If you listen carefully to the health care debate, you will hear the term "bending the health care spending curve." This curve illustrates how the total amount money spent on health care rises each year. Thus, one of the major goals of health care reform is to figure out how to get the curve to level off and ultimately go down. Since we spend substantially more on health care than any other country, there appears to be room to curtail spending. Perhaps the most effective way to bend that curve is to give every American a financial incentive to do so.
Since the large majority of working people get their health insurance coverage through their workplace, employers have the ability to incentivize employees to become prudent buyers of health care services.
Let's look at a simple example of how incentives actually change buying behaviors. Imagine you are going on a five-day business trip for your company. There are two different ways your employer can pay for the cost of meals:
Your employer can reimburse you for the cost of meals, up to $100/day. With human nature as it is, you will probably eat at the hotel because it is convenient, and most likely you will spend close to that $100/day because there is no incentive to be prudent or frugal. If you spend less on food, you don't get any benefit.
Your employer can give you $500 ($100/day x 5 days) and you can choose how you will spend the meal money.
With human nature as it is, you might opt to eat at a less expensive local restaurant a few blocks from the hotel, or maybe a few fast food meals. You might actually spend $50/day instead of $100/day. That's a savings of $250 for the five days. When you get home, you can use some of that money to take the family out to dinner or just save the money.
It makes a difference how meal costs are paid; and it makes a difference how health care costs are paid as well. With human nature as it is, if employers provide a plan that pays most of the cost except for low co-pays, there is no incentive to be prudent. If employers give cash to employees, they incentivize the employee to become a prudent buyer of health care services, because employees get to keep unused dollars and save them for the future.
The HSA strategy
Here is a simple change employers can make to incentivize employees without taking anything away:
Step 1: Adopt a new default health plan for all employees.
Instead of basing contribution on a particular HMO or PPO plan, employer bases contribution on an affordable high deductible health plan, such as a $2,000, $3,000 or $4,000 deductible plan. The employer continues to pay some percentage of employee's premium. They also often include an annual exam at no cost to employee.
Step 2: Provide each employee a default cash allowance.
Since affordable high deductible health plan is less expensive, employer can offer a set amount of cash -- a defined contribution -- that will go into each employee's HSA. Employees can use that money to pay for routine and expected health care costs, and unused dollars accumulate for future expenses. This is like getting the $500 for meals and letting the employee choose how to spend it. There is an incentive to be a prudent buyer of health care services -- to ask about generic drugs, and question if a test is really required or if there is a less expensive alternative test.
Give employees the choice of all plans offered by an employer. Here is the key. By default, if employees take no action, they get the default health plan plus money in their HSA. They will have excellent protection from big bills, plus cash to pay for smaller bills. Allow employees to opt out of the default plan and use the cash allowance to pay additional premiums for a plan with a lower deductible and co-pays for office visits and prescriptions. If employers give employees the money, the employees will do the math and figure out if it's wise to pay more for a plan.
- Employer links current and future insurance costs to one of the most affordable health plans.
- Employer cash contribution is determined by the employer and not subject to annual premium increases by an insurance company
- Employees have real choice. They can keep the cash or pay additional premiums for lower deductibles and co-pays.
- Employees will have a plan that allows them to plan and save for future health care expenses, including those in retirement.
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