Are Higher Deductibles The Insurance Answer?
The rising cost of health insurance is a major gripe for businesses today.
And though cost growth in Massachusetts should slow through 2017 because of a state law enacted last summer that ties cost inflation to economic growth, the reality for many businesses is already stark.
The state has the highest average family health insurance premium in the country, according to a study by the Commonwealth Fund released in December. Bay State employers are paying an average of $12,613 each year for an employee's family plan and $4,385 for a single plan, according to a 2011 survey by the federal Agency for Health Care Research and Quality.
To mitigate those costs, many employers have restructured the plans they offer, said Bill Randell, president of Advantage Benefits in Worcester. For private employers, like those he represents, the majority have moved to more deductible-heavy plans to reduce monthly premiums, which are paid regardless of whether employees seek medical services.
"I would say 80 percent of clients have a $1,000 or $2,000 deductible," Randell said. "On top of that, a lot of employers help employees pay a portion of that."
And they're doing that through what's known as a health reimbursement account, or HRA, which is essentially an employer's promise to pay the second half of the deductible, capping the employee's potential risk at $1,000 after premiums.
Though the tradeoff is lower premiums, those who utilize medical care will take more of a financial hit than those who don't.
But aren't employers worried about scaring off their workers by passing on more risk? Randell said they need not fret; it's become the norm.
"That's the thing," he said. It's not even uncompetitive anymore in the private industry."
'Consumer Driven' Care
If higher deductibles with some cost sharing between employee and employer are a step away from higher-premium plans and co-pays, then perhaps the next step would be what's known as high-deductible health plans, which some refer to as "consumer driven."
The idea is similar — higher deductibles, lower premiums — but the design is more extreme. Unlike the HRA plans Randell is selling more of lately, almost everything except an annual physical exam counts toward the deductible in a consumer-driven plan. The federal government establishes a minimum threshold each year for what that deductible must be.
The idea is that the potential financial hit will cause employees to shop around for the best price for care.
But critics argue that the plans cause patients to avoid care or rack up debt.
And one major sticking point is that health care pricing isn't all that transparent, making price shopping tricky.
This year, high-deductible plan minimums are $1,250 for an individual and $2,500 for a family. After the deductible is reached, co-insurance can drive annual out-of-pocket costs up to a maximum of $6,250 and $12,500, respectively.
Sound scary? It can be, especially if an employee's family needs a lot of medical care early on.
But what's unique about high-deductible plans is they allow employees to establish a health savings account (HSA), to which both the employee and employer can contribute. Funds deposited into the account, which is owned by the employee, are not subject to federal income tax and they roll over if they're not used in a given year.
HSAs are different from the more common flex spending accounts, or FSAs, because the funds in the latter come solely from the employee and do not roll over year to year, known as "use it or lose it."
Mark Gaunya, president of the Massachusetts Association of Health Underwriters and a benefits broker in Methuen, advocates consumer-driven plans, but with one big condition: Employers must use some of the money they're saving to contribute to employees' HSAs.
"In my mind, if I don't give the employee some contribution, if I just make a higher-deductible plan, all I've done is shift the cost to them," Gaunya said. "You need both parts."
Such plans, coupled with HSAs, represent a major change from a traditional plan, he said. It requires employers to ask more of their employees.
The top concern he hears from clients is: "My employees will never understand this."
But Gaunya said employees can catch on. And he said the plans allow for creative incentives, like conditioning some portion of the employer contribution on workers getting health assessments or enrolling in smoking cessation programs.
Joshua Archambault, director of health care policy for the free market-leaning Pioneer Institute in Boston, has studied consumer-driven health plans and thinks they could present a solution to lower costs in Massachusetts.
"The average citizen is much more aware of the cost of health care and realizing they need to play an active role," Archambault said.
But enrollment in the plans, which can be tracked through the existence of the HSAs that go along with them, has not caught on in Massachusetts like they have in other states. Only 3 percent of the state's residents are enrolled in such plans, according to America's Health Insurance Plans, a national association.
Archambault thinks insurers could offer more desirable pricing if the plans can grow a bigger pool. "This is a little bit of a chicken-and-egg problem here in Massachusetts," he said.
Randell isn't convinced. He think HRA-style plans are easier for employees to accept than consumer-driven plans because they still have prescription drug co-pays and the deductibles are a bit less scary.
"When you have a $1,000 or $2,000 deductible … the health care consumer doesn't run out and get stuff done unless you absolutely need it," he said.
One benefits client Gaunya worked with recently is the Association of Independent Schools of New England, which has several Central Massachusetts schools as members.
Hale Smith, CFO of the Groton School, a five-year college preparatory and boarding school in Groton, said the quickly rising cost of health insurance forced the school to introduce a different mix of plans to its 150 employees several years ago.
The school followed Gaunya's advice. It pays 75 percent of the monthly premiums and deposits half of the deductible into employee's HSAs.
"My understanding is the Groton School is relatively generous in its contributions toward medical expenses for its employees," Smith said, compared to other employers.
Kristen Palojarvi, director of finance and operations for the Applewild School in Fitchburg, said her 60-employee school offers a similar type of high-deductible plan, coupled with an HSA.
Both the maximum deductibles and out-of-pocket costs are lower if employees stay within the designated provider network. The school pays half of the deductibles ($1,500 for a single plan; $3,000 family) each year.
"Even doing this, we saved quite a bit of money on our employer portion of the contribution," Palojarvi said in an email.
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