If Americans shopped for health insurance like they do for auto insurance, Blue Cross might need to use a cute green Gecko for marketing.
Eighty-percent of people who buy employer-sponsored health insurance incur less than $1,200 in yearly health-care expenses. Another 10-percent accrue expenses totaling $1,200-$3,000. The final 10-percent require more than $3,000 to cover their yearly health-care needs.
But the average group (employer-sponsored) health-insurance policy costs $350-$800 every month — up to $9,600 yearly per employee. The reason for this high cost, low value equation is simple: Blue Cross, CIGNA, HealthNet, and every other major carrier aren’t selling you health insurance. Their expensive premiums fund pre-paid health care.
Pre-paying for health care instead of buying true health insurance is like expecting auto insurance to cover oil changes and windshield wiper replacement blades. Premiums skyrocket when insurance meets small, predictable expenses, instead of doing what it was meant to do — protect the insured from large, unexpected losses.
Pre-paid health care: punish the healthy
Take the example of the average “low risk” employee during a typical year. Health-care expenses for a healthy woman over 40 might include $90 for a screening mammogram, $150 for a Well Woman Exam, and an acid-blocking medication costing about $30 per month. Add a $65 doctor’s visit and $40 antibiotic prescription for a sinus or urinary tract infection, and her yearly total is $705.
For this amount of expense, her $500 deductible health-insurance plan costs $400 per month. Of course, the insurance company makes her pay an additional $15-$25 co-pay for every doctor’s visit and a $10 co-pay for generic prescriptions ($25 for brand names). And she’ll need to spend $500 out of pocket before her plan even kicks in.
During a typical year, the total cost is $4,800 for the insurance. She adds $500 to meet her $705 in expenses, and the additional $205 gets paid partly by insurance and partly by her (through co-pays for each service and prescription).
For nearly $5,500, she receives $705 in care. Her health-care coverage is equivalent to spending $1,000 on car insurance to get a $30 oil change.
Middle-risk patients still receive poor value
But not every employee has such low costs every year. Take the example of a 50-year-old man who falls into the middle-risk category. His health-care expenses include $900 for a colonoscopy to screen for colon cancer, $400 for doctor’s visits to monitor his high blood pressure and borderline diabetes, and an anti-hypertension medication that costs $100 per month. His yearly total is $2,500.
His monthly premiums are $500 with the same deductible and co-pays, totaling $6,000. He is charged four or five exam co-pays (about $100) and $300 for prescription co-pays. He, too, must pay $500 before his insurance pays anything.
For $6,900, he receives $2,500 in care.
Health insurance for high risk patients…a bargain?
For about 10-percent of employees with group policies, some years are “high risk” in which acute or chronic health problems drive expenses up. A 28-year-old healthy man fractures his wrist in a car accident. His emergency-room visit, x-rays, outpatient surgery, pain medication, and follow-up exams total $12,000. Or perhaps he wakes up with abdominal pain which progresses to acute appendicitis requiring surgery, a two-day hospital stay, antibiotics, and follow-up care. The related expenses exceed $20,000.
For him, pre-paid health care seems like a good idea. Young and healthy, his monthly premiums are $350. He has to pay $500 to meet the deductible, plus co-pays of about $200, plus 20-percent of the hospital bill ($2,400 for the injury, $4,000 for the appendicitis), but his group insurance plan does cap his out of pocket expenses at $5,000 per year…in addition to monthly premiums, of course.
In the worst-case scenario, for $9,200 ($4,200 in premiums plus $5,000 in out of pocket expenses), he receives $12,000-20,000 in care.
One problem exists for the young man receiving such a “bargain” in health-care coverage, however: at the time in his life when he is on sick leave and least able to afford it, he must come up with $5,000.
Additionally, this usually healthy person will pay $4,200 in premiums every year for a plan he almost never uses. He is punished for his good health with high fixed costs (pre-paid health care) and rewarded only for major injury or illness.
