By Mark Galvin, Co-Founder/CEO, MMS Analytics, Inc.
If I agreed to give you $20,000 if you would agree to roll a pair of dice and give me back the number that came up x $1,150 (somewhere between $2,300 and $13,800), would you want to participate (and be guaranteed to make between $6,200 and $17,700)? If you answered “no,” this article is unlikely to be helpful to you…
If you don’t have a health savings account (HSA) yet, you’re not alone. But you might be in the future.
Since their creation as “triple tax-advantaged” accounts by Congress in 2003, the prevalence of HSAs has been growing steadily despite the reality that the health insurance industry doesn’t like them.
Even with the industry floating “Fear, Uncertainty and Doubt” (a.k.a. FUD-factor), consumers are starting to see the light when it comes to high-deductible health plans (HDHPs) and their companion HSAs, and it should be easy to understand why.
So, what makes HSAs so great?
When you purchase a low-deductible health insurance plan, the carrier often charges you more in extra premium for lower deductibles than the amount you’d have to pay if you simply paid your medical bills up to that deductible directly. That’s the price we pay for someone else (the insurance company) taking on that risk on our behalf.
But what many of us don’t realize is how steep a price we actually pay to offload this risk. Here are a couple of real examples based on current health plans underwritten in the market today:
If you currently have a $0 deductible family plan and you decide to purchase a new plan that increases the deductible to $4,000, you would get roughly $10,000 back in premium savings. Since the new plan would only require you to pay a maximum of $4,000 in out-of-pocket costs for medical bills, you just found $6,000 of free money! If your family happens to stay healthy all year, you might save the full $10,000!
Expanding on this simple revelation, it turns out that if you can find a family HSA-qualified health plan with a $13,800 deductible (the maximum deductible considered HSA-compliant in 2020), your premium savings could be about $20,000—equating to overall savings of between $6,200 and $20,000 depending on how healthy your family stays in a given year. Shocking, right?!
So why wouldn’t you take the policy that guarantees you save money regardless of your health status, but could allow you to save up to $20,000 each year if you’re lucky (remember my dice game analogy)?
Well, I’m an older guy (just turned 60 w/a slightly younger wife, plus an 18-year-old dependent on my policy) and the example above is exactly my situation. My premiums are on the high side because of the ACA age banding, so let’s look at how my 35-year-old business partner’s situation varies (married to his college sweetheart with their new18-month-old toddler):
In his case, raising the deductible to $4,000 from $0 saves $7,000 in premiums (guaranteed savings of $3,000 per year, but a potential to save $7,000 per year) and for going to a $13,800 HDHP he saves just over $10,000 (leaving him somewhere between saving $10,000 per year, or in the worst case, in the hole for $3,800 in a given year).
If you run a business, like me, with a bunch of employees, the savings realized with a health plan design change is far more dramatic. The law of averages tells us that only a small percentage of your employees will have significant health expenses in any given year, and on an actuarial basis, if every employee got “hit by the bus” and burned money up to the highest deductible, you’d still save over $1,200 per employee, on average. That’s worst case! The US Department of Health and Human Services issued a study recently that shows that the median family, where everyone is under the age of 65, consumes under $3,200 in total health services per year. So, in the most common cases, you will save $11,100 ($14,300 median family premium savings for going to the maximum-deductible HDHP minus $3,200 median medical bills = $11,100) per family!
In all cases, as an employer, you save by going to the maximum deductible even if every employee had a catastrophic health incident each year and you cover them 100%!
Based on the information I’ve shared here, and other information relating to individual rates, expected losses, and distribution of health service consumption, your average business would save roughly 28% of total plan costs to share between the business and employees each year just by moving to a maximum-deductible HDHP while reducing out-of-pocket expenses for the employees!
So what does all this have to do with HSAs?
A $13,800 family deductible sounds pretty scary to most employees, especially if they recognize that the reimbursement for these costs are all held by the employer. “What happens to me if I have to change employers, or worse, get caught in a RIF (reduction in force) and need to go on COBRA?” Potential for leaving an employee with a large out-of-pocket exposure is not a popular idea for responsible employers, let alone rightfully concerned employees. But there is a way to counteract out-of-pocket exposure for your employees.
Health savings accounts (HSAs). As long as a health insurance plan does not cover the employee for anything in the first $1,400 single/$2,800 family of medical and prescription drug expenses, while maintaining other compliance issues, that employee is eligible to have their employer fund their health savings account for any amount up to $3,550 single/$7,100 family per year. If the employer doesn’t fully fund those amounts, the employee may take a tax deduction for any additional amount they contribute themselves to get to those limits. The HSA is a tax-free savings account, owned by the employee that grows tax-free! The employee can make tax-free withdrawals from their HSA to pay for virtually any out-of-pocket medical expenses. Unused balances in the account grow tax-free into larger savings and can be invested in similar ways to a 401(k) plan allowing savings to grow rapidly. If a job change occurs, all balances in the HSA are owned by the employees and remain in their accounts. When they reach the age of 65, the employee can make withdrawals in the same way they can in their 401(k), or they can continue to use the money tax-free for health expenses and long-term care insurance. You can fund these accounts with premium savings, and you can offset any remaining deductible risks for your employees through a health reimbursement arrangement (HRA).
But wait there’s more!
Since employees become responsible for paying non-routine medical expenses from their HSAs, they’re more likely to seek preventive care, including annual physicals and cancer screenings because under the law these costs are not subjected to the HSA-qualified plan deductibles. They do this because they have a new financial incentive to stay healthy and to live healthier lifestyles. Studies have revealed that those with health savings accounts, as part of their plan design, sought preventive care at higher rates than those enrolled in plans not incorporating HSAs, while other studies have shown that people with HSAs tend to be healthier and require less medical attention. Since the industry has reached consensus that preventive care is a major factor in improving our health and lowering costs, chalk this up as another win for HSAs.
In a nutshell, we’re much better off when we increase our HDHP deductibles to the highest amounts allowed by the IRS and then tuck away the premium savings in our HSAs for use when medical procedures are not considered preventive care. We become empowered to reap the rewards that should accompany good health and savvy medical care decisions. When we’re healthy, we save money. When we choose lower-cost providers, we save money. When we do get sick, we have a funded account that completely covers our out-of-pocket expenses, and a health insurance plan that provides great coverage after we exceed our deductibles. We should be designing our health plans to split these savings between employee HSA accounts to save and grow for retirement, improve employee benefits in other ways like paid medical leave or extended family company activities, and grow the business’s bottom line.
Please contact me directly at firstname.lastname@example.org if you’d like me to share access, at no cost, to our SPARC (Savings Recognized After Recognizing Consumerism) modeling tool. It will contrast current healthcare plan design with an optimal plan design while providing full pro forma financial models for the employer and its employees. The payback on this dice game is always in your favor!