A Better Way to Fund HealthcareBy: Bryan Brown, CFP
The days of cheap health insurance premiums in exchange for complete medical coverage are over. As rates increase, employer’s profit margins shrink and benefits are decreased. Consequently, employers must look at alternative plan designs and funding mechanisms in order to stay competitive. After all, benefits are still going to have to be provided in order to attract and retain the best employees.
Traditional health plans pay for the majority of services rendered. Patients generally are responsible for a copay or have a relatively low deductible to cover the cost for most procedures. Then the insurance company pays the lion share of the balance. There is not much incentive for patients to become better consumers. Think about it, if it costs the same (a copay), a patient will usually go to the most convenient place for treatment, not the most economical and in many circumstances, not the best. Healthcare has to be one of the only areas in our financial lives where this holds true. For anything else we tend to shop around to make sure we are getting the most for our money. When we purchase a car, for instance, most people don’t go to one dealer and pay full sticker price, we search the internet and visit multiple dealers so we can better negotiate price and terms. This is not the case for healthcare expenditures. Our current healthcare environment leads to overutilization which translates into higher premiums and less benefits for employers and employees.
So what is the solution? In my opinion, we have to have employees and patients put at least some “skin in the game.” One way my agency achieves this with our clients without financially crippling employees is by utilizing Health Reimbursement Arrangements (HRA). This works by not only modifying your plan design but your way of thinking.
There are two parts to this type of arrangement. Part one is a high deductible health plan.
The average traditional plan design we see today has a $1,000 deductible with 80% coinsurance to a maximum out of pocket of $4,000 (including the deductible), plus a $25 office visit copay and a $10/$25/$50 copay prescription card. In this scenario, a major illness or accident will cost an employee $4,000 plus all associated copays.
What we suggest is drastically increasing the deductible to $3,000 or even $5,000, changing the coinsurance to 100% after the deductible is met and removing all copays so all costs go toward the deductible. Yes, that is correct. NO COPAYS! Everything goes towards the deductible. Most insurance companies will give between a 35% and 50% discount in premiums when you move to this plan design. Obviously if an employer presented this plan alone to their employees, the employees would run out of the room screaming that they don’t have any health coverage and they can’t afford $5,000 in up front medical costs.
This is where part two comes into play. We use a Third Party Administrator and have the employer fund a percentage of each employee and dependent’s deductible, from the first dollar. This can be done in any number of ways but an example would be to have the employer fund 80% of the employee’s $5,000 deductible. This takes the employee’s liability down to $1,000 annually. Remember, most plans out of pocket maximum is $4,000 plus copays. Which is less, $1,000 or $4,000 plus copays? This scenario applies to office visits, prescription drugs, lab, x-rays, hospital stays, etc. All covered expenses are handled this way. In over 90% of the time, we can show you actuarially that you can improve benefits and save between $1,000 and $3,000 per employee per year and level out your future premiums.
“What about an employee revolt?” When communicated correctly employees are very happy with these arrangements because their out of pocket costs are dramatically decreased and so is their portion of the premium. Many times, their savings in premium will offset all of their out of pocket expenses. The key is getting employees and spouses to think differently and understand what they have. We achieve this through multiple meetings and one on one consultations, not just at renewal but throughout the year.
“This sounds too good to be true. How can this be done?” Because right now, employers and employees are overpaying for the convenience of copays and low deductibles. The premium savings when you move to a high deductible health plan without copays will more than compensate for the employer contribution toward the HRA. This has proven to be a very efficient way to not only immediately lower premiums and health plan costs but to hopefully stabilize renewal increases for many years to come.
My description only gives a very broad picture of these types of arrangements. You must work with an experienced advisor and administrator to ensure you are in compliance. The most important thing to remember is that there is a better way to fund healthcare.
Bryan Brown is a Certified Financial Planner® specializing in employee benefits and consumer driven healthcare. He is a partner in Brown & Company Insurance Services, a 30 year old Texas based insurance agency. Brown & Company manages TAPC’s member health care plans. To get more information, contact Helene Cavanaugh at 1.888.974.2272 to get contact information for our representatives at Brown & Company.
