Employer Creativity a Significant Key in Controlling Healthcare Costs

The free marketplace is an incredible thing to watch – especially when intentional developments and the evolution of programs create unintended outcomes. This is a testament to the entrepreneurial spirit that is alive and well in many businesses today, and it is particularly evident in the way employers have adjusted to the changing demands of today’s economy – even in respect to benefit plans. With the advent of high deductible health plans to support the consumer driven excitement in the marketplace, we can explore an excellent example of this creativity at work.

In 2002, the IRS delivered two revenue rulings (2002-41 and 2002-45) that allowed employers to put a rollover provision on section 105 self-funded health plans. This was the guidance that created Health Reimbursement Accounts (HRAs), and the first stimulus for consumer driven plans. The thought process with consumer driven health plans is that if you raise deductibles and put money into an HRA (the precursor to the Health Savings Account), then people would spend their dollars more effectively than they would in using their low deductible health plan. The desired outcome was that people would use the built-in rollover provisions to save for a “rainy day” of healthcare needs and, ultimately, increasing healthcare costs would be slowed. But consumer driven healthcare is not the creative example here.

As the consumer driven excitement built in the marketplace, health insurance companies began building plan designs with much higher deductibles and coinsurance maximums. Often times, the rate reductions associated with these higher deductibles were exaggerated. This means the medical carriers were reducing the health insurance premiums by much more than the claims would actually be reduced by going to the higher deductibles.

As the market saw this discrepancy, ingenuity took over. Employers began to select the higher deductible plans; but instead of setting up HRA accounts (section 105 self-funded medical plans with a rollover provision) to change behaviors, they began to put other programs in place to support their employees’ needs. Some of the more popular employer decisions have been to purchase “gap” plans or mini-med plans, or to simply create section 105 self-funded plans with no rollover and limit the reimbursable items strictly to deductible costs. In many instances, these programs are much less expensive for employers to purchase or fund versus keeping their lower deductible health plans. The net result of this process was that it kept the employers’ expense low while maintaining the value of the benefit plan for their members.

With the continued maturation and employer adoption of these types of scenarios, the health insurers have begun to fight back. Why are they fighting back? They are upset because they have seen their medical loss ratios escalate as a result of this unintended use in the marketplace. A recent article by industry journalist Jeremy Smerd describes some of the interaction unfolding in California that may begin spreading across the rest of the country. The California health insurers are working to prohibit these various methods of “funding” underneath the high deductible plans, stating that such methods alter the concept of behavioral change and thus make their actuarial assumptions inaccurate.

Regardless of your position on whether using these consumer driven plans in an alternate manner is a “misuse” of the concept, this situation is a solid example of how assertive employers will work with the tools available to make the most efficient choices possible when faced with a situation as challenging as the rising cost of healthcare. Where will the next frontier of creativity lead the market? Stay tuned.

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November 7, 2008

Hill, Chesson & Woody strives to keep our clients' group decision makers abreast of trends influencing the employee benefits market. Look for Eyes on Benefits to bring you news and information affecting you and your employees.

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