By William G. (Bill) Stuart
Director of Strategy and Compliance
Sept. 1, 2016
We’ve reached the tipping point in Consumer-Driven Health, or CDH – even in Massachusetts, where adoption has been much slower than in the nation at large. More than a decade after IRS clarification on Health Reimbursement Arrangements, or HRAs (2002), and Health Savings Accounts, or HSAs (legislation passed in late 2003), employers are in a rapid-adoption phase. We see the evidence everywhere:
- Total HSA assets reached $34 billion by the end of June, continuing a roughly 20% to 25% annual growth rate., according to industry analysts at Devenir. Devenir projects that HSA assets will reach a projected $52 billion by 2018.
- America’s Health Insurance Plans, or AHIP, reported 19.7 million HSAs at the end of 2015.
- Accountholders are becoming more knowledgeable about and comfortable building equity in their accounts. Devenir reports that 14% of all HSA balances are in investments ($4.7 billion total).
Is now the time for an employer to offer a Health Savings Account program?
For a growing number of employers, the answer is a resounding “yes.” Whether their motives are a one-time buy-down to save on premium, trade in a current high-deductible medical insurance plan for another high-deductible plan with a reimbursement and savings account attached or a genuine desire to promote and enjoy the potential long-term premium savings and enhanced employee health, more and more employers are launching HSA programs. Many New England employers are making the choice that their counterparts in much of the rest of the nation have made during the last decade.
The key targets in creating a successful CDH program are design and education. Let’s look at each one separately. For purposes of this presentation, we’ll focus on HSAs simply because they offer employees the opportunity to create long-term medical financial security by building wealth through a tax-perfect account.
Here, we focus on the design of the overall program, not just the benefit design. Here are the most important design elements in a successful program:
- Seed employees’ HSAs. Be sure to make an employer contribution up front to help ease employees’ fears about cash flow early in their first year of enrollment. The best practice is to make an initial lump-sum contribution to encourage employees to open their accounts promptly and to establish their HSAs (most accountholders can’t reimburse any eligible expenses tax-free from their HSAs until an initial deposit – even a token amount – is deposited into the HSA). Then, ideally, the employer continues to fund the account each pay period or monthly either by matching employee contributions or allowing employees to earn incentive contributions. Either approach keeps employees engaged financially.
- Position the program so that employees can “win.” In an ideal program, employees with low to moderate utilization can come out ahead vs. other plans that the company offers (or offered prior to adopting an HSA program). For employees to win, their premium savings plus employer contributions must be greater than their net cost-sharing under the employer’s other plans. Without this reward, employees are unlikely to enroll. If the program doesn’t make financial sense for moderate utilizers as well, employers won’t see the enrollment that they need to manage claims costs.
- Choose a plan with a high deductible and pair it with a generous reimbursement plan funded with employer premium savings. Higher deductibles equal lower premiums. Employers who reinvest those premiums into employee accounts reinforce consumerism and allow more employees to win financially when enrolling in the program.
- Keep a high ceiling on employee financial responsibility. After the deductible, maintain modest coinsurance (no more than 20% in-network) on medical services. Cover prescription drugs subject to coinsurance in the 20% to 50% range, depending on the pharmacy tier. Coinsurance keeps employees engaged as consumers. Employers can design the plan to be the actuarial equivalent (employees on average have the same out-of-pocket costs) as a plan with greater reimbursement after the deductible so that employees remain “whole” and the plan continues to look attractive.
- Make provisions to help employees with high expenses early in the year. Employees’ No. 1 fear about enrolling in an HSA program is high claims and low HSA balances early in the year. IRS regulations allow employers to advance money to employees. Employers also can offer payroll loans – lending outside the HSA program, with employees’ paying back principal and interest via payroll deductions (and then reimbursing themselves tax-free from their HSAs as they build balances to bring their net pay back to its previous level.
- Adjust the plan over time to minimize leverage. When employee financial responsibility is expressed in fixed dollars that aren’t adjusted (copays, deductibles), premiums rise above trend because the insurer pays a higher percentage of each claim subject to cost-sharing. Employers can minimize the impact of leverage by increasing copays and deductibles regularly, weigh cost-sharing toward coinsurance (which negates leverage) or increase employee contributions to premium.
