Although it seems counterintuitive, unhealthy individuals are not disadvantaged by the combination of a high-deductible health plan with a health savings account. In fact, they may stand to gain the most. Whether you are healthy or unhealthy, HSAs have advantages, but for different reasons.
All employees benefit from the efficiency of health savings accounts. Traditional health care benefits actually combine features of insurance with features of prepayment programs. By definition, insurance is the transference of a catastrophic risk to a third party. Few can argue that most routine physician visits or prescription drugs don’t meet that definition. These expenses are typically predictable and the benefit program provides a convenient, although fairly expensive, way to fund them.
The portion of the health premium that reimburses catastrophic losses is very appropriately funded by insurance, an efficient funding vehicle for unpredictable risks. However, the administrative costs of insurance, makes it a less attractive vehicle for funding predictable costs. Most insurance policies include administrative costs of 15% to 25%. As a result, if $1,000 of health premium is put towards funding these routine expenses, only $750 to $850 is actually available to reimburse claims.
In contrast, HSAs are a very efficient funding vehicle for routine health care expenses. Most accounts have a very nominal fee, typically only a few dollars a month. Therefore, $1,000 deposited into an HSA is available to reimburse almost $1,000 of expenses, a substantial increase over what could be reimbursed if funded by insurance.
It is obvious to most that healthy individuals will benefit from the HDHP/HSA combination. They will find that they can accumulate funds for current and future health care needs. This plan design rewards the healthiest employees, who are typically also the most productive. These are employees who rarely, if ever, use their health benefit, yet they have paid the same premiums and even accepted lower salary to ensure coverage.
Employees with moderate health care expenses will also fare well with a health savings account over time. They will appreciate the ability to use the tax-free HSA on a broader range of medical expenses than allowed by most insurance policies or self funded plans. In addition, they can directly benefit by becoming engaged in improving their health and making wise health care decisions.
But what about the unhealthy, the chronic and acute portion of our population? These individuals benefit from the HDHP/HSA in many different ways. Most will find that they actually have fewer out-of-pocket expenses and lower premiums with this arrangement than they would have with a traditional health benefit program.
First, they benefit from a true out-of-pocket limit. Under most traditional health insurance policies, the OOP limits the individual’s exposure on some, but not all, expenses. For example in a traditional plan, if an individual has met his or her out-of-pocket and goes to a physician, the individual will have a copayment. If the doctor writes a prescription, there will be a copayment at the pharmacy. The true out-of-pocket may be much greater than the OOP stated in the benefits.
With a high-deductible health plan, once the individual has met the out-of-pocket limit, all future in-network expenses are fully reimbursed. As a result, the HDHP actually provides greater reimbursement for those with more significant health care expenses than a traditional benefit program does. Meanwhile, the premiums for the HDHP are less than those for a traditional health insurance policy. Not only do individuals with health problems receive greater benefits–it costs them less.
Individuals who anticipate having significant medical expenses should take advantage of the tax benefits offered by the health savings account by fully funding their account (which is $2,850 for those with self coverage and $5,650 for those with family coverage in 2007). This provides them with the additional benefit of a potentially significant reduction in taxes. This benefit is different from health flexible spending account tax savings because there is no “use it or lose it” rule. Any unused amounts continue to be available for future use.
Less healthy individuals tend to have additional health care expenses not reimbursed by their health insurance. The HSA provides them a convenient way to fund those on a tax-free basis.
So how to do the unhealthy benefit from the HDHP/HSA? They benefit from better benefits, lower premiums, lower taxes, and greater flexibility.
High-deductible health plans with health savings accounts provide a convenient, flexible way to fund health care expenses regardless of an individual’s health status. Whether healthy or not, the HDHP/HSA can reduce health care expenses.
Jerry L. Ripperger is the national practice leader for consumer health at Principal Financial Group Inc., Des Moines, Iowa. He can be reached at .