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Thayer Partners Blog

The Most Important Health Plan Trend a Business Owner Must Know

[fa icon="calendar"] Jul 4, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

The_Most_Important_Health_Plan_Trend_a_Business_Owner_Must_Know-1.jpgIf you’re a business owner, you know how important your company’s health plan is. It helps you recruit and keep top candidates and helps protect your employees if they become ill. Unfortunately, it has also become the second largest expense on your Income Statement, which is why it needs to be a strategic priority for your business.

Staying on top of trends can be a time-consuming task for someone who’s already busy. If you can only track one health plan trend though, the move to high deductible health plans would be it.

The History of High Deductible Health Plans

A high deductible health plan (HDHP) is quite simply that: a health plan that has a high deductible. Higher deductibles lead to lower premiums, which means savings for most who switch to an HDHP from a more traditional plan. Traditional plans tend to have lower deductibles for employees. Those lower deductibles mean the health insurance company is paying out more in claims—which means lower deductible health plans cost more.

Traditionally, HDHPs were considered “catastrophic coverage,” a plan to be used by employees only in worst-case scenarios and disastrous illnesses. Most employers didn’t offer HDHPs simply because they would cost employees too much out of pocket; low deductible plans with “blanket” coverage were much more common for employers wishing to offer a valuable employee benefit. But, with the ever-increasing cost of health insurance, high deductible health plans—with their lower premiums—have gained in popularity. In fact, a Kaiser Foundation survey found that, as recently as 2006, only 4% of workers had some sort of high deductible coverage through their employer; in 2010, enrollment in these plans had increased to 13%.

The Rise of the HDHP

In the last decade, research has shown that the number of employees with an HDHP arrangement has more than quadrupled from 2006 levels. In 2015, approximately one-quarter of employees had an HDHP arrangement. Larger employers (usually the trend-setters) are more likely to offer their workers an HDHP option; the Kaiser Foundation found that 56% of large firms had an HDHP option available in 2015.

There’s no denying that HDHPs are popular with employers. The question is why. There’s one major reason for the sudden rise of HDHPs: costs savings.

The average employer can expect to realize savings of $1,000 per employee per year by moving to an HDHP. The lower premiums also mean that your employees pay less—provided they stay relatively healthy. However, going from a low deductible to a high deductible health plan design can be a shock to the system and unpopular among your employees. While their monthly health insurance cost may be reduced a little or stay the same, you are asking employees to pay more out of pocket and take on a large potential liability if someone gets really sick. This could cause financial hardship for many employees.

Why Pair a HDHP with a Health Reimbursement Arrangement?

This is why many companies pair their new HDHP with a health reimbursement arrangement (HRA) to maximize their savings without increasing employee out of pocket expense. In fact, many employers keep the plan deductible the same and pair the new high deductible plan with an HRA that picks up any claims incurred above the current deductible and the new higher deductible. For example, your current plan has an individual deductible of $1,000, and your new plan has an individual deductible of $3,000. You set up an HRA to pay for any claims above $1,000 and under $3,000; the insurance company picks up all of the claims above $3,000. You do the same for families, which, in this example, went from $2,500 to a $5,000 deductible.

When you review the premiums for the higher deductible plan, you see that they are about $2,000 less for individuals and $2,500 less for families. You are not saving anything, so why make the change to an HDHP paired with an HRA? There are a few reasons. First, you will save money on every employee who does not reach the maximum deductible of $3,000 for an individual and $5,000 for a family. You can safely assume that a number of employees will not reach the maximum deductible. If most or all hit the deductible, no one will come in to work, and you will have bigger problems than the high cost of health insurance on your hands. Third, by using this plan design, you have no downside but significant potential savings.

A high deductible health plan paired with a health reimbursement arrangement might not work for all businesses, but it is an option that should be explored and evaluated fully because the potential savings are significant, and the ever-rising cost of health insurance may someday cripple your business if you do not come up with a way to slow down the price increases.



Topics: Health Plan

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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