A Near-Term Solution For Health Insurance Costs

Bruce Merrifield

A strong majority of U.S executives rate health care insurance costs as their No. 1 concern. The poster company for this problem might be GM, which announced on June 7 that it will lay off at least 25,000 employees or almost 8 percent of its U.S. workforce. In a renewed effort to cut costs, it will focus on its $5.6 billion annual health care bill that averages over $1,500 per car. "Intense" discussions have begun on health insurance with GM union leaders.

Conditions are also painful at the small-business end of the corporate spectrum. There are perhaps as many as 45 million U.S. citizens who don’t have any health care insurance, largely because over 50 percent of small business owners can’t afford to offer any health insurance to their employees. And, at many other small firms, the insurance that is offered is too expensive for many employees to subscribe to. As health insurance costs have risen - on average, 12.5 percent per year from 1997 with no forecasted relief in sight - there are two clear patterns that have emerged:

• For every 10 percent increase in insurance costs, 1.3 million adults lose their employer sponsored health insurance, according to a study by the University of California-Berkeley.

• Employee deductibles, co-pays, and share of the total health insurance expense are all rising. The average employee contribution for a family insurance plan in 2004 rose to $3,156, or 32 percent of the total cost ($9,862), from $1,670, or 25 percent, in 2000 (total cost $6,680).

Shifting higher health insurance costs to employees can only go so far. Is it any wonder that more employees are:

• Forced to drop the insurance that might be offered to them by employers each year.

• Not participating in company 401K plans, even with matching dollar inducements, because they can’t afford to save after paying higher medical expenses.

• Putting their children on state Medicaid insurance programs instead of company plans.

Small business faces higher health insurance costs per employee than big companies because of: lack of buying clout; higher administration costs per employee; and more sensitivity to state insurance mandates. The most populous and liberal states have been the most "progressive" in trying to mandate the best and broadest insurance coverage for all their citizens/voters by getting state-based firms to pay for it. For small businesses in these states, this means: paying super high insurance premiums; dropping coverage altogether; going out of business; or relocating jobs out of the state if possible. Because the unintended consequences of mandates are dropped insurance coverage and disappearing jobs, 12 states are in the process of rolling back their mandates to become more business friendly.

HSAs: The Only Business â€˜Solution' On The Horizon

What health savings accounts (HSAs) are and the details about how they work can be found at many Web sites - just Google health savings accounts (check out the HSAs/Wellness tab at www.merrifield.com). Because it is easy to get lost in the details of HSAs, make sure that you don't miss these underlying concepts and trends:

After 30+ years of health care "reforms", HSAs are the first reform that has addressed two of the core problems of our dysfunctional health care system: 1) Only corporations, until now, have been able to buy (and save on) health insurance with tax-free dollars; 2) Having access to the finest, unlimited, unrationed health care regardless of one's personal health habits is not an entitlement; third parties - corporations, government, and our grandchildren - can't afford it. However, HSAs now provide tax-free dollar incentives for individuals to be responsible for being more healthful and shopping frugally for personal, sufficient, health care solutions.

Because health insurance costs and deductibles will continue to climb, most corporate health insurance plans will soon have high enough deductibles for all employees to qualify for HSAs. Since health insurance dollars are part of total employee compensation, companies might as well let those employees who want to have the ownership and control of the premium savings from high deductible, lower premium policies by flowing as much of it as possible through their HSAs. It's a simple empowerment and freedom opportunity that treats employees like the adults that they are.

HSAs will be further enabled by pending federal legislation for tax credits for funding HSAs for low wage earners and making comparison shopping for health care provider solutions viable. Independent supportive shopping services like subimo.com are already rushing to fill the consumer health care shopping information need.

Enrollment rates for HSAs to date - by a greater variety of people - have surpassed all forecasts by all parties. And, the first wave of enrollees are decidedly not just the young, healthy, single, and/or wealthy that the critics of HSAs have predicted. What are the most current, revised future forecasts for adoption of HSAs? Who really knows? Forrester Research, for example, recently upped their forecast for 2012 to 17.6 million HSAs with deposits/assets totaling $35 billion. The point is that this wave is big and broad based.

