Lower premiums entice, yet they mask embedded costs you need to plan for
If you have health insurance through an employer, chances are the premiums are a big – and growing – line item in your household budget. The independent, non-profit Kaiser Family Foundation (KFF) reports that the average household with family coverage pays more than $500 in monthly premiums. Over the past 10 years, the workers’ share of family premiums has increased more than 70%. Inflation over that stretch: 20%.
That’s contributed to the rise of high-deductible health plans (HDHPs), which have the seeming allure of lower premiums. KFF reports that 30% of workers with health insurance were enrolled in an HDHP in 2019, compared to 20% five years ago. (Almost all of the millions of people buying coverage through Obamacare are also on HDHPs.) The average employer HDHP family premium in 2019 was $4,866 compared to $6,638 for families enrolled in old-school preferred provider (PPO) plans.
If you’re considering an HDHP, or your employer forces you into one, it’s crucial to understand that lower upfront premiums come with an agreement that you will cover a lot more in upfront costs. You’ll need a plan for what you’ll have to shell out.
When you are signing on for a high deductible, the cost you pay before insurance kicks in. (Many plans provide basic preventive care without a deductible.) The average annual deductible for single coverage in an HDHP was nearly $2,500 in 2019, more than double the deductible for a PPO. For families with an HDHP plan where each family member has their own deductible, the all-in average family deductible cost was nearly $4,800 in 2019, about $2,000 more than the average deductible for family PPO coverage.
What you save in premiums you can quickly give back if you actually use the plan.
Some employers offer help with upfront costs. A feature of HDHPs is that you are allowed to have a health savings account (HSA) as long as the plan follows a few IRS rules. Money in an HSA can be used to pay for deductibles and other qualified medical expenses.
If your employee kicks in some money, that’s obviously a big help, but find out what you are left to cover. And then make it the highest of priorities to have that much set aside in savings, or be prepared to cover it from regular cash flow.
If you need to save up money, the HSA is the way to go. You can contribute to the HSA through a payroll deduction, just like saving in a retirement plan. If your employer makes a contribution, the combined total that you both can stuff in a 2020 HSA is $3,550 if you have single coverage, and $7,100 if your HDHP covers your family. The limits are $1,000 higher for any enrollee who is at least 50 years old.
Uncle Sam offers up three valuable tax breaks if you contribute to your HSA, all covered in depth in this previous column on health savings accounts.
A study found that households that had an HDHP and an HSA were more likely to see a doctor than people with an HDHP but no savings fund at the ready to help pay for deductibles and other out-of-pocket expenses. This is a point sometimes lost in the debate over Medicare for All. Even if your preference is to retain access to private insurance through an employer, the prohibitive cost of actually using that insurance is an issue for millions of Americans.
In addition to the deductible, you also want to make sure you understand co-payments and co-insurance you could be on the hook for. The annual maximum out-of-pocket in 2020 for HDHP plans is $6,900 for individual coverage and $13,800 for family coverage. Those limits do not include premiums. That’s just the max; your employer may cap participants’ out-of-pocket at a lower level. For single coverage, KFF reported that 12% of HDHP enrollees in 2019 had a max out-of-pocket below $2,000, while 20% were on the hook for more than $6,000.
If you run into a year with big medical expenses and limited savings, you’re likely going to back yourself into the dreaded corner of paying on your credit card, where the average rate these days is around 17%. That’s going to be a big hit to your financial health. So, this is a good time to start building a personal emergency fund. If you’ve borrowed unwisely in the past, also a good time to think about responsible use of credit cards.
While we can all hope that Washington steps up and addresses the high cost of care for the insured, there’s the matter of protecting your household today from budget-busting medical bills. If you are going to use an HDHP, push yourself to build up savings to cover your deductible and maximum out-of-pocket, just in case. If you use the HSA, you will at least get some very valuable tax breaks.
Nov. 6, 2019
Published on September 26, 2022.
When considering health insurance policies for your organization, you may have wondered if it’s better to have a low deductible health plan (LDHP) or a high deductible health plan (HDHP). While HDHPs have higher deductibles than LDHPs, as the name implies, there can be benefits to taking on the risk.
HDHPs can come with significant savings for employers and employees, especially if you maximize them. According to a KFF Employer Health Benefits Survey1, 22% of large employers choose HDHPs with added savings options, such as a health savings account (HSA) or a health reimbursement arrangement (HRA).
In this blog, we’ll go over the pros and cons of HDHPs and how you can supplement your health plan for an even better benefit.
Did you know you can supplement your HDHP with an integrated HRA? Read our guide to learn more
What is a high deductible health plan?
