Business Chatt

Are employers over-insuring their employees?
The surprising answer may be “Yes.”

by Robert Hooper

Michael McCallister, President and CEO of Humana Insurance made a startling comment that nearly knocked my off my chair. He was speaking on the benefits of health savings accounts at the Consumer Directed Health Care Expo in Las Vegas, May 2007. After his talk he was asked by a member of the audience what employers could do? He said: “Employers, you are over-insuring your employees. You are buying plans they would not buy for themselves.”

That’s fairly controversial for an insurance company president to imply that business owners, HR professionals and insurance agents are choosing plans employees wouldn’t buy for themselves. That comment warranted some research.

Based upon my experience as an agent, I had some reasons to suspect this was true. For starters, the large majority of individual health insurance sales at our agency are for affordable HSA-compatible health plans. And, when individuals come to our offices trying to duplicate their former employer’s plan, they usually gasp at the cost, say they had no idea the plan was so expensive, and buy a much lower cost plan.

I talked with a respected HR Director in my community, and asked her if she would be willing to do a quick experiment. I gave her an insurance company brochure for small group insurance plans (2-50 employees). This company offered 21 different health plan options including HMOs, PPOs and HSA-Compatible Health Plans. I also gave her rate sheet so she could see the published premiums for each of the plans. Then I asked, “If you had to pay the entire premium yourself, which plan would you choose?”

She looked them all over very carefully, and then chose an HSA-compatible plan with a $3000 deductible. With this plan, she pays all costs up to $3000 and the insurance company pays all costs over the $3000 deductible. I asked why she didn’t choose a more expensive traditional PPO or HMO and her rationale was simple. “I’m reasonably healthy and the premiums for this plan are much less than the traditional plans. Since it’s my money, I would rather put that premium saving into a health savings account than pre-pay for low office visit and prescription copays I rarely use.”

A problem: employees misunderstand funding of health insurance
So why is it that employees choose one plan at work, and a totally different plan when buying their own coverage? We can gain insight from Devon Herrick, a health economist and senior fellow at the National Center of Policy Analysis. In a May 5th, 2005 article in the Heartland Institute titled “Health Insurance: Why Rent When You Can Own?” he stated clearly and succinctly what all employees need to understand:

“Employer-sponsored health coverage is popular because workers mistakenly assume their employers pay part of the premiums. Economists know otherwise. Workers bear the total cost of their health plans through direct contribution and indirect wage reductions.”

This leads to an interesting question: if employees really understood that they bear the total cost of their health plans, would they choose different health plans than the employer offers?

The experiment
I was recently teaching my 8-hour HSA continuing education workshop to a group of 35 CPAs and decided to conduct a preliminary experiment before starting the class. Here’s the set up. I told them I was their employer and that I prided myself in offering excellent benefits. I then presented three scenarios.

Scenario one: I gave them a menu of plans-a variety of low, medium and high cost HMOs, PPOs and HSA-compatible plans. I then told them I would pay all the costs for their health insurance; they could choose any plan they desired. After they made their choices, I asked them which plans they chose, and virtually all took either the most expensive HMO or PPO. I expected that. It’s like my taking you to an expensive restaurant and saying, I will pay all the costs. Immediately disappearing from your mind is the inexpensive pasta dish, and you order the Filet Mignon with the expensive bottle of Merlot.

Scenario two: I told them I would still pay for the plan they had chosen. But as an option they could choose a less expensive plan and keep any premium savings as payroll. No surprise here. Virtually all-except for two people-chose less expensive plans and pocketed the difference. That’s like going out to a restaurant and giving everyone a $100 bill and saying, “You can buy what ever you want. What you don’t use you can keep. The special pasta and the house white wine suddenly are the popular choices.

Scenario three: The last scenario occurred after the completion of the 8-hour program on health savings accounts. Like scenario two I told them they could keep the expensive plan, or use the money to buy any plan they desired. This time these financial professionals were thoroughly educated on the benefits of HSA-compatible health plans. Virtually everyone chose an HSA-compatible health plan, used the premium savings to fund the HSA to the maximum, and some still had money left over for payroll.

It appears that Michael McCallister, President and CEO of Humana Insurance may be correct in asserting that employers are offering plan employees wouldn’t buy for themselves. If that is true, would companies be smarter-and employees happier-if employers gave employees the opportunity to buy plans they would buy for themselves? It’s easy to accomplish.

Employers could give each employee the “benefits” portion of their compensation in the form of a budget to buy health insurance. The budget is made up of two components:

• A dollar amount sufficient to pay the major medical plan, e.g., a high deductible health plan. Since employee sees a dollar amount, the employee knows the real cost of the insurance. Since employer still pays the premium, it is fully tax-deductible. The employer also makes sure employees have affordable coverage for large and unexpected medical bills-the original purpose for health insurance.
• An additional dollar amount that employees can use in several different ways:- Put cash into employee’s health savings account to pay for routine and expected healthcare expenses, as well as save for future deductibles.
  - Use to pay dependent premiums.
  - Upgrade to a more expensive health plan.
  - Take cash as additional payroll (pay taxes). This fourth option is critical; when the employee has the option of taking this as payroll, then the individual understands that money is really his or hers.

In summary, when employees know their budget and have the “feeling” they are spending their own money, each person can choose between the pasta (e.g., the HDHP + HSA) and the Filet Mignon (e.g., the traditional health plan)? If human nature is true to form, my vote is that most people will choose the “pasta,” and keep the change.

The larger picture: greater transparency
Every employee needs to know the real costs of their health insurance. This idea is already taken shape at the Federal level. The need for transparency of insurance premiums took a big leap forward, according to a Business Insurance article, February 18th, 2008. Employers may be required to report the cost of health insurance coverage they provide to employees on annual W-2 wage and income statements under a recommendation by the Bush administration. This recommendation was included in the administration’s fiscal 2009 budgetary proposal. According to the report, such disclosure is necessary because many employees `are unaware’ of the value of coverage. The current lack of transparency may result in `inefficient choices of health coverage, including over-consumption of health coverages by employees.’