Which plan is the best for you?

Traditional Health Plans

Traditional health plans focus on reducing costs to employees at the time of services by offering features such as a low deductible along with low office visit and prescription copays.

Traditional health plans became popular in the 1980’s and 1990’s. Today’s Bronze, Silver, Gold and Platinum plans are examples of traditional plans.  Plan members like these plans because the low copays make it affordable when accessing the healthcare system. For example, if the plan member pays a small copay at the time of an office visit, the insurance company pays the remainder of the doctor’s negotiated fee. That explains why insurance companies charge a higher premium for plans that offer low copays.

Traditional plans focus on reducing the member’s out-of-pocket expenses during a given year; there are no long term benefits for the future.

Consumer Directed Health Plans (CDHP)

Legislation enacted in 2004 created the health savings account and a new health insurance concept was introduced to America: Consumer Directed Health Plans.

Instead of one comprehensive health plan, consumer directed health plans have two separate elements:

  1. An affordable insurance plan. A High Deductible Health Plan (or HDHP) functions like a major medical plan and protects the plan member against large, unexpected and infrequent expenses such as hospitalization and surgery. The average hospital stay is 3-4 days and costs around $30,000, while a surgery can add additional costs to the bill.
  1. A Health Savings Account (or HSA). The HSA is a tax-advantaged savings/retirement account that allows employees to save tax-free dollars and then use that money to self-insure routine and expected medical, dental and vision expenses, while also saving for future deductibles and retirement health care costs. Importantly, employers can also contribute to employee health savings account as an added benefit of employment.

The consumer directed health plan movement maintains that employees will benefit over the long term if they enroll in an HDHP and regularly fund an HSA, rather than paying an additional premium for more expensive traditional Silver, Gold or Platinum plans. Employees can use that pre-tax money in their HSA for routine and expected expenses. Unused dollars then accumulate over the years into a “pool of money” that can be used to pay for future healthcare expenses, including substantial retirement medical expenses (averaging $260,000 for a couple).

ImportantImportant Note: The essence of the consumer directed health plan model is: if you are spending “your own money” you will spend it differently than if the health plan pays most of the bill.

Here's a good analogy . . .

Dan Perrin, one of the experts involved in the passing of the Health Savings Account legislation tells the story of how he took his daughter and two friends to a theme park and paid for their miscellaneous expenses such as meals, snacks and souvenirs. When he did the accounting the costs totaled $150.  The next year he gave each of the girls $50 to spend as they chose.  They each came home with almost half the money.  When it was their money to spend, they chose to skip the junk at the theme park and instead to save it for activities they wanted to do at home.

When there are no copays and a person spends their own money, the “real costs” of healthcare are felt. This makes individuals more prudent buyers and they will be more likely to shop around for the best prices on healthcare services. For example, if a doctor prescribes a new and expensive name brand medication, employees can tell the doctor they don’t have copays with their HSA-based HDHP, and can ask if instead the doctor could recommend an older brand name drug or generic drug. Often the doctor will prescribe a less costly option that will be both clinically- and cost-effective.

Based upon analyzing claims costs for a variety of situations, these new plans can potentially be more beneficial for a substantial majority of employees.  Here’s an article written by Bob Hopper that does a great job further explaining the power of HSAs.

With the advent of consumer directed health plans, there is an opportunity for employers to change the way they contribute to an employee’s health insurance and gain greater control of costs. That’s worth restating: “Employers can gain greater control of costs by changing the way they contribute to employee health insurance plans.” Employers can now provide money to pay the premium then optionally provide additional money that can go into an employee’s HSA.

Continue to – “HSA Magic”