As the name implies, an HDHP is a health insurance plan that has a high deductible that must be met before it kicks in to cover medical expenses. Because of its higher deductible, an HDHP has lower monthly premiums than an LDHP.
In order for a health plan to be considered an HDHP, it must meet specific criteria.
According to the Internal Revenue Service2, an HDHP is currently defined as the following:
- Any health insurance plan with a minimum deductible of $1,400 for individual coverage or $2,800 for family coverage.
- The out-of-pocket maximum is $7,050 for individual coverage or $14,100 for family coverage, including deductibles, copayments, and coinsurance.
- Once you meet your out-of-pocket maximum, the plan will pay 100% of your covered healthcare costs for the rest of the plan year.
HDHPs are great for those who want to save money while maintaining coverage for unforeseen emergencies and health events. Employees may only be on the hook for premiums and the occasional medical expense.
According to the Affordable Care Act (ACA), all HDHPs bought through the federal health insurance marketplace must contain certain preventive services at an in-network provider, no matter how much of your deductible you've paid. Your employees may be charged for preventive services if they use an out-of-network provider or have a grandfathered health plan.
The preventive care services that HDHPs may cover include:
- Annual physicals
- Immunizations
- Routine prenatal care and well-child visits
- Screening services for things like cancer, heart disease, pediatric conditions, and vision and hearing disorders
- Tobacco cessation programs
- Obesity weight-loss programs
Benefits of an HDHP
Switching to an HDHP is a great way to mitigate the rising cost of premiums year-over-year. Higher deductibles mean lower premiums for small businesses trying to find ways to save on medical costs.
Enrollees in HDHPs have the following advantages:
- A lower monthly premium than LDHPs.
- A wide variety of providers and health plan types.
- People who rarely use their health benefits may save money.
- Out-of-pocket expenses aren’t the market rate, but the negotiated rate between the healthcare provider and the insurance company.
- Can integrate with tax-advantaged funds like HSAs and HRAs
If you have a generally healthy workforce, an HDHP may be the best type of health insurance plan you can get. HDHPs make good insurance plans for young and single employees with a good health status who don't need coverage for spouses and dependents.
Downsides of an HDHP
HDHPs provide a considerable opportunity for small businesses to save money because of their lower premiums. Problems may arise, however, when employees face costly medical expenses and need to pay much more out-of-pocket before their insurance coverage is available.
In a KFF survey3, half of U.S. adults said they put off or skipped some sort of healthcare in the past year because of the cost. Because HDPHs require individuals to pay more in medical expense before their deductible is met, some people with an HDHP might not get necessary medical help because they can’t pay for it.
Overall disadvantages of HDHPs include:
- Deductible can be very high for individuals and families
- Those who suffer from a chronic illness have a high out-of-pocket cost
- Most healthcare expenses, other than preventive services, are entirely out-of-pocket until the deductible is reached
- Some employees may avoid care for fear of the high medical costs
Because of these concerns, HDHPs typically don’t provide enough coverage for those with a poor health status, who need critical care, or those with families and children who require frequent doctor visits. If this is the general makeup of your workforce, an HDHP may not be the best choice.
What does a higher deductible health plan cost?
Many factors impact the price of your HDHP premiums, such as state and federal laws, where you live, and the type of plans available, which are not within your control.
When choosing an insurance plan, it’s a good idea to think about your employees’ total potential healthcare costs, not just the premium. Considering this, you can see if selecting a higher deductible health plan would be the best bang for your buck.
Of course, it’s impossible to predict the exact amount of total medical services your employees may need in a given year. In 20214, the average annual premiums for covered workers enrolled in HDHPs was $7,441 for individual coverage and $21,662 for family coverage, but every organization is different.
Before you pick the HDHP that’s right for your business, you should consider healthcare cost averages, the diversity and general health affairs of your workforce, inflation prices, your health benefit budget, and other controlling factors to the best of your ability.
How to supplement your high deductible plan
At this point, you may be wondering how to offset some of the costs your employees may encounter with an HDHP. Despite its low monthly premium, the challenge with an HDHP is how expensive healthcare can become when your employees need it.
To help lessen the blow of an unexpected out-of-pocket cost, HDHPs can be paired with supplemental health benefits to pay for eligible expenses, such as integrated HRAs, health insurance stipends, or health savings accounts (HSAs).
Let’s take a closer look at each of these benefits below so you can better understand how they work for employers.
Integrated HRA
If you’re looking to lower overall healthcare costs and lessen the high deductible impact of your HDHP, an integrated HRA, also known as a group coverage HRA (GCHRA), can help.