Designing the right program is critical to, but not the sole factor in, the success of any HSA program launch. Employees need to understand how the program works, how they’ll benefit and what their responsibilities are. Here are some critical considerations and activities:
- Make a decision well in advance of open enrollment. Ideally, an employer chooses to offer a CDH program at least six months prior to the anniversary date. That lead time provides an opportunity to design the right program (one to two months) and deliver education (two to three months) prior to the beginning of open enrollment. If employees’ first exposure to an HSA program is during open enrollment, their understanding of and enrollment in the plan will be minimal.
[Note: It’s getting late for clients with Jan. 1 anniversaries. One modification to this approach is to offer an HSA program Jan. 1, 2017,alongside current plans and view the program as a 15-month educational effort leading up to Jan. 1, 2018, with some opportunity to capture early adopters a year earlier.]
- Draft champions among senior management. Buy-in at the highest levels of the organization is critical to success. Employees need to know that the company is committed to the HSA program as a strategic direction, not merely one of many offerings or a whim by the HR department. Make it clear to everyone that senior management stands behind this approach.
- Identify, recruit and educate influencers throughout the organization. These influencers may be supervisors and managers, or they may be vocal employees whose opinions carry disproportionate weight within the organization. If they understand the benefits of the program and are supportive, others will follow (or at least won’t have to jump high hurdles to understand and enroll in the program).
- Make HSA education itself and open enrollment more engaging. Why can’t benefits meetings be fun? The small investment of a few gift cards to raffle, a grill to make employees lunch (after the presentations!), a few games or contests, a benefits scavenger hunt or other activities can break the monotony and dispel the common belief that open enrollment meetings are like undergoing a root canal – except for the lack of anesthesia.
- Conduct HSA education independent of and prior to open enrollment. The educational program needs to focus on the account itself – tax advantages, time horizons, benefits vs. a Health FSA, flexibility in contributions and distributions, estate treatment and role in individual financial and retirement planning. Employees need to understand the power of the account before they’re inundated with medical plan designs, ancillary coverage options and voluntary benefits during open enrollment.
- Create many educational approaches. Offer multiple in-person sessions. Offer at least one Webinar (especially if some employees work remotely) and record it so that employees can review key concepts or share it with a spouse who’s a decision-maker. Consider hosting at least one live seminar after-hours (ideally with refreshments and child-care provided) to give spouses an opportunity to learn and ask questions.
- Provide multimedia educational materials. People learn in different ways. A good educational program includes a library packed with FAQs, PowerPoint presentations with voiceover, videos, whiteboards and other materials. The goal is to give employees a virtual library card to explore the resources that help them understand the program.
- Make education an ongoing process. Don’t stop the education process when open enrollment closes. Keep employees – those who have enrolled in the HSA program and those who chose other coverage – engaged throughout the year. Team up with your medical insurer and HSA administrator to offer ongoing education on how to shop for the best cost and quality medical care; how to read an insurer’s Explanation of Benefits, or EoB, and how to reconcile it with a provider bill; how to find additional funds to contribute to an HSA; how to position an HSA within an overall personal financial program; how to invest in an HSA, etc. The objective is to educate employees so that they understand, adopt and embrace the program.
The final element of success is execution. Plan activities. Work the plan. Be flexible. Seek feedback to identify what aspects of the program employees don’t understand. Make mid-course corrections in your educational program or on-anniversary changes to the program.
With these factors in mind, you increase dramatically the likelihood that your program will be successful and benefit both the company and participating employees.
What We’re Reading
Did you know that 50% of all individuals with health insurance incur 97% of all claims? That means the other half of the covered population incurs only 3% of total claims (an average of $253), according to the Kaiser Family Foundation in a recent report. That means that most employees would be better off with higher deductibles, lower premiums and an employer contribution to their HSAs.
The Obama administration is minimizing the impact of higher premiums in the individual market by stating “Headline rate increase do not reflect what consumers actually pay” because of premium subsidies. Bob Laszewski delivers the real truth here.