More Employers May Look to Higher Deductibles

BOSTON (TheStreet) -- On Sept. 23, six months after the Patient Protection and Affordable Care Act became law, the meat of its health care reforms begin kicking in.

On that date, children under the age of 26 will be allowed to stay on their parents' insurance policy if they don't have one of their own. A ban on "lifetime limits" for insurance coverage will go into effect, as does a prohibition on excluding children with pre-existing conditions and the creation of a consumer appeal process.

These steps could lead companies to rethink their health plans, potentially passing added costs to employees with a shift to high-deductible plans.

Dennis Triplett, CEO of UMB Healthcare Services, part of UMB Financial ( UMBF), expects that growth in spending will increase demand for health services and products and drive further increases in costs. Higher insurance premiums, in a 5-30% range, could be likely in the coming years, he says.

A poll by the National Business Group on Health, an association of large companies, found that employers estimate their health care benefit costs will increase an average of 8.9% next year. To control those increases, 63% of responding employers said they plan to increase the percentage employees contribute to the premium. One-fourth of respondents plan to raise the co-pay or coinsurance for retail pharmacy prescription drug benefits.

Of course, for many long-term employees, hikes in the cost of health benefits and prescription co-pays isn't a threat; it's business as usual. Health insurance premiums have doubled on average during the last 10 years, much faster than wages and inflation, putting health coverage out of reach for millions of Americans and business owners, according to the U.S. Health and Human Services secretary, Kathleen Sebelius.

The White House says the reform plan makes insurance more affordable by providing the largest middle class tax cut for health care in history and reducing premium costs for tens of millions of families and small-business owners. Last month, $46 million in grants was announced so 45 states and the District of Columbia could "improve the oversight of proposed health insurance premium increases, take action against insurers seeking unreasonable rate hikes and ensure consumers receive value for their premium dollars," Sebelius said.

More than 61% of companies responding to the National Business Group's poll said they will offer a consumer-directed health plan next year, two-thirds of them providing a high-deductible plan combined with a health savings account.

The traditional insurance model -- in which employers pay the premiums for coverage (with employees contributing) and insurance companies pay for services and products -- "does little to control costs for businesses or many consumers," Triplett says. "The consumer has little incentive to monitor or manage the costs of care ... When they have skin in the game, they behave differently."

Postreform, employers will increasingly look to consumer-directed plans to address the lack of incentives, or "moral hazard," in fee-for-service plans.

Triplett says an increase in the use of high-deductible plans needs to be in concert with the ability of consumers to use tax-advantaged flexible spending accounts, health care spending accounts and health reimbursement arrangements.

These savings vehicles were nearly a casualty of health care reform, not an integrated part of it, Triplett says. Officials initially sought to eliminate them as a means to recapture lost tax revenue and defray the cost of reforms.

"All of us in the FSA space felt we had a near-death experience," he says.

An initial Congressional proposal would have eliminated the plans entirely. After lobbying efforts, FSAs were spared but given a $1,500 cap. The cap would eventually be finalized at $2,500 by 2013 (there is currently no limit).

"We just kept telling Congress at the time the people you are impacting are not the healthy and wealthy necessarily, you are impacting people who need this most," Triplett says of the lobbying effort. "You would be hurting people who have chronic diseases who need to set money aside. Plus, you are hurting younger parents who are trying to put braces on their children and those sorts of things."

Triplett says that although FSAs were spared, Congress can still do more to ensure their viability.

While there was once a grace period beyond year-end to spend leftover dollars, postreform regulations impose a strict Dec. 31 deadline. The funds, though indexed for inflation, are not indexed to the faster-increasing rate of medical inflation.

Provisions for over-the-counter drugs may also cause confusion, he says. Starting next year, the cost of over-the-counter medications (excluding insulin) cannot be reimbursed from the account without a prescription.

An analysis by Hewitt Associates ( HEW), a global human resources consulting and outsourcing company, may ease the fears of FSA users.

It found that, despite the tax savings, only one in five employees contributed to an FSA this year. Employees who do participate typically save between $250 and $400 each year in federal taxes.

As for the cap, Hewitt found that for employees who contribute to an FSA, the average annual contribution is $1,441. Just 18% contributed more than the new limit of $2,500, and those who did tended to be people earning more than $150,000 per year.

--Written by Joe Mont in Boston.

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