K.I.S.S. Exorbitant Health Costs Goodbye

The simple principle is this:

Medical knowledge has progressed to the point that it is possible to keep people healthy until age 65 if they will get checkups and follow their doctor’s advice.

With runaway health care costs still eating away at profitability, businesses need to adopt a health plan model that gets their employees to have checkups and follow their doctor’s advice.

Years of experience have demonstrated that a lot of people will not go to the doctor for a checkup. Even the new defined contribution health plans have a problem in this regard, because if an employee goes in for a checkup, the cost is deducted from his health reimbursement account.

Experience has also taught us that a significant number of people will not follow their doctor’s advice to quit smoking, to quit drinking, to exercise or to lose weight. And why should they? If something goes wrong with their health, their health plan will pay for it and they get time off from work.

The model is broken and needs to be fixed. We don’t need the security of knowing that we have cradle-to-grave health insurance coverage. In fact, quite the opposite: we need to take responsibility for ourselves, for our lives and for our health.

I am constantly amazed at young people who come into my office to apply for a job. Many of them have graduated from a nearby religious university and are obviously quite conservative. But the first question out of their mouth invariably is, “Do you have a health plan?” And they’re not looking for major medical and hospitalization, but for full coverage, including doctor’s office visits with a $10 co-payment and a low deductible. I wonder, sometimes aloud, whether they understand that they have switched from thinking like a conservative to thinking like a Socialist. A re-education based on economic realities is needed.

How can employers get their employees to go in for a checkup? Pay them to get one checkup per year. And how can employers get employees to follow their doctor’s advice? Pay them for following the advice and charge them for ignoring it. Sooner or later the message will sink in. Disease management programs are based on this approach, and studies have shown them to be successful.

Certain aspects of wellness programs may also be effective. For example, under proposed Department of Labor Regulations, employees may receive a discount of up to 20% of the cost of the employer’s health plan if they meet certain requirements.

The basic defined contribution health plan model also encourages less utilization. The employer purchases (or elects to provide) a high-deductible health plan, a major medical and/or hospitalization plan. (We favor a minimum of $2,500 individual and $5,000 deductible with no co-insurance above that level.) Savings are credited to a health reimbursement account (“HRA”). The employee is required to pay all medical expenses below the deductible level, although a medical debit card may be used for such expenses. By simply becoming aware of what he or she is spending and by permitting unspent amounts to carry over to future years can result in a reduction in utilization of up to 20%.

When a conversion to a defined contribution approach is coupled with a plan redesign, additional savings are possible through the shifting of costs to employees. For example, the employer may require employees to contribute a larger percentage of the health insurance premiums. Even if the employer does not reduce its overall commitment, it will realize a savings of payroll taxes.

Once conversion to a defined contribution approach is adopted, another common savings strategy is for the employer to limit its portion of cost increases in subsequent years, resulting in a gradual shifting of costs to employees. This works ideally in those cases where the employee has been given a choice of health plans, a low-deductible or HMO vs. a high-deductible health plan. If, as is feared by those who oppose defined contribution health plans, this results in health costs staying low for the healthy, high-deductible group and increasing for the HMO or low-deductible group, the desired result will have been achieved: those who cost the employer more will gradually pay more for their coverage, while those who don’t utilize will accumulate funds in their HRA to offset eventual post-retirement healthcare costs.

Ultimately, this will result in a new equilibrium of costs and a more efficient health care financing and delivery model. The model will result in some employers driving away unhealthy employees who discover that they are paying double what they might have to pay for health insurance at another job. And it will result an employer’s group converting from average health to well-above average health over a period of 5-10 years.

This works especially well if provided in connection with the employer’s self-funded health plan, for 2 reasons:

1. Depending on the results of the nondiscrimination tests required under Section 105 of the Internal Revenue Code, it may be possible to provide an extra HRA contribution for employees who are Highly-Compensated individuals.

2. It is a lot easier for the employer to customize the deductible levels to its own philosophy and utilization history, and to offer multiple plans to employees.

Physicians who are experts in disease prevention advise us that the greatest single indicator of whether or not an individual will incur health care costs within the next year is the answer to these questions: Do you expect to go to the doctor in the next year? And if yes, for what?

For that reason requiring health risk assessments for employees is a very sensible approach. Nobody knows better than the individual what is likely to be wrong. The health risk assessment consists of a checkup and answering a questionnaire.

In our prior article we noted the dangers of an unfunded HRA. The use of notational or phantom accounts puts the employer and the sponsor of the health plan at legal risk, and the employees at risk of losing funds promised to them. Therefore, we believe in a model that includes holding the HRA funds in a trust account subject to investment direction by employees.

Under a consumer-driven health plan, coverage such as dental, vision and prescription coverage are optional. The employer simply contributes the same amount as previously, and the employee is given the choice of which coverages he or she desires to take. And, for employees who are concerned that they may not be able to afford the cost of an accident or hospitalization, an optional accident or hospitalization plan may also be offered.

While we acknowledge that this approach is not simple, the underlying concept is: Empowering employees with the tools and incentives to make wiser choices will have two beneficial effects: (1) employees will become informed healthcare consumers, and (2) they will gradually become healthier, or at least pay a larger share of the cost of the employer’s health plan.