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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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  1. 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.
    There are other options out there for those 20% that are sick in your average group. You just need to read more and educate yourself. The individual piece that Mr. Pilzer talks about is a great tool. Employers can save a ton of money by offering their employees Mr. Pilzer’s strategy, and those employees can keep the same level of benefits regardless if their agent knows what to do and has a plan in place that will allow them to do just that. The savings offset the risk. It’s virtually impossible to spend more and NOT save money.

  2. 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.

  3. “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.”
    Been trying to do the math for two days. Where does the 25% come from? If the employer spends $360 instead of $500 it’s $140 less. 140/500 = 28%. What am I missing?
    HDHPs do appear to be a Trojan horse – the beginning of a massive risk shift to individuals similar to the move from defined benefit to defined contribution pensions.

  4. 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 in Florida. Too bad it’s not against the law for a Canadian to be Governor in Michigan so Granholm would be gone and the state could rebuild it’s economy.
    http://edition.cnn.com/2005/POLITICS/10/11/governors.hellohybrid.ap/
    Michigan just needs a break from Liberal Democrats for a while.

  5. 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 in Florida. Too bad it’s not against the law for a Canadian to be Governor in Michigan so Granholm would be gone and the state could rebuild it’s economy.
    http://edition.cnn.com/2005/POLITICS/10/11/governors.hellohybrid.ap/
    Michigan just needs a break from Liberal Democrats for a while.

  6. 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 to pay the $600 a month for us.”
    Also Matthew Governor Granholm asking the American taxpayer to pay 100% of the pensions of companies that go out of business is insane. I know you think the government is always the answer but give us all a break. GM would love to transfer all their retirement health care liabilities onto the backs of the American taxpayer but that is not an option no matter what you , Granholm or any Liberal thinks, sorry.
    Call Governor Grannholm Matthew. See needs a good consultant who can explain her position. Her current advisers are pretty bad.

  7. 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.

  8. 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 $200 bucks for a toilet seat, I have no idea what I should pay for a sterilized catheter. How much more than a non-sterilized catheter is that? How will I know which hospitals use sterilized catheters and which do not–will I look at their lobby furniture and nurses’ fingernails and make sure they’re really clean?
    We’ve got the most market-oriented system in the world, and we’ve got the most out-of-control prices in the world. Please explain, using something other than “markets are magic,” how forcing people to pay money that many of them don’t have will make the health system better.

  9. 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 law, employers must purchase dangerous group health insurance on employees that the average cost was over $10,000 in 2005. This is why most small employers won’t buy insurance on employees and leave them uninsured. This is why Eric you overpay for group health insurance on your own employees if you are purchasing insurance on them.
    Because of the law, all employees of companies that were blown away by Katrina lost their group health insurance without COBRA extensions. I have not seen one article that explains how government mandates and current laws made all these former employees lose their health insurance. Matthew won’t mention this problem either and I posted it here right way after Katrina. Let’s all just agree that the media is agenda driven and will censor the truth which is just a form of propaganda.
    The AMA is reporting that black women have more acute cancers than white women. People who have group health plans on their employees don’t care if their black women who are too sick to work are put to a short COBRA for insurance termination. Cancer and employer-based health insurance termination leads to depression. I have tried to explain to Matthew that depression and cancer is a deadly mix but he just won’t listen.
    Matthew wants employers to choose the isurance that is on their employees’ children. By law, the employers are not the childrens’ guardian and employers will choose a dangerous group plan just because they can save a dime, they think. The real truth is these employers just have rotten evil greedy group insurance agents advising them.

  10. 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 listening too. Goofy Zane doesn’t even have an HSA because his wife says, “No,” ha ha. I think Zane has teamed up with a guy associated with ehealthinsurance. Steve should consider the obvious question: If Zane can’t sell his own wife on a tax free HSA, how in the hell is he going to be able to sell anybody else? It’s almost like the HSA competition is all retarded. I wonder if Steve is paying 6% interest on his HSA. This HSA business sure is competitive.
    Yesterday a GM employee called us after hearing our HSA radio commercial in Detroit. She said, “GM is offering an HSA plan in their open enrollment this year,” and she just wanted to know what they were. That’s the last thing we need is GM employees calling us, toll free, to figure out GM’s HSA program.
    GM’s stock is dropping through the floor because of their health insurance costs. Governor Granholm (D-MI) actually discussed health care yesterday. It was pathetic. She was almost crying saying that Washinton D.C. has got to help with the cost of union employees’ health insurance costs here in Michigan. She is obviously reading Matthew’s comments and is desperate to save her current over-priced insurance “pools.” Then she continues with the federal taxpayers have to give all union employees 100% of their pension even if the companies go out of business. She thinks if an employer makes a promise to an employee, then the Federal taxpayers have to pay for it. Granholm is a perfect example why Governor Jeb Bush calls Democrats, “Pathetic.”
    Maybe I will wake up tomorrow and find out Steve has bought our insurance company. He will need a bit more than $100 million to do that. Steve should buy USHEALTH because they are trying to take my shares away at only $.31 a share. I guess Ben Cutler will get 5 million shares if management can hoze the shareholders that their is no future in their HSAs insurance companies. Ben should hire Matthew as an expert witness to testify that that HSAs will have lttle impact on the markets and these 2 HSA insurance companies that USHEALTH owns are really as worthless as those who want to grab all of our shares for only $.31 a share. Besides, if Steve Case bought USHEALTH then he would have Ben Cutler to advise him and Ben is much smarter than insane Zane.
    Did ehealthinsurance ever answer our questions about their marketing like they said they would? These questons are very important because they go right to the very important question of them being able to be trusted by the consumer.

  11. 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 inflation for years, so companies ought to see some benefit from savings, but also ought to share that savings with employees in either higher wages or funding the HSA.
    I maintain that HSA are a step toward introducing market forces in an industry that, in certain areas, resembles the $200 screwdriver, $1000 toilet seat days of the defense department.

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