Embracing a Higher Deductible: Employees with ‘skin in the game’ engage in more consumer-driven behavior

Healthcare costs have significantly outpaced general inflation in recent decades, averaging 1.4 percent above the Consumer Price Index over the past 10 years. For this reason, employers who sponsor employee benefit plans have increasingly favored Qualified High Deductible Health Plans, or HDHPs.  Employers believe that greater use of HDHPs will reduce inflationary pressure on healthcare spending, and, in turn, lower the cost of their health care spending.

The economic theory behind HDHPs is simple: If participants in these plans have more “skin in the game,” they will engage in more consumer-driven behavior, such as shopping for lower cost medical services (creating a demand for provider cost and quality transparency – a great topic for another day), seeking out preventative care and forgoing unnecessary care when possible. They may also pay closer attention to creating healthy habits: Exercising more, eating healthier, and being more mindful and taking responsibility for their health.

Legislation also nudges employers toward HDHPs.  The “Cadillac Tax,” an excise tax imposed upon expensive healthcare plans by the Affordable Care Act, inherently favors lower-premium, higher deductible, consumer-driven plans. Though Congress has delayed the implementation of the Cadillac Tax until 2020, the continuing shift toward higher deductible plans appears likely. Clearly, the future of healthcare reform is anyone’s guess, but voices out of Washington have maintained that HDHPs and Health Savings Accounts (HSAs) are likely to maintain a prominent role in any sort of reform. HSAs offer tax-advantaged medical savings accounts for those enrolled in HDHPs, allowing people to pay for health care with pre-tax dollars.

How do you identify if your plan is a Qualified High Deductible Health Plan? Generally speaking your plan’s paperwork will clearly identify whether it is.  If not identified in writing, a key feature is most of your health care services costs will be first subject to the plan’s deductibles before the insurance pays any benefits.  The only exception is 100% coverage for preventive services.  If your plan offers pre-deductible benefits like co-pays for doctor, prescriptions, or hospital visits, it’s more than likely NOT a Qualified High Deductible Health Plan.

Once the deductibles are met, the plan then pays according to the plan design purchased. The minimum annual deductible amounts are dictated by the IRS thereby making the plans qualified to partner with an HSA. Minimum allowed deductible amounts vary moderately from year to year. For 2018, the minimum deductible required for a qualified plan is $1,350 for self only coverage and $2,700 for family coverage.
When people are enrolled in a HDHP, they are allowed to open a Health Savings Account, or HSA.

Before I get into more details concerning what an HSA is, let’s first visit what an HSA isn’t. Health Savings Accounts are not Health Reimbursement Accounts.  A Health Reimbursement Account is in play when an employer purchases an employee health plan from an insurer with higher out of pocket costs.  The employer then sets aside dollars saved from buying the higher deducible plan to help employees pay for costs the insurance plan doesn’t cover. Examples are co-payments and portions of deductibles or coinsurance dollars. Health Reimbursement Dollars are only available to an employee if they have medical services. In other words, there is no employee “account” in which the individual can actually access.

Health Savings Accounts are also NOT Flexible Spending Accounts. Flexible spending accounts allow employees to put pre-tax dollars into another “on paper” account that can be used for eligible medical, dental, and vision services. Flexible Spending Accounts have a “use it or lose it” feature attached to it. This means the dollars elected to be put aside for qualified services must be used within a set period of time, generally one year. If the dollars are not utilized, they are forfeited.

An HSA is an actual (in the employee’s name) tax-privileged medical saving account that is available only to individuals enrolled in a qualified high deductible plan, as discussed above. Generally speaking, HSAs are the most-favored investment vehicle under the tax code. Contributions are exempt from federal and state taxes, withdrawals for qualified medical expenses (vision and dental as well) are tax-free, and earnings on investments are also tax-free.  Employees are saving, or spending, their own money.

When eligible for an HSA, most people open an account to 1) put their own money away for eligible medical expenses not covered by their benefit plans, and 2) receive dollars from their employer if/when their employer is contributing to the account on their behalf. The HSA funds rollover year to year – no use it or lose it rule! – are portable to the owner of the account, can be used for medical expenses or, at retirement age, used for retirement similar to a 401(k) plan. Annual account contribution limits of $3,400 per person and $6,750 per family currently apply.

One of my favorite books on HSAs – “Health Savings Accounts for Dummies” – was written by my good friend Amy Chambers, when she was employed at Priority Health. It is still updated and published as an e-book by Priority Health. After 30-plus years as a benefits consultant, I refer to it often. Chambers wrote, “Why the emphasis on consumer-driven health plans? Because when you pay for the healthcare you access rather than having your insurer (or employer) pick up the bulk of the bill, you’re more careful about how you spend health care dollars.  You pay closer attention to cost and quality and work harder at getting the right care, at the right price, and at the right time.”

 Jennifer Johnson Petterson, RHU, is an employee benefits specialist with Advantage Benefits Group in Traverse City. She can be reached at (231) 642-5681;  jpetterson@advantageben.com; or www.advantageben.com.