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Risks and Benefits: Health on Account

Health-savings accounts, yoked to high-deductible insurance policies, are being touted as the next big thing in cost containment. But employees might think twice before taking on so much financial risk when it comes to their health care.
David M. Katz, CFO.com | US
January 27, 2005

Enough already, some finance executives seem to be saying to the human-resource directors who report to them.

The executives are apparently sick to death of years of double-digit increases in health insurance. Indeed, the irritation seems to have spawned some corporate shakeups: According to a recent survey by Hewitt Associates, 7 percent of 500 major U.S. employers are moving responsibility for health-care strategy from the human resources department to finance and purchasing executives.

To be sure, the strategy shift at those employers might only be top-level. The finance and purchasing managers, for instance, aren't exactly redesigning benefit plans, but "creating business plans about health care, defining how much health care [the corporation can afford], creating specific budgets for health care, and determining with HR how those budgets are achieved," says Tom Beauregard, a Hewitt health-care consultant in Norwalk, Connecticut.

While the employers responding to the Hewitt study expect a 12 percent increase in health-benefit expenses this year, they say they can afford only 8 percent. A CFO might draw the line at the latter figure, says Beauregard, then send HR shopping for benefit designs that work within that limit.

Still, some finance execs might run out of patience with yet another premium increase and put the blame squarely on HR. If Dan Perrin were a CFO — in fact, he's president of the HSA Coalition, a lobbying group that promotes health savings accounts — and employees from any other department continually came to him with double-digit expense hikes, "I would fire them," he says.

Isn't that akin to shooting the messenger for delivering bad news? Maybe so, Perrin suggests, but it could be an effective way to help cool down benefit-cost inflation. "If people in the health insurance industry found that their client was getting fired [because of the price hikes], they would come up with alternatives," he believes.

The lobbyist, of course, has in mind one particular alternative — plans incorporating the new health-savings account (HSA) created under the Medicare law signed into law by President Bush in 2003.

Such plans are likely to fit neatly within the tightened cost structures that finance executives are sure to demand. One reason is that the tax-advantaged accounts must be offered in tandem with a high-deductible health plan (HDHP). Because employees are asked to shell out large amounts of their own money for care before coverage kicks in, HDHPs tend to be a lot cheaper than conventional health insurance. Further, employers can choose how much to contribute to the accounts — or they can choose not to contribute at all.

Largely because of its expense-limiting possibilities, the HSA-HDHP combo is the current darling of advocates who tout "defined-contribution" or "consumer-driven" health benefits as the next big thing after managed care. After a spurt of success in holding down health-benefit costs in the 1990s, health-maintenance organizations (HMOs), preferred provider organizations (PPOs), and other forms of managed care have flopped at the job in recent years. While the coverage for a high-deductible plan can be provided by an HMO or PPO, the key difference of the new plans is that they demand a hefty amount of cost-sharing by employees and individual users.

If employees pay substantiallly for their care, goes the theory, they'll spend less than if they're using the insurers' or employers' dollars. In turn, says Perrin, doctors will start to offer discounts — and ultimately post their prices — in order to compete for business. What's more, providers would happily charge less in exchange for the luxury of not scurrying after insurance companies for payment. In the future — under pressure from HSA-wielding patients — increasing numbers of doctors will convert to what he calls a "plumber model" of billing: "I fixed your sink; please pay me."

Still, how much the new plans take hold — not to mention their effect on the future of health care — is at best unclear. One barrier is that they're a tough sell, particular for employers offering a range of other options. After all, an employer is asking employees to switch to coverage that includes a deductible of at least a $1,000 for individual coverage or $2,000 for a family; the cap on an employee's yearly out-of-pocket expenses, including co-payments and deductibles, would be $5,000 for an individual and $10,000 for a family. And those amounts are indexed for inflation.

But the blow of having to pay out so much can be softened considerably — or completely — by contributions to an HSA. In 2005, an employer or an employee, or both, can contribute up to $2,650 for individual coverage or $5,250 for family coverage in an account, or the amount of the deductible if that figure is lower.

There are also alluring tax advantages. Employer contributions to the accounts, which can be used to pay for current and future medical outlays, don't count toward employees' taxable income; employee contributions can reduce that taxable income.


Indeed, for healthy employees it's an appealing prospect to have extra, pre-tax cash on hand in an HSA to make tax-free payments for such things as long-term-care insurance or over-the-counter drugs. But a high-deductible plan can leave sizable bills for even the most robust person to pay. Perrin acknowledges that employees can take on a big risk in the early stages of a plan.

Even an employer that provides hefty HSA funding tends to do so in equal increments over the course of a year. If an employee had a $5,000 deductible, for example, and even in the unusual case in which her employer fully funded that deductible over the course of a year, the employee would have only about $417 in the account in the first month. If the employee suffered an accident and needed to spend many days in the hospital, for example, her part of the charges could be as much $4,583.

That's a hefty exposure, even for employees who are comfortable taking on a little risk. To mitigate some of the peril — and to help sell the plan to workers who are more risk-averse — Perrin recommends that employers attach a hospital indemnity rider to the HDHP. In a typical arrangement, the rider adds 15 months of hospital coverage to the policy.

If the covered person is hospitalized for more than two days, the insurer contributes a fixed payment for the third and later days; the amount depends on the size of the deductible and the month in question. Thus, for example, a person with a $5,150 deductible who is hospitalized during the plan's first month could get $4,828.13, according to a benefits schedule of Medical Savings Insurance Co., an Oklahoma City company. The rider costs $65.

Two other features that could help employees feel easier about signing up are big employer HSA deposits and full medical coverage above the deductible, according to Perrin. Workers get mad if employers set up such money-saving plans but don't share the wealth, he says, recommending that companies put enough money into the HSA in the plan's first few years to cover the entire health-insurance deductible. On top of that, providing full coverage could help the plans look less scary when employees compare them with more-conventional benefit offerings. Another feature that helps make employees more comfortable is that they generally pay nothing out of pocket for certain types of preventative care.

Nevertheless, the diminished coverage the plans are likely to deliver seems certain to cause a stir. If an employer offers employees a simple choice between a traditional HMO and a high-deductible plan, employees would see an extreme difference in coverage, says Beauregard. In "pure actuarial terms," an HDHP can be 15 percent to 20 percent less valuable than an HMO, he adds, although that that can vary depending on how much health care people use.

To encourage enrollment in the new plans, employers should give employees the feeling that they have a decent choice by offering a range of plans with differing levels of risk and costs, he suggests.

In any event, advocates argue, HSA-HDHP plans are a bold step in a direction the country needs to take to hold down health-care costs: the assumption of more risk by consumers. Since unused HSA funds roll over from year to year, employees can invest the money in stocks, bonds, and mutual funds with an eye to building up money in the accounts to pay for future health-care costs.

What happens, though, if account holders invest poorly, or the stock market goes into a severe downturn? Assuming that their employers don't continue to sock away cash in the HSA, employees could find themselves coming up severely short in their health bills — and taking it out on their employers. Bad relations and the loss of good employees could result — and, in the worst case, lawsuits.

While inserting a large element of employee financial risk into benefit plans might help cool down medical spending, the promoters of the new plans may be asking a bit much of most employees in tying health benefits to the fate of a 401(k)-like account. The relatively small number of employees with a high risk tolerance and robust health prospects will no doubt enjoy the plans' low premiums and the ability to choose where to spend their health-care dollars. Most workers, however, are sure to be wary of a plan that mixes the anxieties of investing in the stock market with those of paying for their health care.

David Katz's column "Risks and Benefits" appears every other Thursday. Contact him at DavidKatz@cfo.com.




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