Decoding New Health Plans

Despite Sky-High Deductibles,
They Yield Savings -- Sometimes;
Bargain-Hunting for Care

This fall, millions of Americans for the first time will face a controversial new health-insurance option -- one that claims high deductibles are good for you.

Known as consumer-directed health plans, the idea is that patients will be encouraged to bargain-hunt for medical care. After all, the high deductible means more of their money is now at stake. Employers are adopting these plans as an option for their employees in an effort to cut spiraling corporate health-care costs.

As a result, in coming weeks, which is the time of year when employees traditionally pick coverage for the next year, consumer-directed plans are poised to hit the mainstream. Some 26% of U.S. companies with 500 or more employees say they are likely to offer the high-deductible plans next year, up from 14% who were planning to do so a year ago, according to a recent nationwide survey by Mercer Health & Benefits LLC, a health-care consulting group based in New York.

"This is the year a much broader number of employers are going to expose people to these choices," says Michael Thompson of PriceWaterhouseCoopers' global human-resource-services practice.

For consumers, this adds an extra layer of complexity to what is already one of the most significant benefits decisions of the year. The advantage of these plans for individuals is that annual premiums can be considerably lower, in some cases as little as one-third the cost of traditional insurance coverage. The downside: It is possible that you will end up shelling out considerably more each time you seek medical care.

To help cover the higher deductible, the employee can in some cases put pretax money into a special savings account that the employee can tap to meet the deductible. After the deductible is met, traditional insurance coverage kicks in, usually with the employee picking up 10% or 20% of costs until the out-of-pocket maximum is reached.

Adding to the challenge, the health-care savings accounts come in different flavors that can have important ramifications for consumers. The newer versions, known as health savings accounts, or HSAs, came into existence in 2004 and are largely employee-funded, although some employers also contribute. More significantly, they are portable -- meaning employees can take the funds with them when they quit or go to new jobs. By contrast, earlier-generation health reimbursement accounts, or HRAs, are funded solely by the employer and stay with the employer if the employee leaves the company.

In a traditional health plan, employees typically pay a monthly premium, and perhaps a modest deductible, (typically a few hundred dollars for a single person) along with co-payments for medicines or doctor visits. By contrast, members of a consumer-directed plan pay a lower premium but must foot much of their initial medical costs themselves until they meet a deductible that is often at least $1,000 for an individual.

Being responsible for such a large share of upfront medical costs is an incentive to comparison-shop for health care. But there is an additional incentive for a consumer to bargain-hunt: Unspent money in the individual's savings account can roll over and accumulate year after year and can be withdrawn -- again, without paying any taxes -- for deductibles and bigger health-care expenses down the road.

Because health-care plans vary so much from employer to employer, it is difficult to generalize about which type of plan is right for any given household or individual.

Shift in Philosophy

But broadly speaking, high-deductible plans may have certain advantages for people with minimal medical expenses because the premiums are often so much lower, or those wealthy enough to sock away money for retirement health care in a convenient tax shelter. Conversely, traditional plans often make more sense for those with higher health-care costs because the high-deductible plans require them to pay so much of the initial medical costs on their own.

That is partly a reflection of the fact that these plans mark a fundamental shift in the philosophy behind insurance. In conventional health plans, everyone in a group (or company) pays similar amounts so that sicker group members don't bear too much financial burden. With high-deductible, lower-premium plans, that changes: The sicker are likely to pay a larger share for their costs, while the healthiest may pay even less. That depends on how much financial support the employer builds into the plan.

Some critics worry that these high-deductible plans work as a tax shelter for the healthy and well-off but that they place more of a financial burden on people who are sick or low-income. In some cases, that is true. But the harsh reality of health benefits today is that traditional plans may be just as expensive.

After several years of employers shifting insurance costs onto their employees, the average conventional family plan costs a worker $2,321 in annual premiums alone, according to the Kaiser Family Foundation, a nonprofit health-policy research group based in Menlo Park, Calif. Factor in higher co-payments and extra deductibles, and you are getting less for the higher premiums, as well.

Many people think the best health-insurance plan is always the one with the lowest deductible -- in other words, the one that offers the lowest out-of-pocket costs upfront when paying medical bills -- says Tom Billet, a senior consultant for Watson Wyatt Worldwide, an employee-benefits consulting firm based in Washington, D.C. But plans like that "tend to come with a very hefty payroll contribution."

Many employers provide online tools so workers can type in their estimated annual health-care costs and compare how they would fare on each plan. People who rarely go to the doctor and have minimal health-care expenses may well pay less out-of-pocket by going with some high-deductible plans.

And employers, eager to steer people into these plans, are packing them with additional financial incentives -- one reason it is still worth it for someone with higher medical costs to estimate and compare how they would fare on one. Many of the high-deductible plans cover preventive services upfront, such as mammograms or annual checkups, compared with traditional plans that might require a co-pay. And in some cases, employers also are experimenting with paying upfront for drugs that treat chronic illnesses, in an effort to encourage people to stay on their treatment.

When Cummins Inc., a Columbus, Ind., power-engine and systems maker with roughly 14,000 U.S. employees, decided to introduce two different consumer-directed plans in 2004 alongside its more traditional health plan, it set up computer-equipped kiosks at its plants so employees could estimate their costs under each of the plans.

Under one plan, employees would have to pay an initial deductible of $400; under the other, whose monthly premiums cost half as much, the deductible was $1,000. Once the deductible was met, employees would have $1,000 or $2,000 in a company-funded account to pay for further medical costs, depending on whether they were single or had a family. After that, they would have to pay another deductible, either $500 or $1,000, before a traditional type of insurance would kick in. If an employee didn't use all of the money in the account in that year, it would roll over into a retirement account, an enticing incentive because Cummins no longer offers a retiree health plan to new employees.

Flexibility for Companies

Given that 60% of the company's employees spend less than $500 a year on health care, and the high-deductible plans still covered most preventive services upfront, nearly half of the work force opted for one of them, says Jill Olds, director of Cummins's benefit strategy.

Coupled with a program to manage chronic illnesses, the high-deductible plans have helped slow the company's annual health-cost increases to 5% or less from about 12%.

Cummins's high-deductible plans are built around health reimbursement accounts, a precursor to the health savings account. The HSAs, which Congress legislated in December 2003, are portable -- employees can take them to a new job. Consumers pay no taxes on deposits or withdrawals, but money can be withdrawn only for health purposes.

Many big employers still prefer the older HRAs because the company puts money in the accounts, not the employees. That gives companies more flexibility in designing the plan, often allowing more medical services to be covered upfront or a smaller deductible for employees. (By law, HSAs require a minimum deductible of $1,000 for individuals and $2,000 for families.) But employees should be aware that they can't take money in HRAs if they leave their job.

Write to Vanessa Fuhrmans at vanessa.fuhrmans@wsj.com