A Case For High Deductible Health Insurance
By Joe Rankin & Jeremy Chambers
Employee Benefits
Universal Advisor, 2004 Issue No. 2

In the past, employer-sponsored, high deductible health insurance plans haven’t merited much consideration. Expecting employees to absorb all or part of a deductible in the range of $2,500 to $5,000 per year is hardly a widely accepted or anticipated employer practice.

However, professional health care service providers and insurance agents are starting to offer employers high deductible health plans in the name of consumer driven health care and higher cost for higher usage. This is because, from a cost-containment perspective, high deductible health plans are far less expensive than traditional ones. However, high deductible health insurance can be favorable to both employers and employees — just not for the reasons you might expect.

Consumer-Driven Health Care

There’s been a recent wave of consumerism popularized by many health care administrators and agents. Employee awareness of health care costs is theoretically increased (and utilization is theoretically decreased) by the employer forcing the employee to pay for health care-related services at the source and later reimbursing the employee at some level. The rationale is that through this mechanism, the employee appreciates what's being paid or, preferably, the employee becomes a better user of health care, avoids certain unnecessary treatments, looks for alternative treatments, and lives a healthier lifestyle.

This logic is largely faulty for one simple reason — while this system may force employees to make economic decisions, most health care users can’t make wise medical decisions. Therefore, increased awareness combined with economic and health care consumerism is simplistic and overly ambitious.

Higher Costs for Higher Usage

For any product or service other than health care, a consumer must pay more for more. For health care, employers have traditionally held a more parochial view of cost sharing — no matter who went to the doctor more, no matter who had the more destructive eating habits and lifestyle, no matter who had more children, the cost would be relatively the same for all employees. But why should the healthy have to pay for the unhealthy? Just because that’s the way traditional insurance works doesn’t mean it’s fair.

In recent times, employers have made the payment differentials between high and low health care users more dramatic by adding certain insurance copayments and deductibles but, in reality, the real spread in costs between the lowest and highest users of health care is not very dramatic or reflective of actual costs.

Problems with making employees pay different amounts for different levels of health care utilization include:

1. Determining actual costs — Costs per person may not be available, especially for small employers.
2. Privacy — Even if the information were available, using such information may violate various laws.
3. Recruiting and retaining employees— Few employers would be able to hire qualified applicants if health insurance was offered on a primarily pay-for-use basis.

Although there’s an appeal to a higher cost for higher usage system, it probably won’t work in most organizations.

Where Employers Should Spend Their Health Care Dollars

In January 2004, many large employers gathered in New York for a Health Care Conference sponsored by the Conference Board. The employers analyzed the cost of healthy employees versus other employees, and the differences were staggering.

The above chart shows the medical costs by risk category for an organization with more than 100,000 employees.

The one-year costs for healthy employees of all ages averaged between $350 and $550 for 2003. For very high risk employees, the one-year health care costs averaged between $20,000 and $30,000 for 2003. This analysis was based only on health insurance claims and didn’t include lost time, productivity, or wages.

The cost for high risk employees was more than 50 times the cost of the healthy employees. Even above-average risk employees cost 10 times as much as healthy employees. This type of analysis was consistent for most employers.

So what’s the point? Many lessons can be gleaned from this information, but making employees pay more so they understand more, utilize better, and pay their fair share is not among them. Lessons include:

• Healthy employees cost far less than unhealthy employees.
• Throwing money into health care insurance alone is ineffective.
• High deductible plans make no sense when the employer is functioning as a reimbursement agent — it’s perceived as a cost shift to employees and doesn’t produce the desired result of preventing future recurrences of illness.
• 70 percent of health care utilization can be controlled by prevention, intervention, and monitoring.
• Less than 2 percent of all treatment is prevention oriented.
• Managing the high risk health care needs of employees is a much better use of money than paying premiums.
• High deductible plans are no burden to healthy employees.
• High deductible plans can free up money to fund disease management and wellness programs.

High deductible health plans can free up tremendous amounts of health care dollars that can be used for other purposes. One effective use of those dollar savings is sponsoring wellness and disease management programs and reimbursing part of the employee’s deductible on a tax-free basis.

For example, average monthly health care costs for a single employee are more than $300. It’s possible to obtain a high deductible health plan (of $2,500 for a healthy male, age 40) for $60 per month. That amounts to annual savings of about $2,800 per employee. Those savings could be used to pay for:

• Wellness plans that monitor cholesterol, blood pressure, smoking cessation, obesity, sedentary lifestyle, diet, etc.
• Disease management to prevent recurrences or associated ailments such as diabetes, heart disease, strokes, etc.
• Certain deductibles and copayments — With a $2,500 deductible, the first $1,500 of the $2,800 savings could be reimbursed to the employee for eligible medical expenses on a tax-free basis; the employer would still have $1,300 per employee to spend on other programs.

The economic reward of coordinating high deductible health plans with wellness and disease management programs is not immediate, but it eventually produces the goal we all aim for — healthier and happier employees with lower health care costs.