From the June 2008 issue of Benefits Selling Magazine • Subscribe!

Consumer driven - The risk of underfunded HSA plans

Understandably, there has been a great deal of focus on the mortgage meltdown and the effect certain mortgages have had on homeowners. While many of these so-called "creative" mortgages were entirely appropriate for particular consumers, some homeowners who opted for these mortgages are now unprepared for interest rate changes.

Similarly, a client unprepared for the financial impact of a large claim on a high-deductible health plan might be faced with a financial crisis even though he or she has a quality comprehensive health insurance plan in place. Even if the HDHP is an appropriate plan for a specific client, if that client does not understand the importance of opening and funding a health savings account, brokers run the risk of creating a class of unhappy clients.

Part of the problem with the American health care delivery system is the well-documented disconnect between the actual cost of services and who pays for those services.

High-deductable health plans address this disconnect by making the insured responsible for the relatively low cost of daily health care occurrences, while protecting him or her from a catastrophic claim. The client wins through lower premiums and the tax advantages of opening and funding a health savings account, while the health insurance industry is betting consumerism will help to stem the escalation of medical inflation.

The luster of an HDHP quickly diminishes, however, if clients are not able to fund their deductible when a claim is incurred. Clients will quickly forget their premium savings and focus instead on a perceived lack of coverage.

While it is not unusual for clients who change from a plan with a $1500 deductible to a $5,000 HDHP to see an annual premium savings of $1500 or more, they are often raising their potential out-of-pocket exposure.When clients are using it for commonplace occurrences such as physician visits and lab tests, it is easy to justify the trade-off of first-dollar coverage for the premium savings of an HDHP.However, when faced with a large bill, some will question their decision to move to an HDHP -- or worse yet, question the broker's decision to encourage an HDHP.

In 2005, the median medical expenses for persons under the age of 65 was $912 and almost 20 percent of the under age 65 population reported no health care expenses.

For Americans -- relatively low users of health care services -- purchasing an HDHP may be a sensible method to manage health care costs.

However, when a client experiences a year of acute health care expenditures and has not prepared for the potential financial repercussions, he or she might wind up in a precarious financial situation. Out-of-pocket costs and lost wages can quickly add up, especially if the insured was financially vulnerable before the claim. Much like an increase in monthly mortgage costs from an adjustable rate mortgage, an unfunded large claim can create a financial hole nearly impossible to escape.

Prepare your client

There are several measures you can take to help prepare your client for a large claim. The first is to fully educate him or her on the trade-offs between a low deductible and a high deductible using data readily available on the internet. One great starting point is the Medical Expenditure Panel Survey database, available at www.meps.ahrq.gov/mepsweb. This government site provides information about average health care costs by various standards including age, sex and economic status.

The second step is fully investigating the HSA you sell in conjunction with an HDHP.Present an account with a low (or preferably, no) initial deposit requirement. It is often easier to get a client to open the account if a check isn't immediately required to open an account. Remember, an account must be open on the date a claim is incurred to allow payment from an HSA. If your client procrastinates in opening the account, he or she runs the risk of incurring a claim prior to establishing the account and thus losing out on one of the fundamental tax advantages of an HSA.

If you are as confident in recommending a savings vehicle as you are an insurance carrier, you will give your client one less reason to shop. Details such as the current interest rate, investment options and the availability of a debit card need to be part of your presentation to help the purchaser understand how important the savings account is to the entire insurance package.

Make sure the HSA allows online deposits from a checking or savings account. If it is convenient to deposit money into an account, the chances of that account being funded rise exponentially. Better yet, help your client to set up direct deposit, either from his paycheck or bank account to his HSA.

In 2002 the cost of cancer, heart disease and trauma accounted for approximately 21 percent of all medical expenses.

A third way to help your client plan in advance for a large claim is through critical illness coverage and accident benefits, which help offset large deductibles and increase client satisfaction. For a relatively small monthly premium, these products can provide protection from a large claim before the client has the funds in an HSA to meet his or her deductible.

Even after your client has a fully funded HSA, it may be a good idea to continue with CI coverage to help offset costs not covered under the health plan. Costs such as lost wages, home care and travel for medical care -- which are not always covered under medical plans -- might be paid with CI funds.

The financial similarities between the issues being faced by Americans with adjustable rate mortgages and HDHPs are easy to see. As an industry, it is important to focus our clients not just on the premium savings of HDHPs, but also on what they need to make sure they are properly prepared in advance of a large claim.

For many clients, HDHPs are a perfect solution to health care financing needs.

However, if the client is not properly educated on fully maximizing the benefits of an HDHP, even the best fit can prove to be a nightmare at claim time.

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