The rising trend of high deductible health plans

The health plan marketplace is shifting toward high deductible health plans (HDHP) such as health savings accounts (HSA) and health reimbursement arrangements (HRA) over traditional plans (PPO or HMO).  Employers are making these plans available in an effort to reduce costs, potentially avoid the Cadillac Tax (if/when it becomes a reality) and shift risk toward the employee.  An additional benefit of offering a HDHP could help stem the cost of medical trend, which averages 4-10% each year.  Younger, healthier, workers are driving innovation in plan design such as HDHPs as a way to get healthcare coverage at the lowest possible monthly rate.

The Millennial generation, the tail end of which is now joining the workforce, now comprises the majority of the working population today.  In a response to their desire to pay less in monthly expenses for healthcare, employers are redesigning their plan offerings to include HDHPs.  This generation is more likely to choose an HDHP than older generations, taking advantage of their overall health at this young age.   According to BenefitFocus Inc., 40% of Millennials over age 26 choose HDHPs over traditional plans.

Employers are finding HDHPs desirable as well.  These plans are helping companies control healthcare costs by transferring much of the cost, and much of the risk, onto their  employees.  Having the ever-impending “Cadillac Tax” possibly take effect in 2018, companies are looking for ways to avoid or decrease their tax burden.  The less employers spend on employees’ benefits the lower their tax expense – and high deductible plans are cheaper for employers.  This Cadillac Tax could tax employers with an excise tax of 40% on employer sponsored plans over a certain amount depending on coverage. With this in the horizon, employers want to shift costs to employees through deductibles to stay below the threshold.

HDHPs in the healthcare exchange have gotten a bad reputation because of news stories about people choosing plans based on the lower monthly expense but not taking into consideration the higher risk – and potentially large costs for care.  When choosing an HDHP it’s important to consider if you can afford the maximum annual expenses.  That said, not all HDHPs are alike.

Some employer sponsored HDHPs have a savings option such as Health Saving Accounts (HSA) or Health Reimbursement Arrangement (HRA).  Mercer’s 2014 employer survey showed 41% of employers offered an account-based plan.  Having the option of an HSA or an HRA attached to a HDHP is another way of getting employees to shop around and to educate themselves about their options when it comes to healthcare services and service providers because the first dollars spend are the employees’ dollars.  The good news is that employees’ contributions to their savings accounts are tax free. Many employees have the amount deducted directly from their paycheck each week.  Several employers additionally contribute to an HSA as an employee retention tool.  In the HRA plan, on the other hand, the participant does not directly invest into the account.  The employer has control and funds the account.  It is at the employer’s discretion to allow the account to accumulate year to year.  According to the Mercer survey only 4% of large employers offer both an HRA and HSA.  It is too time consuming to educate employees on what the differences are.  Even though HRAs give more flexibility to the employer, these plans are losing out to HSAs.  HRAs tend to be more costly and employees like the benefit of owning the HSA account.  Therefore, many employers offer just an HSA plan.

Employers offered new plan designs such as HDHPs in an effort to stave off price increases.  Despite this, there was little impact.  From 2014 to 2015, healthcare costs increases were only 1.2% lower according to a 2015 Aon Hewitt survey.

The HDHP trend is expected to continue for years.  Employers are always going to want to keep healthcare spending down and the account-based plans are doing just that.  Employees are always going to want more choices, especially lower cost options.  Coupled with an increased  awareness of price for service employees will likely reduce their medical spending making this a win-win.

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