Status Report: High Deductible Health Plan

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Kent GardnerEarly this year I wrote about the high deductible health plan (HDHP) and health savings account (HSA) being offered to CGR by Excellus. A look-back seems timely.

Five of us at CGR signed up for the HDHP and HSA combination. With our experience as background, nearly the entire staff selected this option for the coming year. Why?

Family A and Family B. Family A is a relatively heavy user of health care services. Over the 9 month period ending in October (CGR’s enrollment began Feb 1), this family chalked up 16 office visits (4 to specialists), 30 prescription drugs, 6 trips to the lab, 4 diagnostic imaging visits and 2 outpatient surgeries. Total payments for care came to $21,955; the family’s share was $4,758. Excellus paid $17,197. As CGR spent $4,649 on premium (again, only 9 months), the net cost to Excellus was $12,548.

Family B experienced ordinary, minor ailments. Between office visits and meds, they spent $1,215 out-of-pocket and never reached either the individual or family deductibles. Excellus spent nothing on their care and kept the entire $4,649 in premium from CGR. See Table 1 for a summary.

Table 1: Healthy Blue HSA1 HDHP (9 months) Family A Family B
Total payments for health care services $21,955 $1,215
Family out-of-pocket spending $4,758 $1,215
Excellus payout to providers $17,197 $0
CGR premium paid to Excellus $4,649 $4,649
Excellus net cost $12,548 $(4,649)

Compared to what? Let’s see what our families’ costs would have been under the other plan. CGR pays 70% of the cost of the “base plan.” For 2009, the base plan was a “preferred provider organization (PPO)” health insurance plan (Healthy Blue 15/25) with a 9 month cost of $8,937 ($993 per month). CGR pays $6,256 ($695 per month) and the employee pays $2,681 ($298 per month).

Ignore the health savings account and assume that CGR captured all of the savings from the cheaper plan (and paid the entire premium). If Family B had stayed in the more traditional PPO plan, it would have spent $3,041 (in premiums plus copayments).

Table 2: Healthy Blue 15/25 PPO (9 months) Family A Family B
Total payments for health care services $21,955 $1,215
Family share of premium $2,681 $2,681
Family out-of-pocket (copayments) $840 $360
Family total $3,521 $3,041
Excellus payout to providers $21,115 $855
CGR premium paid to Excellus $6,256 $6,256
Excellus net cost $(14,859) $5,401

High cost Family A would have spent $3,521 (after premium and copays) under the PPO plan.  See Table 2 for a summary.

Don’t forget the HSA. CGR’s spending for a family policy is the same, regardless of which plan is selected by the employee. The monthly premium spent on the PPO is $695, $178 more than the premium owed on the HDHP. CGR deposits the $178 per month in the employee’s HSA. Over the nine month period, both families received HSA deposits of $1,606.

Table 3: HDHP with HSA (9 months) Family A Family B
Total Cost of Health Care Services $21,955 $1,215
Family out-of-pocket payments $4,758 $1,215
HSA deposit $(1,606) $(1,606)
Tax benefit $(512) $(512)
Family net $2,640 $(903)
Excellus payout to providers $17,197 $0
CGR premium paid to Excellus $(4,649) $(4,649)
Excellus net cost $12,548 $(4,649)

With HSA contributions included, our high cost Family A spent $3,152 in the HDHP, saving $369 over the traditional plan. Family B ended up the nine month period with an HSA balance of $391, a saving over the PPO of $3,433.

Don’t forget the tax advantage. We’re almost finished. The HSA is funded with pre-tax dollars. The $1,606 HSA reduces both families’ tax liability by that total. Assuming marginal tax rates of 25% federal and 6.185% state, this is worth an additional $512. Moreover, if the families choose, they can self-fund their HSA (just as you would a flexible spending account) up to a total employer plus employee contribution of $5,950 (plus an additional $1,000 for individuals 55 and over). While you can secure the same tax benefit for out-of-pocket expenses through an FSA, any funds deposited in an FSA that aren’t spent within the year will disappear. Funds deposited in an HSA are yours and can be kept indefinitely. Family A ended the 9 month period with a total cost of $2,640 while Family B ended with a combined HSA balance and tax credit worth $903 (see Table 3).

Cash flow. Here’s the final wrinkle: Clearly, both families saved money in the HDHP. The high cost Family A, however, had to pay some substantial expenses before reaching the plan deductible. Between February 1 and March 4, Family A had spent $1,745 (largely due to an expensive drug for a single family member). The family’s $2,600 deductible was met by the end of March. At this point, the “coinsurance” period began and the family was obligated for 20% of the cost of care—which was typically at or below the copayments of the traditional plan. The HSA contributions did not keep up with actual cost. Moreover, the family can expect the same beginning-of-the-year cost burden in 2010.

Both families confirmed that paying “first dollar” for care changes your perspective. Knowing that Family B was paying the entire bill, one physician said, “Instead of ordering the whole battery of lab tests, let’s just get the three most important.” Both families report shopping for the best price on drugs. And it is more confusing. Providers are accustomed to applying a copayment and don’t know what you must pay (FYI, it works like this: The physician “bills” Excellus, which sends out a benefit statement that applies Excellus’ negotiated rate and informs the provider what he or she can charge. Then you pay the bill.) Excellus keeps track of progress toward individual and family deductibles and reports this information on each benefit statement.

The transition isn’t painless; you are now responsible for worrying about pricing as well as other considerations. But the savings are considerable and providers are becoming more accustomed to the new model.

Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal December 11, 2009

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