Financial Savvy – Reducing Health Insurance Costs

With the Democrats taking Congress in the mid-term election, the prospects for health insurance reform may look rosier. However, I’m not convinced it can happen. Hillary Clinton’s valiant but failed attempt more than a decade ago to develop a national health insurance plan illustrates vividly the difficulties associated with changing the culture of medical care in this country.  

In my experience, most Americans have unrealistic expectations. They want someone else-their employer in most cases-to pay the full cost of a health insurance policy that covers every possible treatment and prescription drug they might need or want. This is unrealistic for several reasons.  

First, the costs of medical care have been skyrocketing for the last two decades at two to three times inflation and wage increases. Since insurance premiums have to be enough to cover those costs, employers who do provide health insurance have experienced parallel increases. For employers to pay these increasing costs, something else has to give. This something is likely to include wages and quality/quantity of coverage.

Health insurance is a relatively common employee benefit. In fact three-quarters of large firms and two-thirds of small firms make this insurance available to their employees. Today, few employers pay the entire insurance premium for their employees and there has been increased shifting of these costs to employees, particularly for family coverage. Since the cost of comprehensive family health insurance to an employer is between $8,500 and $10,000, the employee portion can be a significant burden on low and middle class families. Without some fundamental change in the way we receive and pay for medical services, you can expect to pay an increasing share of the cost as time goes on.

The second problem has to do with expectations about coverage.  Many plans have tried to reduce premium costs by placing limits on some of the more expensive and unpredictable costs, which in a group plan are shared by everyone in the pool. These might include limitations on mental health benefits or requiring generic over brand-name prescription drugs. These cost-saving strategies are acceptable as long as the plan doesn’t exclude the services you particularly need.

Other methods for keeping down premiums require participants to pick up some of the tab through higher deductibles, coinsurance/copays, and stop-loss limits. All else equal, increasing your deductible will result in a more than proportional decrease in premium because it’s costly to administer small-dollar claims. Thus, if you can afford to budget for a higher deductible, your total annual cost will be lower with the higher deductible plan, all else equal.  

A new alternative that might end up in the public eye as we look toward reform is the consumer-directed health plan, which attempts to gives consumers incentives to control their own costs. Normally, if you go to the doctor and she tells you that you need a particular procedure or prescription, you have little incentive to say "Are there any cheaper alternatives?" In fact, if you have full coverage, you may actually have incentive to buy the most expensive health care or to ask for more tests. Consumer-directed plans make you more sensitive to the cost of medical care and thus wiser in deciding what care to receive, when, and from whom.

The typical arrangement for a consumer-directed plan would be a high deductible major medical plan combined with a health savings account funded by the employer.  At least with the HSA, if you don’t spend all the money in the account, you can roll it over as savings toward future expenses or retirement. At the moment, the HSA limits are too low, but perhaps the next Congress will do something about that.

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Vickie Bajtelsmit, Professor of Finance, Colorado State University College of Business,

(970) 226-1473