HSAs, A Model of Healthcare (Part III) - HealthDecisions.org, Opinion, Tom Cochrane

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How does an insurance advisor or an employer effectively compare an HSA-based plan to a conventional health insurance program? In order to address this question, I briefly introduced a sample case study in a previous article (Article II). The case study involves a sample small business - Peter’s Ads - with 11 employees located in southern California.

The Current Health Plan

The firm currently offers its employees a relatively rich PPO plan. This PPO has in-network deductibles of $250 for individuals and $500 for families. The out of pocket maximums are $2,000 for individuals and $4,000 for families. Office visit co-pays are $15 and in-network hospital services are covered at 90%. The total annual cost for all 11 employees is $107,832. This business owner currently covers 100% of health plan costs for both employees and their dependents.

The HSA-based Health Plan

The owner of Peter’s Ads is interested in at least learning more about HSA plans, so the firm’s insurance broker presents pricing and plan feature information for a qualified high deductible health plan coupled with HSAs.

This HSA-based plan has in-network deductibles of $2,500 for individuals and $5,000 for families. The out of pocket maximums are $5,000 for individuals and $10,000 for families. There are no office visit co-pays, and in-network hospital services are covered at 80%.

The total annual cost of this HSA plan option for all 11 employees is $40,476. Assuming that all of employees move to the HSA plan (there is a “full replacement”), the potential savings available to this small employer is an eye-opening $67,356.

$67,356 in savings - a 62.5% decrease in health care costs - is more than likely a significant number for this or any other small employer. The question to ask, though, is whether a simple analysis of the cost differential provides a reasonable comparison of the two health plans.

Consumer Driven or Employer Driven

An all too common criticism of HSAs and consumer driven care (CDH) in general involves the notion of cost shifting. The critics’ reasoning typically goes something like this: beware consumers, because HSAs and the requisite high deductible health plans enable employers to cut their medical costs by shifting more of the financial burden and risk on to you.

The reality is that these criticisms are premised on what is either a one-dimensional analysis or a shallow understanding of HSAs. Consider, for example, the case study described above. Peter’s Ads could certainly pocket the $67,356 in savings if the firm decides not to contribute to the employees’ HSAs. In this case, the cost shifting critics have a strong case since the $500/$1,000 deductible PPO plan will be replaced by a $2,500/$5,000 deductible plan, and the employer receives as whopping 62.5% discount on their health care costs.

Alternatively, it is clear that Peter’s Ads - and many other employers for that matter - has quite a bit of wiggle-room in between the current plan and the HSA plan. For example, Peter’s Ads has 11 employees in total, and 8 of those 11 employees have some form of dependent (a spouse or children) insured on the company health plan.

Peter’s Ads could fund 50% of each employee HSA - an amount equal to $1,250 for each single employee and $2,500 for those with dependents - and have total annual plan costs of $64,226. In fact, Peter’s Ads could fund 100% of every HSA—an amount equal to $2,500 per single employee and $5,000 for those with dependents - and have an annual cost of $87,976; an amount that is still $19,856 less than their current health plan.

Is a high deductible health plan coupled with employer funded HSAs a form of regressive cost shifting, or is it simply an alternative approach that uses tax advantaged savings rather than insurance as a form of funding for discretionary health spending? The fact of the matter is that in the vast majority of situations it is possible to structure HSA-based plans in a thoroughly progressive manner. HSAs are not a simple zero sum game where the employer gains at the expense of the employees.

The Devil is in the Details

Peter’s Ads is a fairly straightforward case study: there is one plan option; employee premium contributions are not required; and the employer fully replaces a relatively rich current plan with a high deductible plan.

Most situations are not this clear-cut, and moving to an HSA-based plan presents a significant change. As a result, many employers will naturally and justifiably have questions that range beyond the simple “what are the premium costs next year” and “can I afford to provide some starting contribution to the HSAs?”

A realistic picture of the financial impact of HSA funding approach would address questions and variables such as:

• What level of HSA contribution makes sense now and in the future (over time)?
  
• Should the HSA contribution be scaled over time?
  
• Should HSA contributions be fixed dollar or a percentage of a particular plan feature such as the deductible or HSA maximum?
  
• If HSA contributions are in the form of a percentage, how might the CPI-based Treasury formula affect plan costs over time?
  
• Should the premium contribution formula differ from our current plan, and if so, how?
  
• Should premium contribution formulas be fixed dollar or a percentage of premiums?
  
• How do the plan premiums trend over time due to health care inflation?
  
• How does growth or attrition in the employee base affect plan costs over time?
  
• How will plan costs be affected as the average age of my employee base changes over time?
  
• What will overall plan costs look like if only a portion of the employees choose the HSA plan?
  

HSA Simulator™ and soon to be released HSA Dashboard™ are tools designed to help advisors and employers answer all of the questions listed above. While not a simple task, each of the listed items can be quantified in a prudent, objective manner. The fundamental goal is to structure an HSA-based program that meets employer cost objectives while also creating as much value as possible for employees.

Thomas Cochrane, CFA, is the Founder of Cordova Advisors, a company that has developed a patent-pending dynamic financial model that simulates the HSA funding approach. Cordova Advisors’ mission is to provide independent, objective advisory services that help employers and their advisors understand and make informed decisions regarding Health Savings Accounts (HSAs).