Deductible Buy Down Option to Control Costs
With the ever rising costs of health insurance, employers in every industry have begun scrambling to find ways to reduce their premium costs while still maintaining employee participation in their plans.
By Sean Lahey
Date Posted: 8/1/2005
With the ever rising costs of health insurance, employers in every industry have begun scrambling to find ways to reduce their premium costs while still maintaining employee participation in their plans. Employers with a small to medium number of employees often find themselves with limited options and unable to negotiate or shop for more competitive programs. It is often heard from the average employer in the wood manufacturing industry that they are made to feel lucky if they are offered premium increases of only 15% to 17% annually.
Many companies have begun sharing a greater percentage of the health insurance costs with employees while also increasing the deductible levels in order to try to control skyrocketing costs. Unfortunately, most of the workers in the pallet industry are hourly paid employees. Increasing premiums and also increasing deductibles can cause the loss of experienced labor while also forcing younger employees to remain vulnerable by opting out of the health insurance programs. These factors can increase turnover, increase absenteeism due to health issues, and drive up the cost per employee of health insurance while reducing the number of participating employees — making if far more difficult to find health insurance.
Another basic fact regarding health insurance plans is that they are under-utilized by their participants. According to the Blue Shields small group division for 2002, 70% of all members incurred less than $500 a year in preventative care (physical exams, well-baby care and immunizations) and out patient services (office visits and diagnostic testing).
Preventative health care services that do not incur a deductible are not being utilized by employees. Encouraging employees to utilize preventative care can significantly reduce long term cost for the employer as well as the employee.
Employers with a high number of hourly paid employees have found that utilizing a higher deductible program and buying down the deductible to a level that is more beneficial to the employees can be achieved by the use of a Health Reimbursement Account (HRA) or Health Savings Account (HAS) program.
The higher deductible plans offered by health insurance providers generally range from $50 to $5,000. Simply raising deductibles will not solve the issue of rising costs for health care but could simply transfer a large percentage of the burden to individual employees.
The solution to this challenge is the introduction of a deductible buy-down program through the use of a HRA program. Health Reimbursement Accounts are arrangements by which the employer has the ability to buy down deductibles and-or offset co-pays while controlling costs. You can look at the program as self-funding with a cap.
Here is an example of how a deductible buy-down program was used successfully. Last year an employer with a health care plan with a $500 deductible decided at renewal to adopt a $1,000 deductible in an effort to reduce the premium. The employer, not wanting to overburden his employees, also introduced a $500 Health Reimbursement Account program.
To the employee, their deductible continued to be $500. When the employee incurred expenses subject to deductible, they simply turned in their EOB (Explanation of Benefits) report that they received from the health carrier to the employer or third-party administrator (TPA) and were reimbursed for expenses incurred between $500 and $1,000.
If the employer uses a TPA to administer the program, there will be a small administrative fee. The TPA costs tend to be $4 to $5 per employee per month. However, this fee and the costs incurred by the HRA program may be considerably less than the premium increase that would have incurred if the employer had not chosen a higher deductible.
There are additional benefits to using a TPA. The employer does not have to be concerned with increasing HIPAA liability exposure due to the employer having knowledge of an employee’s health records. The employer does not have to set up a separate designated fax line and office administrator to monitor the HRA program.
In considering health care plans with higher deductibles, the employer should also consider moving the plan year to Jan 1. Deductibles in health care are based on calendar year, not plan year. The health care insurance industry got off of calendar year plans with the introduction of HMO plans, which do not have deductibles. If your program renews on a date that does not coincide with the deductible renew date, you and your employees run the risk of being subjected to a double deductible.
Another program used in conjunction with deductible buy-down programs is the HSA. A Health Savings Account is the equivalent to an Individual Retirement Account (IRA). In the context of a deductible buy-down program, the employer increases the deductible rate from $500 to $1,000 dollars. The HSA will pay for deductible incurring expenses that go over $501 and up to $1,000 much the same way as the HRA deductible buy down program.
HSA programs run into issues not seen in HRA as the ownership of the accounts can present a concern. Once funded, Health Savings Accounts are owned and controlled by the employee regardless of whether they stay with the employer.
With both programs, there are no pre-funding qualifications required by the government. The maximum, minimum and projected total cost for the programs can be easily calculated and are often more competitive than the more traditional programs.
The deductible buy-down option, whether coupled with the Health Savings Account or the Health Reimbursement Account arrangement, can be very useful in reducing the total cost of risk for employers in the wood products manufacturing industry.
As every business organization has its own specialized needs and circumstances, it is recommended that you fully explore each option with your health insurance agent to ensure that you are comfortable with your level of loss retention and carrier services.
(Sean Lahey is an insurance consultant with the Insurance Office of America. He specializes in workplace insurance and has worked with a number of leading companies in the pallet industry. He may be reached by
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