Health insurance choice offers price and tax breaks, but deductibles could lead to big bills

Deductibles bigger part health equation this year

Workers may need to do more homework when they evaluate their health coverage options this fall.

This year, more employers may include a new type of plan that can chop premium payments by nearly 20 percent and give consumers a tax break.

The tradeoff is higher deductibles, which have the potential to swamp customers with big bills. The plans, called consumer-directed health plans, vary from employer to employer and require careful comparison with other choices before making the switch.

These plans have been around for several years, but more employers are considering offering them as health costs rise and the recession fosters a new push to cut costs. Employees could see these higher deductible plans among their choices for the first time as open enrollment, the annual window when businesses allow employees to adjust their coverage, begins in a few weeks at many companies.

A consumer-directed health plan typically pairs insurance that carries a high annual deductible with an account fed either by an employer or by the employee through pre-tax contributions to help cover costs.

The deductibles — which start around $1,200 a year and can approach $10,000 for family coverage — make the customer pay more money out-of-pocket for care before most coverage starts. The idea behind this insurance is to give clients an economic incentive to spend carefully, while providing protection from devastating medical bills. Some plans also provide annual physicals and other screenings at no cost to patients to encourage basic and preventive care that could stave off bigger bills down the line.

Some employers help cover the out-of-pocket cost by funding what’s called a health reimbursement arrangement for employees to tap. The money belongs to the company and stays with it if an employee leaves.

A common alternative is to offer health savings accounts. Employees can deposit pre-tax dollars to cover medical expenses not covered by insurance. Some employers contribute to these HSAs. Unused money grows in the account, which belongs to the worker and is portable if he or she changes jobs.

A consumer-directed health plan can help people on both extremes of the health care spending spectrum, but it can be risky for some who fall in between or for those who don’t fund their HSA, financial planners and insurance brokers say.

“It doesn’t fit most people,” said Jon Beyrer, vice president of wealth management for Blankinship & Foster, a Solana Beach, Cailf.-based financial advisory firm.

The plans offer premiums that are, on average, about 19 percent cheaper than the cost of more common insurance plans with lower deductibles, according to statistics from the Kaiser Family Foundation and the Health Research and Educational Trust.

People who use little health care can benefit from that price break and build up their HSA accounts. Plus they earn unique tax benefits. Money deposited in the accounts is either taken from your paycheck before taxes or it can be a deduction, it grows tax free, and then it is not taxed when taken out for qualified medical expenses.

“There’s no combination like that in any other savings vehicle,” Beyrer said.

People who use a lot of health care can benefit because HSA plans come with limits set by the government for how much money a customer spends out of pocket each year. Next year, that will be $5,950 for individuals and $11,900 for family plans, counting the money you spend on the deductible. Out-of-pocket maximums are typically listed in the insurance benefits summary.

Depending on a plan’s coverage, these lower limits could help someone with a chronic condition like heart disease or diabetes or someone who needs expensive medications, said Paul Frontsin, director of the health research and education program for the nonprofit Employee Benefit Research Institute.

It’s the people in between who really have to think hard about risk and what their plan offers. These plans can be a poor fit for people with tight budgets and little savings. Out-of-pocket expenses can pile up quickly.

“I would be worried about somebody who’s really having a hard time making ends meet, switching to a higher deductible plan if they also had health issues,” Beyrer said.

On the flip side, Jim Green hasn’t paid a dime for health care since signing up a couple years ago for HSA-based insurance through his employer, Indiana’s state government.

Green, 56, said the state pays his entire premium and contributes about $1,500 to his account every year.

When he visits the doctor, he simply pulls out a charge card that takes money from the company-funded account.

“My wife and I are not sick very often, and we don’t go to the doctor very often, so it’s covered everything we’ve had,” he said.

Consumer-directed plans have become more popular in recent years with many businesses that offer coverage. Benefits consultants say companies like the lower premiums and the fact that these plans encourage workers to use the plans more judiciously.

Runaway health costs are at the heart of the debate in Washington to overhaul the nation’s health system. Businesses would like to see something emerge that lowers expenses.

In 2009, the average annual premium for employer-sponsored family coverage outpaced inflation to rise 5 percent for the third straight year, topping $13,000 for the first time, according to Kaiser. The cost of single coverage remained relatively flat. The study did not include federal government employees.

The percentage of employers with more than 1,000 workers who offer a consumer-directed plan has climbed from 10 percent in 2005 to 28 percent this year. That figure has jumped from 4 percent to 18 percent over the same span for companies with 200 to 999 workers.

The Kaiser study also found that 31 percent of employers offering benefits but not a consumer-directed plan were “somewhat likely” to provide one next year. Another 11 percent said they were “very likely.”

Several other benefits consulting firms see similar spikes in interest. But the percentage of businesses that commit to these plans often drops after companies see final insurance prices.

Workers can view consumer-directed plans as a major slash in benefits, which they can be depending on how much an employer sacrifices coverage to cut costs. This can make companies reluctant to offer them.

Many workers also are scared off by the high deductible without considering the entire plan, said Ken Ambos, senior managing director with Equity Risk Partners Inc., a consultant that works with medium-sized companies.

“It’s complex and it’s difficult, and you end up taking a black eye even if you’ve done it for good reasons,” he said.

Workers typically stick with their current benefits plan if cost increases aren’t too painful, said Blaine Bos of the consulting firm Mercer. Existing plans generally involve coverage with a higher premium, modest co-payments and a deductible of a few hundred dollars.

“You know how it operates, you know how it’s covered and what’s covered,” Bos said. “You’re comfortable with the amount of out-of-pocket (costs) you have to pay.”

Business owner Don Ehlerding faced annual premium increases as high as 20 percent until he switched to consumer-directed health plans a few years ago at his Fort Wayne, Ind., motorcycle dealerships, which employ about 30 people.

Increases have since been between 8 percent and 10 percent.

“That’s the only thing we’ve been able to do to control premium cost,” he said.

The slumping economy hurt sales at his business, Motorsports Inc., and he’s thinking of offering only health savings accounts next year.

“We’re just trying to survive this recession,” he said. “Sometimes you just have to provide the best that you can that works best for the whole team.”