The dangers of an underfunded HSA

Understandably, there was 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, an employee 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 high-deductible health plan is appropriate, if employees don’t understand the importance of opening and funding a health savings account, they'll ultimately be unhappy.  

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 insured people responsible for the relatively low cost of daily health care occurrences, while protecting them from catastrophic claims. The employee 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 a high-deductible health plan quickly diminishes, however, if employees are not able to fund their deductible when a claim is incurred. They'll quickly forget their premium savings and focus instead on a perceived lack of coverage.

While it is not unusual for workers who change from a plan with a $1500 deductible to a high-deductible health plan with a $5,000 deducible to see an annual premium savings of $1500 or more, they are often raising their potential out-of-pocket exposure. When they're using the plan 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 high-deductible health plan. However, when faced with a large bill, some will question their decision to move to an high-deductible health plan — or worse yet, question the company’s decision to encourage an HDHP.

For some Americans — relatively low users of health care services — purchasing a high-deductible health plan may be a sensible method to manage health care costs.

However, when an employee 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 employees

There are several measures that brokers and benefits managers can take to prepare employees for a large claim. The first is to fully educate them 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 This government site provides information about average health care costs by various standards including age, sex and economic status.

Fully investigate the health savings account you offer in conjunction with a high-deductible health plan. Present an account with a low (or preferably, no) initial deposit requirement. An account must be open on the date a claim is incurred to allow payment from a health savings account. Clients who procrastinate in opening the account run 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.

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 employees set up direct deposit from paychecks or bank accounts to health savings accounts.

A third way to help 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 patients have health savings account funds to meet a deductible.

Even after the employee has a fully funded health savings account, 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 high-deductible health plans are easy to see. Insurance professionals and benefits managers must help focus employees not just on the premium savings of high-deductible health plans, but also on what they need to make sure they are properly prepared in advance of a large claim.



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