[UPDATE: I've corrected some of the numerical assumptions in the HSA section]
Okay, enough with the theory, let’s talk turkey. One of my small group clients asked me about changing their plan to an HSA. Let’s review some basic information of how this group’s plan currently works:
A small professional practice, 8 people work at the XYZ Company. Their current plan is relatively rich, with $10 office visit co-payments and a modest $500 annual deductible per person for “the big stuff.” Once the deductible’s met in a given year, the plan pays 80% of the next $5,000 of covered expenses, leaving any one person with a maximum exposure of $1,500 in a year. There’s a family maximum of two on the deductible and co-insurance. This means that, even if all 4 members of a particular family have major claims in a year, the family’s only responsible for $3,000, not $6,000.
There’s also a prescription drug card, with $10 co-pays for generics and $20 for brand names. All in all, a decent enough plan, maybe a little benefit rich, and therefore pricey, but you get what you pay for. The current monthly premium for this group is a little over $3,100.
Now, to keep things manageable, we’re going to be looking at only two alternatives. The first is the HRA; simply by increasing the deductible to $1,000, and the co-insurance participation to $1,250, the employer would save over $300 a month, or about $4,000 a year, in premiums; each covered person would have an additional $750 of potential claims participation (subject, of course, to the two per family maximum).
In its simplest form, an HRA would obligate the employer to pay (or help pay) the additional $500 added to the deductible. There are eight employees, and an additional 4 or 5 dependents (spouses, children) in this group, so we’re talking a total of a dozen or so warm bodies to be covered. On average, maybe 4 of them will have claims exceeding $500 (the original deductible) in a given year, so the employer could conceivably pocket about $2,000 in savings in this scenario. And the employees still have their office and drug card co-pays.
With the HSA, we’ll need to make more substantive changes. We’ll be bumping the individual deductible up to $1,250, and the family deductible to $2,500. We’ll also be doing away with the office visit co-pays and prescription drug cards. In other words, pretty much everything medical will be going toward the deductible until it’s satisfied. On the other hand, we’re also getting rid of the 80/20 coinsurance: once that deductible is met, the plan pays 100% -- nice. This part alone is worth the price of admission, because no one understands co-insurance.
One interesting “twist” on that deductible: a “family” is defined as two or more covered people (could be husband and wife, or single parent, or whatever), and they kind of “pool” the deductible. That is, whatever expenses any one of them has goes towards it, until the $2,500 is hit. Could be one person with a heart attack, or 3 with broken arms. Once the $2,500 threshold is met, everyone’s at 100%. The group’s premium for this plan is about $2,500, representing a $7,000+ annual savings for the employer.
Well, sorta.
Each employee is actually decreasing his potential claims exposure by $250 a year, and each family by $500. However, this comes at the expense of the 1st dollar benefits (office and rx co-pays). In order to mitigate this, the employer could contribute $50 per month for each "single," and $100 for each "family". This group has six with individual coverage, and two with family. So the employer would be contributing up to $3,600 for the singles (6 x $600), and $2,400 (2 x $1,200) for the families. This reduces the net savings to $1,000 per year.
That’s money he’ll have to spend, and which the employees would then “own.” Not necessarily a bad thing, but it changes the equation. All of a sudden, that $7,000 savings starts to go away. Granted, he doesn’t have to be that generous; he could, for example, choose to contribute less to to the accounts. But still…
Next time, some conclusions, and suggestions.
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