The Downside of HSAs – Closing the Coverage Gap

Beyond Coverage October 25, 2021

High deductible health plans (HDHPs) have steadily become the norm, not the exception, as employers seek to contain healthcare costs. As of last year, a majority of employers (51%) offered one of these plans.[i] And one analysis by the Centers for Medicare and Medicaid Services found that 28% of covered workers are enrolled in an HDHP, up from just 5% in 2007.[ii] Momentum has been building, with an increase in employee enrollment of three percentage points over each of the last two years.[iii]

While HDHPs give employers new tools for cost control, they shift more of the cost-sharing burden to employees. As primary healthcare coverage continues to shrink and coverage gaps widen, employees are facing the financial realities of rising healthcare expenses. As a result, out-of-pocket (OOP) spending on healthcare has risen steadily over the last decade. This jump can be traced to sharp increases in costs for both routine and unexpected healthcare, as well as an increase in coverage gaps. In 2018, the average annual deductible was 53% higher than in 2013—and over 200% higher than in 2008.[iv] Between 2006 and 2016, OOP healthcare spending costs rose more than 53%.[v] In fact, a recent Kaiser Family Foundation report revealed that more than four in 10 employees enrolled in HDHPs, don’t have enough savings to cover deductible costs.[vi]

Put simply, increased OOP healthcare spending strains employees. It can affect employee satisfaction, productivity and ultimately the bottom line, especially when the associated costs of higher turnover are considered. The reality is that employers should be concerned about the turnover-benefits connection: over half of U.S. workers have left a job after finding better benefits offered elsewhere.[vii]

With enrollment in HDHPs on the rise, many employers and employees have turned to health savings accounts (HSAs) as a solution for coverage gaps and increased OOP healthcare spending. While HSAs offer tax advantages, they fall short in closing the coverage gap. Here’s a closer look at the downsides of HSAs and what alternative solutions employers can consider in order to reduce employee OOP healthcare spending, while still balancing the benefits budget.

Downsides of HSAs: timing issues

HSA funds have to accumulate before they can be used. This means that available funds might not match up to when expenses are incurred. Or, funds might be depleted (by every day or unexpected healthcare expenses) more quickly than anticipated.

Downsides of HSAs: coverage gaps

The average individual deductible for an HDHP is $2,500.[viii] Yet the average contribution for an employer- or self-funded HSA is just $750.[ix] The math is easy: contributions often fall far short of the cost of even an average-sized deductible. Employees facing coverage gaps presented by HDHP/HSAs can struggle with financial hardships, even with unexpected medical expenses under $1,000. A recent Kaiser Family Foundation poll found that 45% of employees surveyed would not be immediately able to afford a surprise medical bill of $500.[x]

Downsides of HSAs: lack of employee loyalty

As they have shifted to HDHPs, employers have moved toward funding employee HSAs. These employer-funded HSAs can be viewed as “dollars in, dollars out” coverage. This means employees use them for medical expenses, but the perception of their value can be considered transactional. In addition, because they’re portable—meaning the employee can take the account with them when they leave the employer—HSAs aren’t conducive to building lasting loyalty like other insured benefits.

Worksite voluntary insurance

To close coverage gaps and reduce OOP spending, some employers offer worksite voluntary plans. While these plans can fulfill some needs, they often don’t cover the routine healthcare expenses that can cause financial hardship for employees: over half of respondents to a recent survey had delayed filling a prescription or had postponed routine medical care in the last year due to cost.[xi]

Closing the coverage gap

Clearly, there are downsides of HSAs that any employer must consider. And there is certainly a need to address coverage gaps that may contribute to financial hardship, reduce engagement and affect employee loyalty.

But benefits budgets matter. With employee benefits amounting to a third or more of the total compensation budget in many companies,[xii] it’s crucial that employers be strategic in controlling costs and maximizing ROI. If HSAs and worksite voluntary plans aren’t the answer, what is?

Flexible supplemental insured healthcare benefits can reduce OOP spending for employees and allow employers to reallocate HSA contributions—preserving the benefits budget—to more meaningful and valuable insured coverage for employees. These plans can co-exist with HSAs, meaning that employees can self-fund HSAs and reap the associated tax advantages while also having access to first-dollar coverage against the high cost of annual deductibles. And finally, supplemental health insurance benefits can be offered to all or select employees at any level, as determined by the employer—making them a win-win when it comes to reducing OOP spending and closing coverage gaps.

ArmadaCare’s BeneBoost is a new, fully insured supplemental indemnity plan that offers coverage for routine and unexpected expenses, giving employers an alternative to their HSA contributions and employees meaningful “first dollar” coverage inside their deductibles along with HSA compatibility.  Learn more.

[i] Gallagher – Benefits Strategy & Benchmarking Survey, 2019

[ii] Think Advisor, 2018

[iii] Gallagher

[iv] Kaiser Employer Health Benefits Survey, 2018

[v] Economic Policy Institute, 2018

[vi] Kaiser Family Foundation, 2019

[vii] HR Dive, 2018

[viii] SHRM, 2020

[ix] SHRM

[x] Kaiser Family Foundation, 2020

[xi] Kaiser Family Foundation, 2019

[xii] SHRM, 2018

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