Logical deduction: Do high-deductible plans really work?
High-deductible health plans are sold as transparent solutions, but who’s benefiting more — employers or employees?
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From the pages of In Business magazine.
Conventional wisdom would suggest that any time a responsible individual has to spend their own money, it will be spent wisely.
That was the theory behind high-deductible health plans (HDHPs), introduced in the early 2000s to battle the rising costs of health care. The thought was that as the true costs of health care became more transparent, consumers with “skin in the game” (e.g., employees) would be more selective about their health care overall.
Is it working?
Are employers seeing savings from their employees being thrifty consumers of health care, or are employees choosing to forego their own care because they can’t afford to pay lump-sum costs toward their high deductibles?
While both scenarios have proven true, high-deductible health plans are here to stay, primarily due to the tax and savings benefits they provide.
We asked several area experts to explain the mechanics behind HDHPs, which are growing in popularity nationwide.
HDHPs and HSAs
Kent Smith, vice president of business development at Employee Benefits Corp., a 100-percent employee-owned third-party administrator, explains why these high-deductible plans exist.
“Employers are looking to cut their health-care costs, and high-deductible health plans reduce what they pay for their insurance premiums.”
However, by saving on their own expenses, employers also create more out-of-pocket risks for their employees in the form of higher deductibles.
“What can employers do to help mitigate that? Enter the HSA plan,” he states.
An HSA, or health savings account, can only be offered with a qualified high-deductible health plan, and the Internal Revenue Service is very specific about what the limits of those plans are, Smith explains. They can also change from year to year.
An employer can make contributions into an HSA on behalf of an employee to help reduce the employee’s deductible, and if they do, employers can write it off as a business expense.
“For example, an employee’s annual deductible can be reduced from $2,000 to $1,500 if an employer contributes $500 to help offset the costs. Many employers do this, but not all. It’s an option,” Smith says.
For the employee, HSAs have no deadline for qualified expenditures, unlike Flexible Spending Accounts (FSAs), which are renewed every 12 months. With FSAs, if an employee doesn’t spend all of the flex dollars they socked away by the end of the plan year, they will lose it.
“There is no use it or lose it with HSAs,” Smith explains. “If an employee elects to put money from their paycheck into an HSA, it’s theirs forever, whether they stay with that company or move on. It’s liquid money that they can manage themselves or even combine with other HSA plans. That’s why HDHP/HSA plans are seen as a very favorable tax instrument.”
Money is invested pre-tax, and when it reaches a designated amount ($1,000 or $2,000 is common), it can also be invested into mutual funds just like a 401(k), Smith explains. There are investment limits, however.
In 2020, an individual HSA contribution cannot exceed $3,550, or $7,100 for employees with family HDHP coverage. A “catch-up” contribution of an additional $1,000 is also allowed for individuals over 55 years of age.
“Money is invested pre-tax, growth is not taxed, and as long as withdrawals are used for qualified medical expenses, they will not be taxed either,” Smith explains. [Qualified medical expenses are identical to those specified in typical Flex plans.]
Smith believes that any employee, no matter their age, could set up an HSA, so long as their employer offers a high-deductible plan.
He describes the most common users of HSAs as either spenders or savers. Spenders use the HSA for expenses such as co-pays or co-insurance.
Savers may opt not to touch the HSA at all and save it for medical expenses that crop up down the road, perhaps even after retirement.
If offered by an employer, another option for savers is a limited-purpose HSA or FSA plan, which will only reimburse dental and vision expenses.
“You can’t have a regular flex account and an HSA at the same time,” Smith cautions, “but if an employee opts for a limited-purpose dental/vision plan, they can still contribute to a regular HSA, as well.
“The point is to not touch the HSA at all because it can be used in the future for medical, dental, and vision expenses.
“Employees who may not be able to afford out-of-pocket medical expenses can use their HSA dollars as necessary, and that’s perfectly fine, too.”
Employees need to understand the power of pre-tax, which may take more education, he suggests. “If you’re going to spend the money anyway but now you don’t need to pay federal, state, or FICA on that, it would sure behoove you to do that.”
Just save your receipts, Smith cautions, because many HSA plans offer a debit card that can be swiped and does not require people to submit claims for expenditures, unlike Flex accounts. Holding on to receipts dating back seven years is still recommended.