Integrated HRAs are so named because they are integrated with a traditional group health insurance plan. This type of HRA is used to supplement the group insurance health plan by reimbursing employees tax-free for eligible expenses that aren’t fully paid for by their health plan.
Many employers choose to pair an HDHP with a tax-advantaged fund like HSAs or HRAs to offer additional savings to their employees. Examples of eligible expenses include copays, co-insurance, and expenses paid before the deductible is met.
Overall advantages of an integrated HRA include:
- You can keep your HDHP but provide extra benefits through reimbursement.
- You can attract potential employees and retain key talent with a more attractive HDHP-supplemented benefit.
- You can customize this health benefit by setting unique cost-sharing options, like requiring an explanation of benefits and setting employee classes.
- The only employees eligible for the integrated HRA are those on your employer-sponsored health plan.
- Unlike HSAs, there’s no employer contribution limit with an integrated HRA, so you can choose a budget-friendly allowance for your organization.
- Reimbursements submitted through an integrated HRA are only paid out if an employee submits a qualifying expense, so there’s no pre-funding needed.
GCHRAs are typically used with HDHPs for more significant cost savings, but they can also work with any group health plan, including an LDHP.
Integrated HRAs are an excellent option for employers looking to keep their HDHP for the lower premium while keeping the employee’s traditional plan the same, if not better, by enabling reimbursement capabilities.
Health stipend
Over the past few years, a lot of new information has been coming out about the many benefits of health stipends and how they can supplement your HDHP.
With a health stipend, employees receive a fixed, taxable stipend to purchase out-of-pocket healthcare expenses that meet their needs, such as prescription drugs and preventive services. This extra money can also help pay for items needed that insurance wouldn’t yet cover until their HDHP’s deductible has been met, or items the group plan doesn’t cover at all.
The employer's monthly contributions are typically added to the employee's paycheck as wages on a recurring basis, however, stipends can also be offered through a reimbursement model. Similar to an integrated HRA, your contributions to your employees are unlimited, so you can pick an amount that works for your budget and your employees.
Overall advantages of a health insurance stipend include:
- Bridge the gap between items that aren’t included in the group health insurance plan.
- Fewer compliance or regulation considerations with the IRS, HIPAA, or ERISA.
- Simple and easy to manage through automatic payroll additions.
- If you choose to offer a health stipend through a reimbursement model, reimbursements submitted are only paid out if an employee submits an expense, so there’s no pre-funding needed.
The flexibility of health stipends is what is propelling them into recent popularity. And because they work with any group plan, you reap the benefits of low HDHP premiums while giving your employees added funds to pay for additional medical care and services.
Health savings accounts (HSAs)
HSAs are tax-advantaged savings accounts where money can be contributed on a pre-tax basis to be used to pay for medical services and other qualifiying out-of-pocket expenses.
Both the employer and the employee can contribute to the HSA so long as the combined employee and employer contributions don’t exceed the annual contribution limit. Either way, the individual employee always owns the account.
Overall advantages of an HSA include:
- Contributions an employee makes to their HSA are tax-deductible.
- All excess contributions remain in the HSA indefinitely until the funds are used.
- There is no vesting schedule or penalty if the money isn’t used, and excess contributions are automatically rolled over into the next year.
- Withdrawals used to pay for qualified medical expenses for your employee, their spouse, and their dependents are never taxed.
- The account is portable and the employee can keep it forever, even if they quit or retire.
Offering an HSA along with an HDHP helps ease an employee's financial burden, especially if the business makes additional contributions to the account. It’s important to note that with HSAs, you must have an HSA-qualified HDHP to make employer HSA contributions to your employees’ savings account.
Conclusion
Because of their lower premium costs, HDHPs have been gaining popularity among employers and employees. While there’s no doubt that they can offer huge savings, they may not always be the right fit for your business.
If you have a want to expand the value of your HDHP, it's best to offer it alongside an integrated HRA or a health stipend. If you’re ready to implement one of these benefits for your company, contact a PeopleKeep personalized benefits advisor, and we’ll get you started right away.
This article was originally published on May 28, 2020. It was last updated on September 26, 2022.
1//www.kff.org/report-section/ehbs-2021-section-8-high-deductible-health-plans-with-savings-option/
2//www.healthcare.gov/glossary/high-deductible-health-plan/
3//www.kff.org/health-costs/issue-brief/americans-challenges-with-health-care-costs/
4//www.kff.org/report-section/ehbs-2021-section-8-high-deductible-health-plans-with-savings-option/
Originally published on September 26, 2022. Last updated September 26, 2022.
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