Exploring the Benefits of High Deductible Health Plans

January 24, 2020
BY COLLEEN DAVENPORT

As the healthcare landscape changes, high deductible health plans (HDHPs) have emerged as a powerful way for employers and members to control costs. They’re gaining popularity – the number of employees enrolled in HDHPs nearly tripled between 2007 and 2017.[1]

A high deductible plan, also known as a consumer-directed plan, is a plan with a higher deductible and lower monthly premiums than a traditional health plan.

HDHPs do not offer first-dollar coverage. Members are required to pay for health care until their deductible is met, at which point coinsurance covers a portion of the costs – typically 80 percent. When, and if, the insured hits their out-of-pocket maximum/limit, they pay nothing for remaining services during that benefits period (which can be either on a calendar year schedule or on a different benefits period schedule). It’s important to note many preventive care benefits are covered before the deductible is met.

This approach creates a bit more risk and uncertainty for insured individuals but also allows for much greater consumerism and control. It can be especially beneficial for a few different groups of members:

  • Relatively young, relatively healthy insureds who do not anticipate many healthcare expenses over the next year
  • Proactive insureds who will have predictable healthcare expenses over the next year or who want to more actively manage their healthcare and costs

However, it’s something every member – and therefore every employer – should at least consider. If any member is paying more in premiums than healthcare costs, a consumer-driven plan could be a better approach to coverage.

Considerations for Structuring a HDHP

Employers have a number of options when it comes to creating HDHPs and structuring costs, particularly in using tax-free funds to cover medical expenses. The two most popular accounts used to provide tax-free funds are a health savings account and a health reimbursement arrangement.

  • A health savings account (HSA) is an employee-owned account in which employers or members can deposit pre-tax funds to be used for qualified medical expenses. These accounts can only be used in tandem with qualified HDHPs as determined by Internal Revenue Service standards. There are a variety of HSA structures which an employee benefits broker can explain in more detail.
  • A health reimbursement arrangement (HRA) is an employer-owned account that allows companies to reimburse approved medical expenses. Employers can claim a tax deduction and employees receive these funds tax free.

For employers, these options are typically very similar. In most cases, an employer has more control over an HRA, but an HSA has fewer administrative costs. It’s worth working with an advisor or other outside partner to explore which options are best for specific situations.

Educating Employees on HDHPs

HDHPs have a number of clear benefits for employers and employees, but they don’t have the greatest reputation among employees. Even when they save members money and offer greater cost control, many employees still default to the high premiums and peace of mind that comes with traditional coverage. It takes a great deal of education to get employees on board with HDHPs.

Here are a few ideas to get members on board:

  • Help them run the numbers – Give employees the tools they need to calculate their past and projected healthcare spending in the context of premiums, deductibles and out-of-pocket costs.
  • Ease the transition – As employees consider and move toward a HDHP, make sure they understand how HSAs and HRAs work and how they can make the most of them. Some employers add funds to the HSA to get employees started, even if it’s just a few hundred dollars. In some cases, it’s beneficial for employees to move the money they’re saving in premium costs directly into their HSA.
  • Focus on preventive care – Many preventive care services are covered at 100 percent under HDHPs. Encourage employees to stay current with check-ups and other preventive care, which can improve health outcomes and reduce future costs.

The Future of HDHPs

HDHPs are on the rise, but the political environment and consumer appetite for HDHPs means their future is far from certain. After the Patient Protection and Affordable Care Act (ACA) passed, some employers shifted their benefits to offer HDHPs exclusively in order to reduce their risk of qualifying for taxes on expensive healthcare plans, including the so-called “Cadillac Tax.” That portion of the ACA has since been repealed. As a result, the trend of employers transitioning exclusively to HDHPs has shifted to offering them as an additional option to traditional insurance.

Regardless of how specific regulations play out, HDHPs will continue to be a major benefits structure, and organizations can benefit from exploring their options when it comes to consumer-directed healthcare coverage. The right partner can help navigate how best to set up the plan and guide the organization in communicating its specifics and benefits to employees.

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[1]https://www.cdc.gov/nchs/products/databriefs/db317.htm#adult_employment_based_health_coverage_changed_over_past_decade

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Employee Benefits

Practice Leader

Colleen Davenport

Senior Vice President, Practice Leader