Making health insurance more affordable
By Richard A. McGrath
Mandating health insurance coverage doesn't make it affordable.
While Gov. Romney's health care reform has the worthy goal of insuring all Massachusetts residents, it does not address affordability. Already, in attempting to implement the legislation, the commonwealth has found that insuring everyone will be more expensive than anticipated.
That's no surprise to Massachusetts employers, who have become accustomed to double-digit increases in their health insurance premiums every year. In the past year, increases averaged 12 percent to 15 percent. At 15 percent a year, costs would double in just five years.
Employers can't pass on increases of that magnitude to customers and remain competitive, but they also can't absorb the added costs and remain profitable. The net result is that part of the cost is being passed on to employees. It's now common for employees to pay for 25 percent of their premiums.
So what can be done to keep costs manageable for both employers and employees?
Controling premiums
To control health insurance premiums, you must, of course, have an understanding of why they are increasing so rapidly. Certainly, our lengthening life span is having an impact. Our ability to treat diseases that previously were untreatable is also adding to costs. Cost of prescriptions, drugs, overall in-patient care, tests and health diagnostics have increased.
Managed care is also putting pressure on premiums. Currently, employees with managed care plans receive coverage for just about every disease and ailment. Doctor's visits and even prescriptions are often covered, with only a relatively small co-payment by the insured.
That's a great benefit to have, but it's expensive. Ideally, it encourages people to seek medical care when they need it, but it also results in people seeking treatment when they don't need it. As costs continue to rise, so do co-payments. At one time, patients typically paid $2 for a co-payment. Today they pay $10 or more.
Anyone old enough to remember the days before managed care - when indemnity plans were the norm - may remember that routine doctor's visits were paid for out of pocket. Insurance covered only expensive procedures and hospitalization.
A return to an indemnity system would cause protests from employees who are accustomed to not paying for doctor's visits, but over time we may be forced to if costs continue to spiral out of control.
In the meantime, employers can add elements of an indemnity plan to their current coverage in a way that can save money for both employers and employees.
An incentive to save
No one thing is likely to have a sufficient impact on premiums, but an integrated series of changes can result in significant savings.
The key is to create financial incentives for employees to use the health care system efficiently. But how can you encourage them to seek medical care when they need it - and to avoid it when they don't?
The starting place is to increase the size of the deductible. This will save money and will have little impact on young, healthy workers. However, it's important for employers to offer employees something in return for accepting a higher deductible.
Several options are available to help employees pay all or most of the higher deductible. One approach is to use some of the premium savings to fund a Health Reimbursement Arrangement (HRA). An HRA reimburses employees and their families for medical expenses up to a maximum dollar amount per coverage period. Unused funds are carried forward.
The employer decides what is covered by the HRA. For example, it may be used solely for medical expenses, or it can provide reimbursement for dental expenses, vision or both.
If the HRA complies with IRS regulations, employees will not be taxed on the value of the reimbursements they receive or on the balance in their accounts. In addition, the employer will be entitled to a deduction.
Flexible Spending Accounts (FSAs) are a similar option, but are paid for by employees using pre-tax income. Unlike funds in HRAs, unused funds in FSAs cannot be carried forward to the next coverage period.
HRAs and FSAs are often used together. When they are, technically HRA benefits must be exhausted before FSA funds are used. However, the plan can be drafted to specify that HRA funds are available only after expenses exceeding the dollar amount of the FSA have been paid. As a result, an employee may exhaust FSA funds, which cannot be carried over, before tapping into HRA funds, which can be carried over.
The employee must demonstrate that HRA and FSA expenses are for approved healthcare costs. However, some companies have now made debit cards available expressly for that purpose. If the employee tries to use the card to pay for non-reimbursable expenses, it won't work.
The ability to track HRA and FSA expenses using debit cards greatly reduces the administrative burden and will likely make them more popular among mid-sized and even relatively small businesses.
Richard A. McGrath is president and CEO of McGrath Insurance Group, Inc. of Sturbridge. He can be reached at rmcgrath@mcgrathinsurance.com. This article is written for informational purposes only and should not be
construed as providing legal advice.
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