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HEALTH PLANS/POLICY: High-deductible health plans and how the employer does the math

Marketwatch has an article about how you should choose your high-deductible health plan and as you might expect it goes over ground that has been pretty well trod over here at THCB. Basically it suggests that an employee should guess whether they’re going to be healthy or sick over the coming year, factor in the premium contribution they’ll be asked for by their employer, and balance it out accordingly. (No prizes for guess which you should choose if you know you’re going to be one or the other).  But even though the author doesn’t realize it, the really interesting piece is a throwaway at the end about Cigna’s plans for its own employees:

The biggest changes for Cigna Corp.’s 26,000 employees during this year’s open enrollment include a total conversion to high-deductible plans, mandatory health-risk assessments and a 10% break on premiums for nonsmokers, said Catherine Hawkes, director of Cigna’s total health and productivity. The health-benefits company already has 40% of its workers enrolled in high-deductible plans for 2005, most of them in HRAs, she said. But they’ll have the choice of two HRAs and an HSA for 2006. For in-network coverage where the employer has negotiated rates with providers, single HSA plans will have a deductible of $2,000 and families will pay $4,000 up front, Hawkes said. The out of network HSAs will carry deductibles of $3,000 and $6,000 respectively. Cigna also is contributing to workers’ HSAs for the first time in the amount of $200 for single employees and $400 for family plans, she said. And workers will be able to choose from six mutual funds instead of the low-interest-bearing account currently in use. (Bold emphasis added by me)

This explains exactly how things will play out (much, it might be added, to the fears of Eric Novack). The basic problem with HSAs, (as I’ve explained add nauseam–for the math detail dig down in here) is that they allow the individual to pull money out of the risk pool, forcing the pool to find more money for the care of the sick 20% after the healthy 80% have taken their money out. A self-insured employer is a risk pool so there’s no logical incentive for an employer to put money into an HSA that an employee can walk off with.  But there is a logical incentive for them to move employees from low or no deductible plans into high-deducible ones and not fund that deductible.

Imagine if Cigna had 100 employees, and paid $500,000 total for their health care in a fully covered pool. Remember that 20 of them will take up 80% of spending ($400,000 at $20,000 each).  If Cigna  switches to a HDHP and put $2000 cash into each of their HSAs, by the time it came to find the $360,000 required for the sick 20 (the $400,000 minus the $40,000 in their HSAs), it would notice that it had already put $200,000 into the HSAs leaving a hole of $60,000. But if instead it started paying for its employees only when they spent more than $2000, they would now be spending $360,000 on health care for its sick 20 employees (the employees needing to come up with the first $2000 each) and nothing for the rest of them. So Cigna could even afford to throw a couple of hundred bucks into every employee’s HSA because it would all of a sudden be saving itself 25%, over what it cost it before. That’s why the HDHP is proving so popular among employers, because it gives them the ability to reduce their costs while claiming that they are "empowering" their employees.

No, of course reality isn’t quite like this, and Cigna’s employees are probably getting breaks on premium co-shares, and maybe even bigger pay rises that go along with this, and overall it’s a trend rather than an immediate shift. But that is what is going on here, and it’s not dissimilar to the Walmart/Costco situation, where Walmart pays fewer benefits and makes more money. So it’s just more evidence that the abdication of employer-based health insurance is well underway, and being led by health plans who are looking for the next big thing to sell to their dumb employer clients.

This rightly has sensible advocates of market reform like Brian Klepper and Pat Salber very worried. In their opinion piece in Modern Healthcare they note that we are essentially replacing employer-based health insurance with nothing. And that has big consequences for a health care delivery system which depends on third party payment to make up the numbers.

And I guess if Cigna et al eventually finish off employer-based health care by getting their clients out of the business of providing health benefits–well that wouldn’t be a great loss. After all it would mean the plans went out of business too! But I guess that’s slightly longer range thinking than the average health insurer’s management team is used to.

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TimDavid BriggsMatthew HolttheorajonesRon Greiner Recent comment authors
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Tim
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Tim

Also, Ron, Calling Paul Zane Pilzer an idiot? You are so confused. It’s brokers and agents like yourself who are costing people so much money, by not thinking about what’s best for the consumer. You realllllllly need to bone up on your federal tax code knowledge. Mr. Pilzer presents an interesting case. Why are all the healthy people being forced to pay for the sick? I see group plans every day… every single day… where employers are paying over $1,000 per month for family coverage, and often more. Even their individual rates are in excess of $300 in many cases.… Read more »

Tim
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Tim

Ron,
If you think it’s illegal for an employer to pay for his employee’s individual health insurance plans, you are sadly mistaken. There are a couple of options. I set up new accounts in this fashion every week.

