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Helping You Reduce Health Costs

Everyone knows that health insurance costs are rising at a rate much faster than inflation, but what to do about it generates as many thoughts as there are commentators.

Perhaps giving employees "ownership" in their health plans would help ease the rate of inflation.

And save money for you, the employer.

Whether you're a large employer who self-funds, a smaller employer at the mercy of the carriers, or a one-person shop, by taking or giving ownership of the costs of healthcare, you and your employees can save money.

That's what this section is about. In this page and all the linked subsidiary pages, you'll find ways to empower yourself and your employees. Tips, techniques, pitfalls... all the info is here.

If you would prefer acting on it instead of just reading about it, click here to let us know of your interest. We'll gladly give you a customized look at your own plan and how it can work for you.

Employees Are Disconnected from the Cost of Health Care

At least part of the cost increase can be attributed to the complete disconnect between the cost of healthcare and the recipients of healthcare. What does the average person mean when they say, "healthcare costs are rising?" There's a pretty good chance that they're talking about the premiums they pay at work, not the cost of healthcare itself.

Surprisingly, a relatively large number of employees, when asked how much a doctor's visit costs, give an answer that is somewhere around their health plan's copay amount.

Maybe the question is misleading -- after all, it only costs them the amount of the copay.

But could they really think that a doctor works for $15 or $20? Maybe.

Buy Why Should They Care?

I'm not being flip in asking that question. It's a legitimate question.

What difference does it make to the average employee if his doctor makes $20, $50, $100 for his visit?

Will the employee's premium change if the employee knows?

And if he does know, what can he do about it? There's no gain... and no value in knowing. It's a totally boring fact.

Therein lies one of the biggest problems with the American healthcare system. (Is the answer a single payer sustem? That makes the lack of reward for knowledge even more remote.)

Health Cost Awareness Can Help Control Medical Inflation

Contrast that attitude, lack of knowledge and the concomitant high healthcare inflation with two other health care areas where cost increases are much more tame - durable medical equipment and prescription drugs.

Just this October, the Department of Labor announced that the inflation rate for prescription drugs had dropped to one percent! Think about that - that's less than the general inflation rate. And durable medical equipment inflation, things like crutches, wheelchairs and the like, has averaged under five percent over the last 20 years.

Not coincidentally, both of those product areas require a greater cost participation from the insured than most of health costs. Durable medical equipment coverage is usually limited to some relatively small amount ($750 - $1,500 maximum benefit) and requires coinsurance even up to the maximum benefit. So the employee is paying 20% of the first few hundred dollars and 100 percent of the amount above the maximum.

With regard to prescriptions, not eight years ago, many drug plans required only a five or ten dollar copay for any drug. Drug costs were rising by double digits, reaching a high of 22 percent per year. But in the last half dozen years virtually every health plan in America has moved to a three-tier drug copay plan. Insureds pay, for example, $10 for generic drugs, $25 for "approved" brand name drugs, and $45 for non-approved drugs.

The result of these requirements - both of which give the insured a vested interest in how much she spends - has been a dramatically lower inflationary rate. While durable medical equipment inflation has been tame for years because of little insurance cov-erage, prescription rates of inflation dropped dramatically within a half-decade.

How the Smart Employer Takes Advantage of Employee Cost Awareness Knowing this, smart employers who desire to reduce the cost of benefit inflation are turning to three supplemental health-insurance-related plans to take advantage of this economic fact of life:

• Flexible Spending Accounts (FSAs)
• Health Reimbursement Arrangements (HRAs)
• Health Savings Accounts (HSAs)

In each, the employee's cost of health care is directly related to her spending decisions. Frugal spending reduces her cost; profligate spending increases them.

The Flexible Spending Account

The FSA is the granddaddy of all these plans. The employee deposits money into the FSA account (only employees can deposit money into the FSA plan; employers aren't allowed to contribute) on a paycheck-by-paycheck periodic basis. It's a tax-wise way to spend money because the contribution is deductible, and the withdrawal is income tax free if used for medical expenses. Moreover, the variety of medical items on which it can be used are huge, everything from traditional medical and dental costs to air conditioners for asthmatics to over-the-counter cold remedies.

There are three problems with the FSA. First, if the employee neglects to use the money, any amount remaining at the end of the plan year is forfeited to his employer. Second, if an employee plans to put $100 per month into the FSA and incurs a $1,200 expense in the first month, the employer must front the money.

But the biggest problem is that the FSA has little direct impact on general health care costs. It's mostly used for "fringe" expenses such as those listed above that typically aren't covered by the health plan anyway.

The Health Reimbursement Arrangement

In 2003 the Treasury authorized the use of the "Health Reimbursement Arrangement," or HRA. It's similar to the FSA in that money in the arrangement can be spent on the same wide variety of medical items as the FSA, but in this case the money must be 100 percent employer money. No employee money is allowed.

Creatively used, it's an extremely effective tool, particularly for the smaller employer. For example, an employer of any size can now select a plan with a large up-front deductible (which can dramatically lower the premium cost of the plan) and establish an HRA from which claims can be paid. In this case, it's small-company-self-funding.

The employer has pretty much unfettered control over how the money is to be used. Vesting, for example. The employer needn't ever vest the employee in the monies held in his name (there isn't even an account, per se, that's why it's called an "arrangement" and not an "account"). The employer can choose whether or not money can "roll over" from year to year or whether it expires each year. He can choose to restrict the items on which employees can spend, limiting it only to services falling under the health plan deductible.

The advantage of the HRA falls primarily to the employer, since he can choose to retain the benefits of the lower premiums on the underlying plan. But therein lies the HRA's primary disadvantage: without ownership of some kind, employees are less inter-ested in spending money wisely.

They still have some sense of responsibility because the HRA money isn't always enough to cover the full deductible, so if they spend foolishly they pay the penalty, but there's typically no economic carrot to go with the economic stick.

But for firms who team up with the right benefits broker to design a plan specific to the needs of their company, it can be a powerful tool, particularly for companies with fewer than 100 employees.

The Health Savings Account (HSA)

Introduced in 2005, and modified in 2006, the HSA offers possibly the greatest po-tential to combine carrot and stick. The HSA is the only triple-blessed-tax vehicle in the US. The money is deductible when deposited, it grows income tax free while in the account, and it can be withdrawn income tax free for medical purposes at any point in life.

The employer, the employee or both may contribute to an HSA. All money in the account immediately accrues to the employee, and he gets to use it for his own medical purposes if he is smart enough to retain it (carrot). But if he spends foolishly, he'll pay the economic penalty (stick).

There is room for both to be able to afford to contribute. An HSA can only be sold in conjunction with a qualified "high deductible health plan" (HDHP), under which noth-ing may be paid until the deductible is satisfied. Because it is a high deductible plan, the premiums can be substantially lower than the typical plan, so there is ample savings to fund both employer and employee contributions.

And early experience with the plans is encouraging. Many carriers are finding that employee utilization is enough lower under an HSA that they are now aggressively competing (one carrier in our area just reduced premiums on HSA plans by 10 percent in the fourth quarter of 2007!). While two years' experience isn't enough to boldly predict the future, there is every indication that the HSA is here to stay.

So what can the savvy business owner or manager do? Find a broker who is knowledgeable, creative, and can intelligently discuss the rewards and pitfalls of each of the plans. Then - cautiously - move ahead with a plan designed to meet the particular needs of your company.