High-Deductible Health Plans: Has Their Time Come?

Employers are increasingly turning to high-deductible health plans to control their benefit costs. In 2014, 20 percent of people covered by an employer-sponsored plan had an HDHP, and 27 percent of large employers offered this type of plan.

Plan Structure

Many plan sponsors offer high-deductible health plans (HDHPs) designed to work with a tax-advantaged health savings account. Although employers have higher out-of-pocket costs before their deductible kicks in, they can use the account to pay their routine medical expenses, including deductibles. The account can be a health savings account (HSA), health reimbursement arrangement (HRA) or flexible spending account (FSA). The account may be funded by the employer or the employee, depending on the type of account. The employer and/or employee can fund an HSA; the employee or employer funds a flexible savings account with salary deduction contributions or limited employer contributions; and the employer funds an HRA with no employee contributions. The HDHP then protects them from catastrophic medical costs.

Often called consumer-driven health plans (CDHPs), this plan design aims to give employees more incentive to control their healthcare costs. Consumer-driven plans have three payment tiers: the savings account, the employee’s out-of-pocket payments and an insurance plan. The first tier, the savings account, will allow employees to pay for services using pretax dollars.
The second tier is the gap between the amount of money in the individual’s pretax account and the policy deductible. The insured must pay whatever amount is not covered by the pretax account out-of-pocket. When out-of-pocket expenses exceed the annual deductible amount, the high-deductible health insurance plan, the third tier, kicks in.

Once this happens, a CDHP behaves like a traditional health plan. After insureds reach the HDHP’s annual out-of-pocket maximum, the plan will pay all covered health costs for the remainder of the year.

If you want to encourage employees to think twice about their healthcare spending, the type of tax-advantaged savings plan you select could make a difference. In plans that use HRAs or FSAs, unused funds disappear every year, or offer only limited rollovers. This encourages employees to see them as an evaporating asset they should spend, which drives up healthcare costs. HSAs, on the other hand, allow all unused funds to roll over year to year. This could encourage employees to save their funds for future crises, rather than spending their accounts down.

HSAs also help employees create a lifelong healthcare fund. Individuals can take their accumulated HSA balances with them when they change employers or retire. This feature transforms health benefits from an annually evaporating asset into a lifelong savings plan for any qualified healthcare expense.

And perhaps most attractive, health savings accounts are triple tax advantaged — tax-free, or tax deductible, when contributed; tax-free as they grow (funds can be invested); and tax-free at withdrawal if spent on qualified medical expenses, whether one day after the money is deposited or 20 years later.

As individuals become more accustomed to self-directed plans for retirement savings and out-of-pocket expenses for traditional health plans continue to rise, employee resistance to CDHPs will likely continue to decrease.