High Deductible Health Plans, Healthcare Consumerism, and the Real World Effect On Employers

In their 2013 annual Health Employer Survey, TowersWatson reported that employers with the lowest healthcare cost increases over the past four years were those using “emerging strategies” to improve delivery and cost containment.  Interestingly, those employers focused on what economists call “supply-side” management, so vendor performance, transparency and value-based design, for instance.  What the Towers survey overlooked was the revolution occurring on the “demand-side” of the health care market, namely consumer behavior and decision-making.  As important as sponsor program initiatives and vendor alignment are, free markets find equilibrium.  In many ways we are embarking on a free market experiment with health care, and employers will be wise to take note.

The 2013 Health Employer Survey found 67% of respondents would offer High Deductible Health Plans (HDHP’s) as the only option in 2014, and 57% would set up and contribute funds to a Health Savings Account (H.S.A.) for their employers.  This represents a massive shift in the market as employees become responsible for their own health funds. While much has been written about HDHP’s and HSA’s, we still don’t know how this fundamental shift in buyer incentive will ripple through the health industry.  However, if healthcare is like any other industry, we should expect higher quality service at a lower price.

The Benefits Of High Deductible Health Plans

In the meantime, we do know that HDHP’s save money for employers when compared with traditional PPO health plans.  Early data on buyer behavior suggests lower claims costs, which, in turn, result in lower annual premium increases.  Further, participants in HDHP’s are eligible to contribute funds to HSA’s, which provide payroll tax advantages to both employees and employers.

As a result of these tax advantages, we should expect more employers, particularly large employers, to plan their benefit strategies more holistically.  Traditional retirement fund programs (401(k)’s) will blend with consumer driven health plans, as the latter provides access to the same long-term savings vehicles, but with even better tax incentives.

In anticipation of this, we here at HelloWallet did a full replacement of our traditional PPO plan and converted to an HSA-qualified High Deductible Health Plan.

A Story From A HelloWallet Employee

It wasn’t long before I began fielding questions about where to go, whether the insurance rates would ever go down, and, particularly satisfying for me, which investment funds should they direct their HSA dollars into.  A fuse had been lit.

So I wasn’t surprised when one of our software engineers asked me why the healthcare industry was so difficult to understand from a consumer’s perspective.

His story:

My colleague takes a prescription drug that costs $80 at the local pharmacy for a one-month’s supply. Because HelloWallet includes prescription drugs as part of our benefits package, the pharmacy instead charges him $40 based upon the negotiated rate with our insurance company.

On a recent trip to Costco, he stopped by the pharmacy to ask whether Coscto carries the drug, and at what price.  The conversation went something like this:

Colleague – Hey, do you carry drug X, and how much do you charge?
Costco pharmacist – Yes, we do.  It is $14.
Colleague – Is that with or without insurance?
Coscto pharmacist – Huh?  That is the price. Without insurance.
Colleague – So you are telling me that all I need is a prescription and you will sell me this drug for $14?
Coscto pharmacist – Yes; that is how it works.

Now my colleague was annoyed.  Last year while under a traditional PPO health insurance plan his cost was a $15 deductible.  However, under a HDHP we still have the same contracted rates for doctors, medical services, prescription drugs, etc., but because the HSA funds belong to the individual they have an interest in knowing what the total cost will be.  Now the $40 cost through the local pharmacy comes out of my colleague’s pocket, and finding a lower price clearly leaves more money in his accounts.

What Does This Mean For Employers and Employees

What are the chances my colleague would have purchased his prescription drug at Costco last year?  Absolutely zero; statistically speaking my colleague was indifferent to the cost.  Now, however, his medical savings (HSA balance) are part of a broader portfolio of savings and investment accounts.

Clearly we are in the early days of this shift, but it is happening.  For employers this behavior change will make all the difference.   Employees will look for ways to decrease their own healthcare spending, while increasingly recognizing that money spent on healthcare is no different than money spent on groceries and clothing – the more you spend, the less you have left over.

Please share your personal experiences with HDHPs and the “Costco Effect” in the comments!


[1] This colleague used more colorful language, clearly annoyed by his discovery.

[2] Like many employers, we provided initial “seed” funding for the health savings account, as well as provide ongoing dollar matching for employee contributions.

Aaron is both CFO and CHRO at HelloWallet. At times wearing these two hats can result in long conflicts in Aaron’s head, however it makes him an excellent writer on both subjects. Aaron has also been called HelloWallet’s healthcare consumerism chief as he is both passionate and increasingly knowledgeable on the topic. Aaron joined HelloWallet after working at GM, The Carlyle Group, and Deutsche Bank, though started his career as a nuclear engineer in the US Navy.  When Aaron isn’t pondering the ROI of office improvements and compensation and benefits packages, he can be found traveling, exercising and spending time with his wife and their three children.

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