“If you’re audited, the IRS will know because your W-2 form will show pre-tax earnings.”
Why employers should care
Heidi Hoffland, owner/advisor at HR Outsource LLC in Madison, helps organizations with human resources needs ranging from recruitment to offboarding. Over the past five years, Hoffland has observed employer interest in high-deductible health plans grow significantly.
“There’s definitely a benefit for employers to offer HDHPs,” she says. “A lot of it has to do with the lower premium costs, but there’s also a tax advantage if they offer a health savings account, as well.”
One common misconception about HDHPs is that the employee needs to pay out of pocket for all of their health care up to their deductible.
That’s not necessarily true, Hoffland explains. “Preventive services (e.g., immunizations, annual physicals, pre-natal care) are covered at 100 percent so there’s no out-of-pocket costs and they don’t apply toward a deductible, either.”
Some employees may not have a choice because their employer only offers an HDHP. But if it’s part of a company’s benefits mix, employees can elect whether to participate in either, neither, or both.
The benefit to employers is in the lower insurance premiums. “They usually pay something, so these plans reduce their cost share, and if they offer an HSA as well, there’s a tax deduction involved,” she adds.
“If an employer decides to match whatever the employee puts in — and they can set a limit — the employer also gets a tax benefit. They don’t have to pay the payroll tax on whatever they’re matching.”
Business owners have been very interested from a personal standpoint, as well. “Employers can reduce their tax burden a little by putting their own money into the HSA, but again, there are limits.”
Many of Hoffland’s clients offer high-deductible health insurance as a part of their benefits mix. Some even pay the entire HDHP premium for employees and may contribute even more into an HSA, which drives employee participation.
“I think Madison is unique in that respect, though,” Hoffland notes.
The onus is on employees to anticipate what their health-care costs might be, and especially on employers to educate them on these plans. HDHPs have limits, and once an employee meets their deductible, there may be other out-of-pocket expenses they may have to pay, as well.
It’s not always an easy concept for employees to grasp, she observes.
“When I speak to employees about high-deductible health plans and health savings accounts, there’s a disconnect. They don’t understand how the two work together, so it’s up to the employer to educate their employees. Many use benefits brokers who explain these things, but my sense is a lot of people still don’t understand HDHPs.”
Last July, M3 Insurance released its annual health-care cost study. The 2019 Trends in Health Care report showed that health-plan premiums grew 4.4 percent, the lowest increase in 15 years, and the average annual health benefit cost per employee decreased from $13,727 in 2018 to $13,559 in 2019.
The results suggest that employers are becoming savvier about encouraging employees to be mindful of how they use health care.
“Education is critical,” agrees Amy Olson, senior account executive-employee benefits at M3. “To me, it’s best when you have many months to start laying that foundation for employees to understand. The minimum deductible is high, but it’s not necessarily higher than what the cost might be on a traditional plan without the co-pays.”
Employees need to understand the benefits to them in terms of their own savings, financial sustainability, and their retirement planning. “With an HSA, you’re saving for the future,” Olson adds.
One of the basic tenets behind the development of HDHPs and HSA accounts was that with cost transparency, employees might be able to help slow the meteoric rise in America’s health-care costs by becoming better consumers of medical care.
That hasn’t necessarily occurred, notes Olson. “We’re seeing some evidence of savings, but the full impact has yet to be seen.”
M3 often suggests comparing prices when physicians suggest they have certain medical procedures performed.
“If an employee needs an MRI or CAT scan, which are high cost, we’re instructing our employers and their members to seek other options, such as Turville Bay, for example,” Olson says. “An employee may be able reduce costs by doing more homework or pressing their doctors on whether certain procedures are really needed.”
Technological advances such as e-visits or virtual care should also be encouraged. “Many things can be diagnosed or treated using today’s technology,” Olson adds.
For example, someone with a sore throat or a rash can take a photo with their phone and send it in to their clinic electronically. It’s especially beneficial for people living far from their nearest provider.
Employers are taking a more proactive stance, too, Olson says. She’s noticed a groundswell from employers interested in exploring what drives their health-care costs. Sure, transparency and education are key, but so is ensuring that procedures are being billed appropriately. “Miscoding can result in a bill being off by hundreds or thousands of dollars, she adds.”
“We’re always being told that ‘costs are being controlled,’ but some employers out there may want to change that up a bit.”