Get the Lowdown on Consumer-Directed Health Plans

Inflated health insurance prices are putting the squeeze on your budget, but are consumer-directed plans the way to go?

Six years ago, Jim Noon paid 100 percent of the $100 monthly health insurance premium for each of his 11 employees and their families. After premiums rose sharply, the owner of Centennial Container Denver began requiring employees to pay for spouses and children. Costs kept climbing. Noon, 50, began increasing the deductible, eventually to $2,000 for individuals and $4,000 for families. He still paid $400 per month for each employee. Says Noon, whose $2 million company sells cardboard boxes and shipping supplies, "We had a poor insurance plan, but we were putting more and more money into it."

Last year, Noon tried a health savings account, one of the consumer-directed health plans that are the industry's latest cost-control effort. The plan premium pays for insurance and also puts money into a savings account where it draws interest and is available for withdrawal for future medical expenses. Only high-deductible plans are eligible for HSAs, but HSAs have significantly lower premiums than comparable insurance plans.

Other consumer-directed plans featuring medical flexible spending accounts, or FSAs, have had limited acceptance because of a use-it-or-lose-it provision: FSA funds not spent the year they are set aside are forfeited. HSA funds roll over from year to year and build up.

The hope is that employees will build up enough in HSA accounts to pay their future medical bills and, because they are spending their own money, will make more cost-conscious health-care decisions. The insurance companies pay out less because of the higher deductibles, so they reduce premiums. Only half of Noon's employees are taking advantage of the HSA, and Noon pays the same amount because he contributes the money he saves on premiums into the employees' HSAs. He thinks he's offering employees a better value, and he hopes HSAs will become widespread and eventually reduce health-care costs for everyone. Says Noon, "I think it's terrific."

What Will It Really Cost?
Similar enthusiasm about anything related to health insurance is hard to find. Premiums for small employers rose 9.2 percent last year, according to the Kaiser Family Foundation. That was a slower rate of increase than the 11.2 percent rise in 2004 and the 13.9 percent rise in 2003.

But Gary Claxton, vice president of the Menlo Park, California, health research organization, says it probably doesn't signify a major change of direction: "We've had really high growth the last couple of years, and the system is a bit self-regulating." He says since insurers have had some really good years, prices aren't rising as fast as before.

The number of smaller employers with company-sponsored health plans also fell. Sixty-one percent of firms with 10 to 49 employees had plans in 2004, but only 58 percent did last year, according to a survey by consulting firm Mercer Health & Benefits. That trend, if prolonged, could hurt entrepreneurs' ability to hire talented employees, says Kerry Finnegan, a Chicago-based executive in Mercer's small-business segment: "Health benefits are identified in every survey as one of the key incentives for attracting talent."

Entrepreneurs are, unfortunately, at a disadvantage. One reason is that big employers who don't like the deals insurers offer can opt out by self-insuring, which is less viable for small employers. "If you're Ford, with 300,000 employees, you don't need an insurance company to spread the risk," Claxton says. Even companies with a few thousand or a few hundred employees--not enough to self-insure--are better-equipped to play the health-insurance game because they can hire specialists and offer a variety of benefits with cafeteria plans, Claxton says.

The entrepreneurs left holding the health-insurance bag still sometimes find that, even though they pay more than others, the insurance industry isn't interested in serving them. David Wilner pays 80 percent of the $300 monthly premiums for each of his six employees at Rhino Imaging LLC, his $1.3 million New York City document management company. Wilner feels it's important to be as good to employees as possible. "I know if I were working for someone and didn't have health insurance, it would really impact my life," says the 30-year-old entrepreneur. He also wants to offer dental coverage, but can't until he has 10 employees. "I had my health insurance guy look, and he said there's really nothing I could do," Wilner says. "I was shocked by that."

Entrepreneurs have been slow to embrace HSAs. The number of people enrolled in HSAs tripled during 2005, from 1 million to 3 million, according to America's Health Insurance Plans, a Washington, DC, industry group. But few worked for entrepreneurs--just 2 percent of employers with 10 to 49 workers had any kind of consumer-directed plan, according to Mercer. More than twice as many--5 percent--of 500-employee companies had consumer-directed plans, and a whopping 22 percent of jumbo employers with 20,000 or more on the payroll had them.

One reason for the disparity is that bigger companies can offer HSAs as one option in a cafeteria plan, while small employers are usually limited to a single offering, Finnegan says. Smaller employers are also less likely to have the resources to research and educate employees about the plans. Even when the entrepreneur enthusiastically accepts the HSA, it can be hard to get employees to do the same, as Noon's experience shows: "A lot of them don't understand the concept."

HSAs usually make good financial sense for the insured, says Steve Kinsky, a health insurance broker in Denver. The calculation isn't simple, however. Premiums may drop 30 percent when you switch to an HSA plan, but employees pay more out of pocket because of the higher deductibles. Still, says Kinsky, "from a pricing and taxation standpoint, most of the time it winds up looking better. I'm being won over."

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This article was originally published in the June 2006 print edition of Entrepreneur with the headline: What's Up, Doc?.

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