This reward comes at a price. Despite driving up profits for the health insurance corporation that he and his employer fund year after year, he will have nothing to show for it during “healthy” years — and a $5,000 bill during the rare years in which he asks for something in return for the massive premiums he and his employer have already paid.
There is a better way.
Low cost, high value — what Blue Cross doesn’t want you to know
Instead of offering high-cost, low deductible pre-paid health care at $350-$800 per month for every employee, the employer can offer the choice of a low-cost, high deductible health insurance plan with the safety nets of a Health Savings Account (HSA) and a Health Reimbursement Account (HRA).
For most people, a health insurance plan can be purchased for $80-$200 monthly (compared with the typical $350-$800 plans shown above). The difference is that instead of the $500 deductible found with typical (expensive) employer-based coverage, this type of plan carries a high deductible, perhaps $2,400.
The reward for low and medium risk patients (up to 90 percent of employees) is clear. Health insurance premiums for the woman in the low risk example above drop from $4,800 to $1,620, given a typical monthly premium of $135. For the 50-year-old man with a few health problems, his yearly $6,000 insurance cost drops to $2,100 with a monthly premium of $175.
But both employees would still need to meet the yearly health-care expenses that don’t reach the deductible. To lower the impact of these expenses further, every month their employer matches a $50 contribution they make into their own private Health Savings Account (HSA). This HSA earns interest and is owned entirely by the employee even when they change jobs. After one year, the account balance exceeds $1,200 and employees can add to it — without being federally taxed — to a maximum of their deductible or $2,850 in 2007.
If the employee has a healthy year, incurring less than $1,200 in health-care expenses, they reap the financial rewards of such health. The account grows until retirement, when the employee can withdraw their savings.
This is in contrast to the yearly “investment” they make in Blue Cross or other insurers who never manage to return dividends to healthy people.
Do HSAs work for sick people?
For the employee with expenses exceeding $1,200 — particularly for the high risk employee in a “bad” year with acute or chronic illness whose expenses reach their out of pocket maximum of $5,000 or more — there is another safety net called a Health Reimbursement Account (HRA).
The HRA is an employer-funded line of credit for medical expenses that exceed the HSA balance but haven’t reached the out of pocket maximum. The employer pays to assist the sick or injured employee only when their health-care expenses require it. For 80-percent of employees during a given year, this credit line is not used. For 10-percent of employees, the gap in expenses to be covered by the HRA is less than $1,800.
For the high risk employee, the HRA would need to cover $3,800 to protect the employee from the financial disaster of high out of pocket expenses. This amount, used by just 10-percent of employees in a typical year, still allows the employer reduced health-care costs. Overall, they enjoy much lower monthly premiums associated with low cost, high deductible plan coupled with HSAs.
There are ways to drive down the employer’s HRA costs even further without shifting the burden to the employee or reducing care. Products called “Critical Insurance” and “Accident Insurance” can be purchased by the employer for less than $35 per month per employee.
If an employee sustains a “Critical” health event like having a heart attack or being diagnosed with cancer, the insurance immediately pays $20,000 to the employer’s HRA account to cover the expenses the employer will then pay for their ill employee.
Accident Insurance is especially important to protect against the high health-care costs associated with major trauma. It works in a way similar to Critical Insurance by making an immediate payment of $5,000-10,000 when an employee’s injury results in high medical treatment costs.
Solutions for today’s work force
The employee is protected from financial ruin and the employer lowers their financial risks when they offer valuable health-care benefits. The risk of job instability and loss of coverage, however, is all too real for the majority of the modern American work force.
There may come a time when health insurance coverage is affordable, high quality, and portable instead of dependent on employer contributions. But until then, both employers and employees benefit from simple, common-sense solutions that offer value without overburdening the employee’s paycheck or the employer’s ability to continue providing benefits.
A low cost, high deductible plan coupled with the safety nets of a Health Savings Account and a Health Reimbursement Account offers a better alternative to the plans now offered to most employees. Pre-paid health care ought to become as uncommon as the $1,000 oil change.
–Dr. Linda Halderman is a board-certified general surgeon practicing in rural central California.