Consumer-Directed U.S. Health Insurance Surges

There may not be a consensus in the nation's capital on how to control the cost of health care, but businesses and their employees are not sitting around waiting for clarity. They are voting with their wallets for one approach that's already available: Account-based health insurance plans, which offer lower premiums in exchange for high deductibles.

April 19, 2012

(The author is a Reuters columnist. The opinions expressed are his own.)

CHICAGO, April 19 - There may not be a consensus in the nation's capital on how to control the cost of health care, but businesses and their employees are not sitting around waiting for clarity. They are voting with their wallets for one approach that's already available: Account-based health insurance plans, which offer lower premiums in exchange for high deductibles.

Consumer-directed health insurance is a cornerstone of Republican-backed market-oriented health reform solutions. It will also be offered as an option to shoppers in the public health insurance exchanges under the Affordable Care Act (ACA), if the law isn't struck down by the U.S. Supreme Court in June.

Currently, 59 percent of major employers have an account-based health plan option in place, up from 53 percent a year ago, according to a survey by Towers Watson and the National Business Group on Health. They queried companies with 1,000 or more employees across a range of industries.

More significantly, employee enrollment in ABHPs has spiked at companies offering them as a choice. This year, 27 percent of eligible employees are enrolled, a 35 percent increase from 2011. That finding mirrors a Fidelity Investments report last week showing a 61 percent surge in sign-ups for health savings accounts among its client companies - the largest one-year gain since Fidelity has been offering HSAs.

ABHPs are linked to tax-advantaged HSAs, because contributions can be used to accumulate funds to help pay costs not covered by the high-deductible plans.

Savings on premium costs are the key driver.

Employers expect their healthcare costs to jump 5.9 percent this year, according to the Towers/NBGH survey. Total annual premiums paid by employers and workers for high-deductible plans in 2011 were 10 percent to 19 percent lower than for managed care or traditional point-of-service plans, according to a Kaiser Family Foundation study.

For example, Kaiser found that the average annual cost for individual coverage through a high-deductible plan last year was $4,793 - 15 percent lower than for a PPO managed care option.

"Everyone saves some money, and that really matters in tough economic times," says Helen Darling, president and CEO of NBGH.

Another motivator for employers is to avoid the excise tax on high-value "Cadillac" health plans under the ACA healthcare reform legislation. Starting in 2018, plans with total value over $10,200 for individual coverage and $27,500 for families will be subject to a 40 percent tax on the amount exceeding those thresholds. High-deductible plans offer employers a way to avoid triggering the tax.

The growing use of ABHPs also is linked to employer strategies for retiree health coverage. These benefits are being reduced or eliminated in many cases - or replaced by a defined contribution. The Towers/NBGH survey found that many employers see ABHPs as a way to help workers accumulate funds that can be used in retirement, since HSA contributions roll over from year to year and the accounts can be invested in mutual funds or other investment vehicles. (For strategies on how to manage HSAs so they last in retirement, see a related story at https://link.reuters.com/wuf77s)

That does not appear to be happening yet. Fidelity reports that the average balance in those health accounts last year was just $2,700. One reason: a large portion of the accounts were newly opened last year. IRS rules limiting contributions are another factor. For 2012, the limit on total contributions to an HSA is $3,100 for individuals and $6,250 for families.

HSAs do come with significant tax advantages for workers. The money contributed is tax-deductible; federal taxes are not owed on investment gains; and withdrawals are tax free so long as the funds are used for qualified medical expenses. Most employers also make an annual contribution to HSA accounts.

Another health account option is known as a Health Reimbursement Arrangement. These accounts often are offered in conjunction with high-deductible insurance plans, and employees use them to pay out-of-pocket costs until deductibles are met. They resemble HSAs in that pre-tax dollars are contributed - in this case by employers - and the funds are tax-free to employees so long as the funds are used for qualified medical purposes.

Like HSAs, unused funds can be rolled over from year to year. But HRAs lack the investment feature available in HSAs.

High-deductible accounts shift significant risk to the employee. Out-of-pocket expense can be painfully high in the event of illness. But by law, there is a maximum annual out-of-pocket liability of no more than $5,950 for single coverage and $11,900 for family coverage in 2011, although the Kaiser survey reports that the average maximum out-of-pocket cost in plans for single coverage was $3,304.

Backers of ABHPs argue that greater out-of-pocket responsibility will lead to smarter, more careful consumers of health care - which in turn will slow the rapid growth of health care spending.

There is no conclusive evidence that's happening yet. But it's clear that employers and employees do like the ability to carve out savings on their own premiums at a time when health care costs continue to rise. (Editing by Beth Pinsker Gladstone, Linda Stern and Dan Grebler)