage. So, if in a family of three with a $2,200 family deductible, only one person incurs any expenses, that person's expenses must total $2,200 before any reimbursement is allowed by the insurance portion of the program. 

HSA account balances can be used tax free to pay for long term care, out of pocket  expenses under Section 213 (including dental and vision, etc.), COBRA premiums and health coverage while receiving unemployment. Rollovers from FSAs and HRAs are not permitted, but unlimited rollovers are allowed from MSAs. 

Taking the Money

Do employers want to contribute to HSA accounts? Let's see:

Yes, the coverage is subject to COBRA. Also, the expenditure of the money is supposed to be for certain qualified expenses, but an IRS official has stated that how the money is spent is between the "taxpayer, God and the IRS." There is no requirement for third party claims adjudication. Employees own the accounts and can take them with them when they leave the company.

We'll ask again, "Do employers want to contribute to HSA accounts?"

The Reality

Itís hard to know where to start in all the media generated hoopla about these types of plans. Letís get this straight though, these plans are not "Consumer Driven." They are media frenzy driven, employer driven, "me too" broker driven, consultant "jump on the bandwagon when we think itís safe" driven, but not consumer driven. The consumer is not flying this plane, he is a passenger on it and has about as much control over it as the average consumer has control over his commercial airline flight, and maybe less.

"Fix it Doc"

Donít get us wrong, we donít believe doctors and hospitals are Gods that should not be questioned, but letís face it, we canít shop for doctors the way we shop for cars. There is no price list because doctors are "practicing medicine". Sometimes they will know what is wrong with you and sometimes they wonít. How do you price for the unknown? We donít condone the prices, but from a consumerís standpoint, it is difficult to ask for anything more than to "fix whatever it is doc, and if you think itís that, then try it." Once you have a second opinion and maybe even a third, you still might not know what caused the problem anymore than the doctor. So how do you ask the doc to set a price? For Office visits, Yes. For Fix whatever it is, No. The big charges in the healthcare system are not coming from the day to day office visits.

What Does it Cost?

Call a claim center and ask what is reasonable and customary for an appendectomy. Chances are they wonít quote you a price. Ask the doctor and he/she probably won't know either. The doctor also wonít know the anesthesiology, pathology and radiology costs. The doctor won't know the hospital costs. You'll have to ask those providers too. Be sure to know your  CPT code and ICD 9 Code when you call for prices.  And by the way, if you asked for the price of the appendectomy only, you didnít ask for the extras. You bought the car with the sunroof, but didnít put the sunroof in the specs. A doctor may be able to tell you for Only that procedure for only him. But if there is a complication, do they know how much the assistant surgeon will cost? Do they know your recovery time and how many $5 Ibuprofen you will take while lying in bed? Do they know that all you need once they cut you open is an appendectomy? What if they find something else? Now ask another doctor about the same operation. I think you get the picture?

Leveraged Self-Empowerment Strategy? Love the Lingo....

One carrier reports that in 1960, consumer out of pocket expenses as a percent of total health care costs was 49%. In 1980 it was 24% and in 2001 it was 14%. For that you can thank the failed concept of the HMO that was supposed to be the wunderkind of curing healthcare costs. That was, until CDHPs came along as the next panacea. Obviously, things are going in reverse as costs are increasing, but if you listen to the proponents of CDHP (Consumer Driven Health Plans), this is all about increasing the "Transparency" of health care costs (meaning we were all in the dark and now we will be able to see it). They are calling it "consumer engagement" to make it look better. Itís all in how you present it. "Itís about giving employees the tools and options to balance their coverage in ways that are meaningful to them."

Consumer Driven is pure baloney. These plans are high deductible plans. They are part of a "leveraged self-empowerment strategy" only if the employee chooses the higher deductible and also has a low deductible choice and the money to decide to take either plan. The employer may empower the employee to decide (whether to sign up for the program) simply because it will most likely be the employer that chooses to offer the high deductible plan. Consumer Driven health care is nothing more than cost shifting back to the employee. Period. We are not saying that cost shifting is wrong. From the employer standpoint it may be necessary and with the economy these days it probably is. The great new lingo just means weíve just found a way to spin it.

When people say the number of doctor visits and scripts are reduced with these programs, weíre never sure if they are talking about visits as it relates to a percentage of the whole group, or the portion of the group that opted for the consumer driven plan. Thereís a big difference. Then again, in either scenario, if visits are reduced, did just the unnecessary visits and scripts decrease, or did people choose not to spend the money even if there may be  something wrong?

The HMO Strategy with a Different Twist

By the way, all these consumer driven specialty companies that want to just take a part of your employee group are really only taking the healthy part of the group for now. Any one person that will spend significant dollars for care does not want these plans. Separating out the healthy part of the risk was the strategy of the HMOís in the early days too. When they finally had themselves in the price position to take on the whole group, the rates would not support the risk. Same strategy, different product. And the results will be the same as the failing HMOs. Either way, if you split the group between carriers, you will kill the group for most less than 1000 employee companies. In the meantime, the consumer driven plans will be touting the healthy results of THEIR group (of only the healthier people that join the program), while conveniently forgetting (and the reporter too stupid to know) that the rest of the group was the group causing the high rates to begin with. Itís going on right now, but the reporters and most brokers, consultants and buyers are not educated enough on risk to see the truth. You see, you need a basic understanding of the transfer of risk that is supposed to be insurance, to see how things really will develop. Consumer driven health care transfers much of the risk of healthcare back to the unhealthy. We aren't condemning that, but we aren't going to make these plans out to be something other than what they are.

Defined Contribution- What You Should Have Been Doing All Along

So you say, "No, that is not all of what Consumer Driven Healthcare is. What about defined contribution plans? Arenít they consumer driven?" Well, yes, if the consumer can afford the higher contribution for the more rich plan, then the consumer is at least in a position of choice if there are two or more plans. Affordability is also a choice. But having defined contributions for a single plan or a variety of plans is nothing new. We hate to tell that to all the Consumer Driven Media Fanatics (and most of the consulting and brokerage community that is too uneducated and /or too young to know). Defined contribution, is nothing more than the employer saying, "I will pay this amount and no more." If there are multiple plans involved, it becomes a cafeteria plan. Havenít they been around for at least 30 years? Give it a new name and the uneducated suddenly think they actually have something new.

By the way, when it comes to defined contribution, isnít that what the employer should be doing and should have been doing all along? "My budget is $1million. What can I get for it?" Make the plan fit the budget and not the budget fit the plan. Pretty simple, but most brokers and consultants donít understand it, so they never ask the question of, "How much do you, Mr. Employer, wish to spend on health benefits?"

The Probable Future

The plans wonít stop materializing. It is estimated in 2006 that there are 2.7 million workers enrolled in these plans. Thatís not that many. The growth rate has slowed and HSA plans seem to only be offered as an option for most employers, unless they are desperate to shift costs. Enrollment could increase dramatically, and due to the media and broker/consultant frenzy, it probably will if medical costs continue to increase. Will the population be healthier because of these plans? That's doubtful.

Will costs actually decrease?

The answer is No. Why? Hereís why (and this is plagiarized from a friend): 

"The basic total cost of healthcare is the out of pocket cost of the employee plus employee contributions plus employer contributions."

 With these CDHPs, all that will happen is that the cost will have shifted, it will not have changed. Someone will have to talk to the medical community about cost reduction. Itís not going to come from these plans, although employer costs may be temporarily reduced.

If you have any comments or wish to learn more: please contact jseiler@ssbenefits.net

We hope to update this page from time to time as new thoughts and plans develop. 03/22/2004, 8/14/2007