David Briggs
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David Briggs

“Imagine if Cigna had 100 employees, and paid $500,000 total for their health care in a fully covered pool. Remember that 20 of them will take up 80% of spending ($400,000 at $20,000 each). If Cigna switches to a HDHP and put $2000 cash into each of their HSAs, by the time it came to find the $360,000 required for the sick 20 (the $400,000 minus the $40,000 in their HSAs), it would notice that it had already put $200,000 into the HSAs leaving a hole of $60,000. But if instead it started paying for its employees only when they… Read more »

Ron Greiner
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The difference between Governor Granholm and Governor Jeb Bush is extreme. Governor Jeb Bush has switched to a Ford Escort to save gas after Katrina but Governor Granholm still drives her expensive SUV. Governor Jeb Bush gave all Florida state employees the tax free HSA option but Governor Granholm won’t. Florida has the lowest unemployment in history and Michigan has the highest unemployment rate in America. The Democrats are just simply out of ideas except taxing the citizens even more. Jeb Bush has cut taxes $14 billion dollars for Florida citizens. By law Jeb Bush can’t continue his good work… Read more »

Ron Greiner
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The difference between Governor Granholm and Governor Jeb Bush is extreme. Governor Jeb Bush has switched to a Ford Escort to save gas after Katrina but Governor Granholm still drives her expensive SUV. Governor Jeb Bush gave all Florida state employees the tax free HSA option but Governor Granholm won’t. Florida has the lowest unemployment in history and Michigan has the highest unemployment rate in America. The Democrats are just simply out of ideas except taxing the citizens even more. Jeb Bush has cut taxes $14 billion dollars for Florida citizens. By law Jeb Bush can’t continue his good work… Read more »

Ron Greiner
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Matthew, You just said it again that the security of individual health insurance is “cherry picking.” All these companies going broke here in Michigan has nothing to do with individual insurance “cherry picking” off of GM or other union employees group pools. The family I saved $600 a month last week who had a Ford Motor Company COBRA plan didn’t care what you think Matthew. I told them a guy named Matthew thinks they should pay $600 a month more to help Ford Motor Company maintain their current profit in their employee pool. They said, “Maybe this guy would like… Read more »

Matthew Holt
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Good to see that Ron’s recent absence didn’t involve a long session at some brainwashing institute to cure him of the ability to make up what he thinks the rest of us believe. However, Granholm knows that after he and his bunch have picked all the cherries, the state/taxpayer will be left with all the stones. That’s why she’s complaining.

theorajones
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theorajones

Erick–what you’re arguing in terms of market forces makes no sense. First off, when normal people are presented with a “your money or your kid’s life” situation, they don’t usually haggle over price. Second, I fail to see how money will provide a greater incentive for good patient decision-making than pain and suffering does already. Personally, I’d rather spend $25,000 unnecessarily than have my chest cracked open unnecessarily. So, how exactly does the prospect of wasting money suddenly make me more likely to challenge my doctor’s judgment on the whole chest-cracking thing? And finally, while I know I shouldn’t pay… Read more »

Ron Greiner
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Eric, If the employee can choose the lowest cost HSA health insurance, all healthy employees will get the security of low cost individual health insurance, that they can keep if their company goes out of business, because it’s so much cheaper and bail on dangerous over-priced group health insurance pools. Matthew says it’s merely a trend and I say it’s the cataclysmic collapse of government controlled employer-based health insurance. I assume you understand Eric that it is illegal for an employer to purchase low cost individual health insurance on an employee for only $200 a month for family coverage. By… Read more »

Ron Greiner
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You’re a hoot Matthew. You have said that HSAs are no big deal, yet here you say that “employer-based” health insurance is being “finished off.” Steve Case, it is being reported, has spent $100 million since June trying to buy up HSA delivery companies. So I doubt if Steve is going to pay you for your advise on HSAs Matthew. On Steve’s team is that insane Zane guy (I posted his article from Newsweek here). Steve thinks there is a “market disruption” coming in “employer-based” coverage. Good luck Steve. You would think Steve could afford smarter people than he is… Read more »

Eric Novack
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Matthew- These kinds of changes do worry me– I see Cigna employees in my practice and a couple have expressed frustration and uncertainty with the upcoming changes– and a lack of knowledge about HSAs. I have stated on the blog before that employers must tell employees what their TOTAL COMPENSATION is each year– wages + bonus + benefits. This will serve as a serious check on employers posting the savngs on premiums of HSAs as pure profit. The “easy” answer is to require that this be disclosed on the end of year W-2. Health costs have been rising faster than… Read more »