How to weigh your options when switching to a high-deductible plan

Companies that have health insurance plans with low deductibles can save money by increasing the deductible, and then use some of the savings to ensure employees aren’t harmed by the change.

“If you go from a fairly rich deductible of $250 to $2,500, the insurance carrier will provide you discounts of 25 to 35 percent in premium reductions,” says Dan Wilke, Vice President of Underwriting and Statistical Analysis at Benefitdecisions, Inc.

“But if you tell employees their plan changed from a $250 to a $2,500 deductible, that’s a PR nightmare. Instead, you can create a health reimbursement account (HRA) or health savings account (HSA) to reimburse them under that deductible,” he says.

Smart Business spoke with Wilke about the advantages and differences with HRA and HSA plans.

How does the reimbursement strategy work?

In essence, you make the employee whole all the way back to their original deductible liability. If their deductible was $250, then you’ll reimburse employees for any deductible incurred after the first $250. This works because in 90 percent of the cases we’ve done, the amount of premium savings — the 25 to 35 percent reduction the insurance carrier gives — is more than enough to cover the claims reimbursement the company has promised employees.

Doesn’t that involve some risk for the employer?

Yes, but our studies show that 53 percent of individuals incur $0 to $100 of claims on an annual basis. Even when you increase the amount to $250, it’s 63 percent of employees on the medical plan. So the company will have minimal reimbursement on 63 percent of employees. We haven’t had a situation where reimbursements have been more than the premium savings. It can happen; but our findings are that 10 to 20 percent of employees incur 80 percent of the claims.
The vast majority of employees don’t incur much in claim dollars. Employers should accrue an average of what they expect to reimburse, and that will add up to more than what is paid out. Over time, they’ll save money while giving employees the same coverage.

What are the differences between HRAs and HSAs? Which is better for employers? 

The HRA is a promise to pay. If an employee has claims, the company will give the employee money that has been set aside. Under an HSA, the company pays money into the account regardless of whether the employee ever goes to the doctor. If you raise the deductible to $2,500 and put $1,500 into an HSA, the company has incurred a fixed expense of $1,500. In essence, employees earn a $1,500 bonus that goes into a health retirement account they can take with them when they leave.

If you’re putting the premium savings into HSAs, you’re not really seeing any cost savings. You’re not pulling any costs out of the medical plan. Employees prefer HSAs because that’s money the employer is putting into a personal account. There also are tax advantages to the employee regarding any contributions made on an individual basis.

With an HRA, companies can cover the employee exposure from changing to a low-deductible to a high-deductible plan without giving up as much of the savings. Depending on your plan design, you can also issue debit cards to employees so that when they go to the pharmacy or doctor’s office they can have expenses paid upfront and they don’t have to pay up front out of pocket expenses.

Employees like that because the first thing they’re concerned about when switching to a higher deductible is having to pay a $2,500 bill and waiting to be reimbursed. This strategy is likely to continue to provide savings because you’re compounding premium increases on a lower amount. If rates go up 10 percent next year, a plan costing $500 with the $250 deductible would increase by $50, while the plan costing $375 with a $2,500 deductible costs $37.50 more. 

When employers see the compounding effect on three to five years of increases, they realize that it’s a way to curtail the trend seen over the last 10 years.
Dan Wilke is Vice President of Underwriting and Statistical Analysis at Benefitdecisions, Inc. Reach him at (312) 376-0437 or [email protected]
Insights Employee Benefits is brought to you by Benefitdecisions, Inc.