Hybrid Financing Will Increase HSA Adoption

By Robert Hopper
Hopper Insurance Services

Employers can play the key role in helping employees select health savings account-compatible plans by redefining the employer contribution, and in the process, gain better control over rising premiums. Here's the logic:

Hybrid financing is the solution

The easiest way for employers to gain control over rising health insurance premiums is to base their financing on the hybrid approach to health insurance; meaning that you combine a defined benefit with a defined contribution.

Defined benefit: A high-deductible health plan

For example, the employer pays 100 percent of an affordable high-deductible health plan for each employee. For this example, let's assume it's an affordable $3,000 deductible HDHP. With this plan the employee pays all costs under $3,000, and the insurance company pays all costs over $3,000. The plan includes free preventive services. If an employee faces a major surgery or hospital bill, the out-of-pocket maximum is $3,000, which is comparable to many traditional PPO plans.

Defined contribution: A fixed amount of money

The employer gives the employee a defined cash allowance, and the employee can decide how to use that cash. In this example, the employer provides $125 per month or $1,500 per year. The employee has two options: 1) The employee can put that tax-free money into a health savings account. 2) The employee can use the money to upgrade to a richer health plan with low deductibles and co-pays.

The employer is financing protection from major medical bills by paying for a high-deductible health plan. The employer is also financing a portion of the routine and expected health costs by providing cash for an HSA. The employee can take ownership of this plan by payroll deducting some of their own money into the HSA to plan and save for future health expenses.

The new default employee benefit

The employer should make this HSA-compatible plan the default, or base, employee benefit. Alongside the base HSA plan the employer offers a yraditional PPO plan with office copays and prescription drug copays. By giving employees a cash allowance, they can deposit that allownce in the HSA account, or they can use that cash allowance to upgrade to the more traditional plan. In essence, they get to choose between cash or co-pays. Isn't the purpose of the consumer-directed health care movement to give employees real choices on how money is spent?

Hybrid financing will lead to increased HSA growth

If employers adopt this hybrid financing method, more employees will opt for HDHPs coupled with the HSAs. And, they will choose these plans in favor of the traditional plans employers offer to their employees. That's an opinion shared by Michael McCallister, president and CEO of Humana Insurance. Speaking on the benefits of health savings accounts at the Consumer Directed Health Care Expo in Las Vegas, May 2007, he was asked by a member of the audience what employers could do. He responded, "Employers, you are over-insuring your employees. You are buying plans they would not buy for themselves."

In the individual market, people rarely buy the health plans that that are comparable to what employers offer to employees. The reason: individuals are using their own money, and those plans are too expensive. They often opt for HDHPs coupled with HSAs. If employees are given the cash, and asked if they want to keep the cash or give that money to the insurance company for co-pays, most will keep the cash because in most cases it is in their best long-term health and financial interest.

Employers benefit over the long run

With this hybrid strategy, employers will benefit over the long run. The employer controls costs by tying funding to a low cost, high-deductible health. These plans are also more resistant to annual premium increases than traditional plans. The cash HSA contributions are fixed and not subject to annual increases unless the employer wants to provide a greater benefit. Over a period of five or more years, employers will see substantial savings in total costs.