While HSAs are not the solution for all of our nation's health care problems, there is no political momentum for creating any other type of significant reforms on the horizon. Perhaps the health care crisis will be a big 2008 election issue, but in the meantime every business has a survival imperative to continuously study and incorporate HSAs as an option, if and when possible.

HSAs are already providing some true sustainable and continuously improving cost savings instead of the simple cost-shifting that critics feared.

True Savings From HSAs?

Where is the free lunch with HSAs? When employees are spending their own money for outpatient care, they start asking and negotiating with doctors about what are the minimally sufficient, cost-effective solutions. More generic drugs are prescribed. Nice-to-have diagnostics get waived. Both insurance companies and doctors are starting to offer discounted premiums and fees respectively that reflect the reduced cost of not having third-party paperwork costs for the first $2,500 of care that is paid with credit cards out of HSAs.

Five insurance companies have announced premium rate cuts on policies for HSAs recently due to competition and better design of policies that let individuals custom tailor where the deductibles and varying sizes of co-pays apply to get only the insurance coverage that they want. One industry guesstimate is that by September rates for HSAs will settle 30 percent lower than rates in mid-summer 2004.

Doctor offices are starting to post discounts for services that are paid with credit cards, and some doctors are moving completely to "cash or credit card only" practices. Check out simplecare.com for one national network of primary care physicians doing this.

The best, most mature proof for savings from HSAs comes from South Africa where HSAs have been legal - in a more expansive form than the U.S. - for 11 years. Here are some key questions with the short answers that I gleaned out of a fascinating testimony that drew significantly on South Africa's experiential outcomes. For more information, go to www.ncpa.org/prs/tst/JCG_Testimony.pdf.

1. Will HSAs control costs? Yes.

2. Will HSAs encourage people to forgo needed care? No, they've increased in several studies. Policies that provide first-dollar coverage for annual checkups and hospitalization while applying all other outpatient care costs to the deductible are a big reason for this.

3. Will HSAs only appeal to healthy, young, single, and/or wealthy people? No. U.S. enrollees show broad demographics and even counter-intuitive averages.

4. Will HSAs encourage employers to reduce benefits? No. Employers don't need an excuse to cut benefits or raise the employee's cost for insurance. They have to provide the best competitive compensation/benefit package that they can afford to attract and keep good employees.

5. Will HSAs force patients to pay retail prices while HMOs pay wholesale? No. HSAs can be part of provider networks that get network prices, and cash-only doctors are sprouting up to offer the same services that network providers do for dramatically lower prices due to the absence of network overhead costs.

Conclusions

If companies look at the full cost of their employees and flow as much of their health insurance dollars through employee HSAs as possible, good things can happen. We shouldn't underestimate the power of employees wanting to save their own tax-free dollars or of the speed which health suppliers will change to meet consumer needs empowered by HSAs.

Because employees all along the personal health spectrum will have instant motivation to be incrementally more healthful and more savvy medical shoppers, they all have a chance to save money by shopping for sufficient solutions. To help employees become incrementally more healthy, every company regardless of size should start a simple-to-scale wellness program with the goal of creating a wellness, total-health productivity culture. It's possible that, in a few years time, offering HSAs will become an expected option and a necessity for luring the most responsible, health conscious employees from other employers that also have HSAs. Because HSAs have better total tax and spending characteristics than IRAs and 401K plans, they may well become the preferred vehicle for most employees to save.

But, why stop at empowering employees just for health care spending? Why not ask the employees to become "engaged" in creating better service value propositions for the right core and target customers in the right target customer niches? If employees could understand the chain of connections between their efforts, better service value, better customer retention, and bigger bonuses, they could help to make it happen. Otherwise, most employees simply don't care about saving the company's money to improve return on investment. They don't realize that company profits reinvested per employee per year is the cost of their having a secure and expanding career. Teach them so they can appreciate, play, and win in the game of business too!

Bruce Merrifield is president of Merrifield Consulting Group Inc., Chapel Hill, N.C. For more information, call 919-933-7474, e-mail bruce@merrifield.com, or visit www.merrifield.com.

Publication date: 07/25/2005

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