High-Deductible Health Plans Join the Mix

Workers may face new tradeoffs in their 2006 health-care decisions as high-deductible plans take their place among traditional programs offered by employers.

Conventional coverage such as health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are still the dominant plan types. But more employers for the first time will offer high-deductible health plans with a savings account attached during upcoming open-enrollment periods, benefits experts say.

"It is going to be a big transition year," said Paul Fronstin, director of the health research program for the nonprofit Employee Benefit Research Institute (search ). "It's the year in which large employers start offering HSAs."

Health savings accounts, or HSAs, allow workers who accept high-deductible plans of at least $1,000 for individuals and $2,000 for family coverage to sock away and invest money tax-free, as long as the funds are used to pay for qualified medical expenses. Typical PPO-like coinsurance kicks in if workers spend all of their upfront money, and the account is portable from job to job.

Health reimbursement accounts (HRAs) are another form of high-deductible plan, but unlike HSAs, HRAs are funded solely by the employer. Balances roll over from year to year but employees don't own the fund — if they leave the company, they can't take funds accrued in the HRA.

Many employers have shied away from HSAs, which have been on the market only a little more than a year, as they worked through administrative and regulatory questions. But this year, more big companies will offer them as an option, and more cash-strapped small employers will replace their current plans and make it the only health-care choice, Fronstin said.

Proponents hope the HSAs and HRAs, dubbed "consumer" health plans because they aim to control costs by giving users more discretion in seeking care, will make workers more price-sensitive, likely to shop around and motivated to take better care of themselves.

After several years of double-digit gains, annual health-care premiums grew 9.2% on average in 2005, according to the Kaiser Family Foundation.

Evaluating HSAs

Consumers confronting the choice of an HSA for the first time will need to weigh the risks and the benefits versus their current coverage.

The plans aren't for everyone, but they do have advantages for some, said Tom Billet, a senior consultant for Watson Wyatt. "The more upfront cost-sharing the employee can bear, typically the less they will have to pay out of their paycheck" in premiums.

Workers should view the choice as a budgeting issue, said Johan DeKeyzer, a health-care consultant for Hewitt Associates.

"They might be paying $200 a month for a PPO plan and $50 for high-deductible HSA plan and could put the difference aside into the HSA to cover expenses not covered by the high-deductible plan," he said. "If you're a healthy person, it would benefit you to put aside funds for when you do become ill or need health care."

Workers considering an HSA need to ask themselves, and in some cases their employer or insurer, the following questions, experts said:

— How much did I pay out of pocket for care during the past year? Is it realistic to think I can change my behavior enough to yield savings?

— What expenses count toward the deductible? Is a maintenance drug considered preventive? While workers are supposed to have preventive care covered under the plan instead of paying it out of the deductible, there are gray areas in what the IRS and some of the underlying insurance plans consider preventive care.

— Am I solely responsible for contributions or will my employer contribute? Will my employer match what I put in? How much risk do I want to accept, especially in the beginning of the year when my balance is low?

— Do I have enough income to pay 100% of the deductible if I need to?

— How important is the idea of building up a balance to cover Medicare Part B and D premiums and long-term care after I retire?

— What kind of investment choices do I have? What are the fees? "If you're going into this thing with the idea that you'll drain money out continuously, look at the fees he vendors are charging," said Barry Barnett, a principal for PriceWaterhouseCoopers' human resource solutions.

— What support tools or services, such as price-comparison data or an advice hotline, are available and how effective are they?

Keep in mind that the IRS doesn't allow eligible spouses to hold a joint HSA. As of 2005, annual out-of pocket expenses for HSAs — deductibles, co-payments and other amounts excluding premiums — can't exceed $5,100 for individual coverage or $10,200 for family coverage. The IRS will update limits on these as well as contribution levels for 2006 by mid-December.

If two married people both have coverage, they should compare plans, and individuals need to consider similar factors: which plan offers more comprehensive benefits, a wider network of providers and lower overall costs, taking into account your personal and family situation.

Other changes

Workers also may find more financial incentives to take health risk assessments. These are surveys employees take to help them gauge their risk of illness and injury. Employers can't use them to discriminate against workers with certain conditions because their confidentiality is protected by law.

"It's a reward structure to say, 'If you do this test, and I don't care what the results are, I'll do something for you,'" Barnett said.

For their part, flexible spending accounts (FSAs) that are funded with pretax earnings and have to be used within 12 months remain helpful tools for offsetting predictable out-of-pocket health expenses. But they don't pair well with HSAs, and many people choosing the new option likely will forgo FSAs, Fronstin said.

"You have to use the money in the HSA before you can use the money in the FSA," he said. "You have to use money that does roll over before you use the money that doesn't roll over."

The biggest changes for Cigna Corp.'s 26,000 employees during this year's open enrollment include a total conversion to high-deductible plans, mandatory health-risk assessments and a 10% break on premiums for nonsmokers, said Catherine Hawkes, director of Cigna's total health and productivity.

The health-benefits company already has 40% of its workers enrolled in high-deductible plans for 2005, most of them in HRAs, she said. But they'll have the choice of two HRAs and an HSA for 2006.

For in-network coverage where the employer has negotiated rates with providers, single HSA plans will have a deductible of $2,000 and families will pay $4,000 up front, Hawkes said. The out of network HSAs will carry deductibles of $3,000 and $6,000 respectively.

Cigna also is contributing to workers' HSAs for the first time in the amount of $200 for single employees and $400 for family plans, she said. And workers will be able to choose from six mutual funds instead of the low-interest-bearing account currently in use.