By Christine Cooper, CEO of aequum LLC
Health care cost inflation is impacting the annual and out-of-pocket costs of financially vulnerable Americans. To combat this, experts recommend that health plan sponsors and members focus on proactively building savings in addition to managing costs.
Equitable access to health coverage, alone, won’t be enough to achieve equity in outcomes for those who are financially fragile – including those whose compensation or career opportunities have been impacted by racism, sexism or implicit bias. To be effective, plan designs must incorporate ease of access, including administrative processes that deploy automatic features and enhanced liquidity.
All workers are not lined up at the same starting line. Middle-aged adults and Black Americans are already disproportionately weighted down by medical debts.
Share of adults with medical debt, 2019, by demographic:
Source: Commonwealth Fund
Those most affected are middle-aged adults and blacks with low- or middle-incomes and/or those without insurance:
For participants in employer-sponsored health plans, the best option is to build savings by leveraging the employee and employer tax preferences available only by deploying Health Savings Account (HSA) capable coverage. Contributions to an HSA, whether made by an employer or employee, are excludable from the employee’s income. So, the employer contribution is tax deductible as a business expense, and for employment taxes as well – including FICA (Social Security) and FICA-Med (Medicare Hospital Insurance).
Employee pre-tax contributions via a cafeteria plan election receive the same tax preferences – avoiding federal, and generally state income taxes, FICA and FICA-Med.
The transformative thinking around HSAs has shifted toward viewing them as part of a “health and wealth” rewards strategy. Not only do HSAs fund current or future out-of-pocket medical costs, they can also be used to pay Medicare premiums and as additional income in retirement, with any residual passed along to the named beneficiaries after the account holder’s death. When it comes to paying retiree medical expenses and premiums, savings in an HSA can be 60% more valuable than a comparable contribution from take home pay to a 401(k) plan.
The challenge is that most employers do not offer HSA-capable coverage, and they fail to adjust their enrollment processes to encourage employees to consider the HSA. Employees don’t enroll in HSA-capable coverage when it is offered, those enrolled in HSA-capable coverage fail to open the HSA account and others fail to contribute to the HSA, fail to maximize their HSA contributions or fail to invest HSA assets.
Today, most plan sponsors deploy annual enrollment processes that focus employee attention on near-term and predictable medical needs. Complicating the issue, plan designs frequently overlook the diverse needs of their employee population and fail to effectively address barriers to enrollment, which:
- Focus on deductibles, which shifts enrollment away from HSA-capable coverage
- Fail to highlight expenses beyond the coming year or post-employment
- Lack of a savings target for future HSA-eligible expenses
- Fail to position HSA-capable coverage against the minimum requirements
of health care reform, such as affordable, minimum essential coverage of minimum value
Too many plan sponsors place a larger out-of-pocket expense maximum on the HSA-capable option compared with preferred provider organization (PPO) and/or health maintenance organization (HMO) alternatives. In addition, the standard summary of benefits and coverage presented is often a fragmented comparison that excludes the difference in employee contributions and the employer contribution to the HSA. Also, the plan sponsor may inadvertently contribute more to the traditional PPO or HMO than to the HSA-capable option.
When it comes to cost sharing, a plan with copays may appear to be more valuable but may lead to over-insurance. For employees who live from paycheck to paycheck, the plan with the lower copays and/or deductibles typically has higher contributions. The key to overcoming these and other challenges is to incorporate HSAs as part of an overall health and wealth rewards strategy and to effectively convey to employees the many advantages of these accounts.
Value of HSA Accounts
Here are some advantages that HSAs offer when compared with other benefits or income tax strategies:
HSAs vs. health flexible spending accounts (FSAs)
More items qualify as eligible expenses under HSAs than under FSAs. FSAs are subject to “use or lose” forfeitures, while HSA assets stay in the account. Also, HSAs have higher contribution maximums than FSAs. What’s more, participants can change HSA contributions midyear without a change in status, and, unlike most FSAs, many HSAs qualify for employer contributions. HSAs need not be fully funded in advance or with irrevocable elections prior to incurring qualifying expenses. Unlike FSAs, HSAs offer investments capable of funding future, post-separation and retiree out-of-pocket costs and premiums.
HSAs vs. itemized tax deductions
Fewer Americans itemize federal tax deductions since the government raised the standard deduction and limited the deductibility of medical expenses. Itemized medical expenses don’t qualify for tax-favored treatment when it comes to most state income taxes, FICA and FICA-Med.
HSAs vs. 401(k)s
401(k) contributions are post-tax for FICA and FICA-Med. So, where an individual contributes the same dollar amount to an HSA and a 401(k), the 401(k) contribution will result in a larger reduction in take home pay. Also, when allowed to accumulate and when later used for retiree medical expenses and Medicare premiums, an HSA can offer 60+% more value compared to 401(k) contributions that have the same impact on take home pay.
Health plan sponsors should reconsider how HSA-capable coverage is communicated to employees to fuel greater adoption or optimization of these accounts. They can start by conducting full-positive annual enrollments. When the default is the HSA-capable coverage for those enrolling in medical coverage, an employee must take proactive steps to opt out to a different coverage option. The default process forces them to (re)consider their current election. Opening the HSA on the first day of coverage with a nominal employer contribution gets them off on the right foot. Also, adding midyear HSA re-enrollment and escalation processes, say by introducing a new HSA-capable option, can help – as does altering the default investment from capital preservation to longer term investments.
Optimizing Medical Plans
Plan sponsors should consider partnering with a medical billing partner that is fully engaged in ensuring that employer-sponsored, self-insured plans incorporate the most effective strategies available today. Based on all metrics and experience, this includes effectively designed HSA-capable coverage, along with reference-based pricing, adequate participant protections against balance billing, participant advocacy and litigation support as needed, and features and transition provisions that specifically address the needs of Americans with lower wages, as well as those living paycheck to paycheck.