Employee health benefits Featured

8:00pm EDT July 31, 2006

As the cost of providing health care benefits continues to climb, many employers are offering their employees the option of selecting the more traditional HMO plan or establishing a Health Savings Account (HSA).

“It’s difficult to define what is a standard health plan in today’s marketplace,” says Jay Pierce, principal for Pierce Associates in Tampa. “For all of the workers that have come into the workplace since the advent of the HMO 18 years ago, a standard plan is simply a co-pay plan.”

Smart Business talked to Pierce about the financial advantages an HSA can provide to both the healthy worker and one who may need to see a doctor several times a year.

What’s the main difference between an HSA and a traditional health plan?

The HSA is different in that it has a higher deductible and co-insurance. We have come full circle in that an HSA is really just a large deductible with co-insurance.

The concept behind an HSA is that by utilizing a large deductible and forgoing the upfront dollar benefits (primarily doctor visit, pharmacy co-pays and emergency co-pays), employees receive a lower premium that allows them extra money that they can put into a savings account, which is what an HSA is. Then the employee can shop for services, since they’re paying for the upfront dollar services out of their own savings account. Employees are then able to determine how badly each individual health care service is needed and weigh it against the price of the service.

It’s a revolutionary way of doing health care. For the past 15 or 20 years, we really haven’t been intelligent consumers — we’ve just been users. A doctor would tell us to get this prescription filled and we did, or that we had to see a certain doctor and we did. It didn’t matter then because it only cost the $10 co-pay. In reality, it cost the insurance companies more than that $10 co-pay and — as a result — premiums went through the roof.

Can HSA members choose which doctor they want to see?

Not necessarily. The insurance plan still provides a list of doctors with negotiated prices, so when the employee goes to that doctor, he or she is paying the negotiated price, not the retail one. The same holds true for pharmacies listed on the plan.

Where does the process start?

Employees still have to go to a primary care physician to get everything started. The primary doctor may write a prescription for some medications, and since employees pay for it out of their HSAs, they have a vested interest in whether the difference in price between a generic and name brand is worth it.

Now there’s a pharmacist involved and no one — not even the physicians — know pharmacy or chemistry as well as a pharmacist. So the pharmacist either says that the generic is just as good or that it is lacking in one capacity or the other, and the employee can make an informed decision based partly on price. The employee becomes a consumer — and that is important to the process.

Because the employee has foregone upfront benefits, the premium cost is lower, and usually it is the employer that sees those savings. As a result, in order to get the employee to buy into the HSA system, the employer should feel compelled to contribute something to the account. There are no federal or state laws that require this, but in order to encourage employee buy-in, employers should contribute something each year for the first several years.

What if money is left in the HSA account at the end of the year?

If the employee exceeds the amount, then the excess is paid out-of-pocket at the end of the year. Leftover money rolls over like an IRA. That money is ‘found money’ and belongs to the employee. If it is used for a nonhealth reason before age 65, then it will be taxable income with a 10 percent penalty. If it is used for nonhealth reasons after 65, it is taxable income.

What are the biggest advantages to an HSA?

If the money is used for health reasons prior to age 65, the real advantage is that the employee pays co-pays with pre-tax dollars instead of after-tax dollars. Just by virtue of the taxes, the costs are lower.

The system, which doesn’t penalize the employee who doesn’t go to the doctor a lot, is much fairer. Plus, since each plan has an out-of-pocket expense cap, it makes more sense for employees who are sick often and for those who are never sick.

JAY PIERCE is principal for Pierce Associates and is a preferred agent for AvMed Health Plans. Reach him at (813) 961-6585 or jay@jpierce.com.