The Genesis of the HSA

Whatever happened to personal responsibility and accountability? Is it dead, in a coma or just in hiding? I think it is just in hiding. It is our job to find it.



 The question, how do we do that? Enter CDHC knight in shining armor with their HSA sward in hand to slay the financial dragon and the rescue the beleaguered consumer. But to rescue the consumer we need their help and without some "skin in the game" we are unlikely to get it.



Between 1985 and 2000, we created a nation of "copayment junkies". This is a term that I first heard from Sharon Alt (the December issue's "Broker Spotlight") in January of 2008. Virtually every "traditional" medical plan on the market today, HMO and PPO is defined by its copayments (office visits for primary care and specialists, ER, hospital admission, prescriptions, etc., etc.). Consumer Driven Health Care (CDHC) delivered through a qualified HSA plan offers us a unique and profitable way to go "Back To The Future".

In the mid 70s, when I entered the business, indemnity medical plans dominated the market. They had a deductible coinsurance and an out-of-pocket maximum. The standard deductible was between $100 and $250 and out-of pocket (OOP) maximum between $750 and $1,500 for an individual.

Using the "rule of 72" (at 7.2% inflation, costs double every 10 years), in 2010 dollars, the same deductible would be $1,200 to $3000 and the OOP $9,000 to $18,000. If the average wage earner then was able to handle a deductible and coinsurance, why not now? We have conditioned the consumer to think that a low income family or even a middle income family can't afford to handle $250 to $700 to take care of the cost of a cold or the flu. This in a society where even low income families have a flat screen TV, IPods, I phones or blackberries and all of the most current electronic gadgetry.

Before discussing the merits of HSAs it is important for us to remember that the original purpose of insurance was to ELIMINATE RISK, NOT INCONVENIENCE. Most small medical claims are only a financial inconvenience.

To get the consumers assistance, they need to be educated. The reality of the matter is that when comparing HSAs with traditional copay plans, until the consumer has paid OOP expenses greater than the premium savings they have had a ZERO DOLLAR COPAY PLAN. They have had 100% coverage when compared to the traditional plan.

Let's take a look at two scenarios and "Do the Math"

Consumer education and professional help are critical to doing the math correctly and helping an employee to make a good decision. Let's take a look at the math in two different situations.

Comparing A Seemingly Comparable PPO Copay Plan and HSA plans (Table One)

This is a tough one. Just looking at the $45 copay with a $750 deductible verses a $3,000 deductible, the decision seems quite easy. "Copayment Junkies" will take one look at a $45 office visit as opposed to a $3,000 deductible and you can guess their choice. But, with good council (guess who), when the math is done they may well make a different decision. Take a look and "you be the judge".

If the employee pays any portion of the premium and only has an annual physical the PPO plan would be $57 less annual cost than the HSA. Considering any claim other than a cold or the flu (inconvenience), the following things need to be considered before a decision is made:

PPO $45 Copay HSA
OOP Risk Exposure $4,500 $5,000
Generic Copay (formulary only) $10 Copay
Brand, formulary not covered $30 Copay
Brand, non formulary not covered $50 Copay
 Rx OOP Maximum  no maximum  $0.00
Maximum Risk Exposure $4,500 plus Rx $5,000


In advising our clients, we need to remember that any claim other than a very minor occurrence, will likely cost the employee thousands of dollars with either plan. To recommend that the employee stay with the PPO to get an office visit copay for a cold of the flu while sacrificing back end exposure and the loss of pre-tax advantages just doesn't make sense. In either case the employee will likely be forced to pay the OOP expense over time (inconvenience). Expenses must be paid with after-tax dollars with the PPO while with the HSA they will be paid with pre-tax dollars, a saving of 25% to 40%. To put it another way, an employee in a 25% tax bracket would have to earn $4,000 dollars to pay a $3,000 OOP expense with the PPO and only $3,000 to pay the same expense with an HSA.

With this type of information available to the employee they are able to make an informed decision. The same math work applies to Example 2 and Example 3. You can do the math yourself and will probably come up with a similar result.

The most important consideration when making a decision is to minimize the risk not the inconvenience.

Comparing a Traditional PPO Copay Plan and an HSA (Table Two)

Another, more common scenario would be to compare a more traditional PPO to an HSA. The math works the same:

PPO $45 Copay HSA
OOP Risk Exposure $4,500 $5,000
Generic $10 Copay $10 Copay
Brand, formulary $30 Copay after a $150 deductible $30 Copay
Brand, non formulary $45 Copay $50 Copay
 Rx OOP Maximum  no maximum  $0.00
Maximum Risk Exposure $4,500 plus Rx $5,000


With the HSA, again assuming the employee pays a portion of the premium the employee will save $1,476 in annual premium and have no cost for their physical. Assuming a $40 copay plus $80 in coinsurance for lab work for the physical with the PPO the employee would be $1,596 ahead before any claims. Since the maximum OOP increases only $500 and the $1596 will handle most small claims (zero dollars in copayments), there is virtually no risk when compared to the potential gain. There is, however, a small doughnut hole that might incur greater expense with the HSA. But the risk is insignificant. And again in this scenario any OOP expenses are paid with pretax dollars.

Another misconception in the decision making process is that the money has to be in the HSA account at the time of a claim to be able to pay for a medical expense with pretax dollars. Wrong! As long as the account is established, even with one dollar, the employee can set up a payment plan with the medical provider then make monthly contributions to their HSA account and pay the payments from it. This will also work with small claims such as a cold or the flu; the expense can be paid with a credit card and then paid off from the HSA account.

Here also, with your help the employee can make an informed decision.

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