Author: Alison Neilson, ASA, MAAA, Consultant & Lead Actuarial Consultant
What are HDHPs?
High deductible health plans, HDHP for short and sometimes optimistically referred to as consumer driven health plans (more on this later), are exactly as the name describes. HDHPs are healthcare plans with high deductibles where all care is paid for by the member until the deductible is met. Preventive care is the one exception and is covered by the plan at no cost to the member prior to the deductible being met (thank you Affordable Care Act!). To be considered an HDHP in 2021, there are a few requirements. The deductible must be greater than $1,400 for individual coverage and $2,800 for family coverage, and out-of-pocket maximums cannot exceed $7,000 for individuals and $14,000 for families. Once the deductible is met, the member and the plan split the cost of healthcare until the member meets his or her out-of-pocket maximum, at which point the HDHP covers all remaining costs for the rest of the plan year.
An important feature of HDHPs is that they can be paired with a Health Savings Account (or HSA).
For those that may not be familiar with some of the terms used above, here is a quick rundown:
- Deductible – functions the same as your auto or home insurance deductible. This is the amount that the member must pay before insurance covers any costs (*except preventive care). More straightforward for home and auto insurance since a single incidence or claim would require the full deductible to be paid at one time. More complicated for healthcare since many claims (office visits, prescription drugs, labs, etc.) often add up to meet the deductible.
- Out-of-pocket maximum – the most a member can pay for healthcare in one year. Note that the out-of-pocket maximum almost always includes the deductible meaning that money paid to reach the deductible is also applied to the out-of-pocket maximum.
- Health Savings Account (HSA) – tax-advantaged savings account that can only be contributed to if the member is enrolled in a HDHP. In 2021, the member can deposit up to $3,600 if enrolled in individual coverage or $7,200 if enrolled in family coverage. HSA contributions, funds spent on healthcare expenses, and interest earned are not subject to federal tax or state tax for most states (calling out CA as not one of the most states). Funds rollover every year and belong to the member.
What was the purpose of HDHPs and HSAs?
The main purpose of this dynamic duo was to encourage healthcare consumerism to reduce the cost of healthcare – enter Consumer Driven Health Plans (CDHPs). The thought was that if the insured had ‘skin in the game’ through the plan deductible, the insured would shop around for the most cost-effective, highest quality, and appropriate care. The HSA would also encourage members to put money aside to save for upcoming and future healthcare expenses.
How did it work out?
To be honest, not great. Many studies have shown that HDHPs did not reduce the cost of healthcare as intended and any reduction in cost was actually the result of care avoidance. Avoidance of preventive and maintenance care. The care that helps people manage their chronic conditions and identify more serious health conditions that are not only detrimental to the patient’s life but also cost a lot of money. As deductibles in HDHPs have risen over the years, HDHPs have become catastrophic plans for many, and care is only accessed for emergencies or when the healthcare condition can no longer be ignored. Before I get into the challenges of HDHPs, know that it’s not all bad, and HDHPs have their place. More on this further down.
- Purchasing healthcare is not the same as purchasing any other consumer good. The stakes are higher. The healthcare marketplace is complicated and difficult to navigate. Healthcare is expensive, even for routine office visits and maintenance medications. Others, such as physicians or insurers, recommend or mandate what we should buy or what we should do.
- Prices are not readily available. While tools have emerged over the past few years that provide the cost for a procedure or service, these are estimates and not guaranteed. How can you be a good consumer when you don’t know the exact price of what you are consuming?
- Healthcare is expensive, and a large portion of Americans do not have access to funds to cover the deductible. Even an office visit with a primary care physician can cost $160, and the price will climb from there if additional services are required during or following the visit, such as labs, imaging, etc. Need to see a specialist? The price can be considerably more. I mentioned the minimum deductible for a HDHP is $1,400, but the deductible can be and often is much higher. A $5,000 deductible could mean the entire cost for a minor surgery is the responsibility of the member.
- Employer HSA funding helps but does not solve the cost barrier. It lessens the burden of the deductible but depending on what portion of the deductible is funded and how the funds are distributed, the insured may still be vulnerable. If the insured experiences an unexpected medical event early in the year but the funds are deposited per paycheck or quarterly, the insured is left holding the bag until enough time passes to accumulate the HSA funds.
- Low healthcare literacy. Most healthcare consumers don’t understand how a HDHP or HSA works, and confusion leads to complacency.
Have HDHPs run their course?
It’s clear that HDHPs did not turn out as expected, but not all hope is lost. HDHPs are appropriate for those that can afford them. In fact, higher compensated employees will often enroll in the HDHP because of the tax-advantages from the HSA and will have access to funds to pay for their care before the deductible is met.
Key elements of a successful employee HDHP plan:
- Above-average compensation for the employee population. If an employer has lower compensated employees, an employer could consider increasing HSA funding for lower compensated employees or offering salary-banded plan designs with higher compensated employees having a higher deductible.
- Robust pricing tools. While these tools aren’t perfect, members need information around cost, quality and distance to make informed decisions. Adding a concierge resource makes this process easier for the member since most of the leg work can be completed by the concierge, with the member deciding between two or three providers. Bonus points for concierge programs that employ clinicians since these programs can also help a member navigate potential care paths.
- Especially around HSAs. There needs to be communication efforts dedicated to how HDHPs and HSAs work that also outline the benefits of HSAs.
- Advanced HSA funding. There are several HSA bank vendors that can advance employer HSA funds to employees for qualified medical expenses. This helps relieve apprehension that stems from unexpected medical expenses early in the year.
- Focus on preventive and primary care. The largest expense of any healthcare plan is large claims driven by 5% of plan members. Identifying these members before they become a large claimant is our best bet at mitigating these claims. Identification is made possible through age-appropriate screenings and annual exams. Building a wellness program that encourages wellness visits or introducing direct primary care can help with this effort.
In summary, HDHPs may have initially missed the mark, but we can set them on a new course. A properly designed and well thought-out HDHP can be a beneficial part of an employee medical benefits strategy.
Let’s Find Solutions
To evaluate what benefits strategy is best for your employee population, reach out to your Burnham team for any questions or email us at firstname.lastname@example.org.
Alison Neilson, ASA, MAAA
Consultant & Lead Actuarial Consultant