Chris Bjorklund: You’re listening to the AllBusiness podcast. I’m Chris Bjorklund. If you’re getting this through iTunes and RSS feed or an online streaming-media player, you can hear interviews with other experts at AllBusiness.com.

Bjorklund: With healthcare costs going up year after year, many employers are looking for new ways to maintain benefits for their employees through consumer-directed health plans. Marsha Black and Steve Dupuis, from Black and Associates, share their expertise on these plans in this AllBusiness podcast. Marsha is a benefit plan design specialist with more than 25 years experience in the group insurance business and Steve is a specialist in employee benefit planning for small to midsize businesses, public or private.

Bjorklund: We all know that healthcare costs have been going up and up and up for the last, well, for many years now. Steve and Marsha, how have small businesses been dealing with these increases?

Marsha Black: Several ways. One way is that they have passed some of the cost on to the employees and that amount has been increasing as the premiums have gone up. and also they look at different plan designs, increasing some of the internal benefits to lower the premiums.

Bjorklund: So they are getting creative.

Steve Dupuis: Well, they are getting creative. But in reality what they are doing is passing on cost to employees by raising copays, raising deductible amounts, raising out-of-pocket costs for employees and all of these things. Of course, the employee has to come up with the money to pay for before the insurance benefits kick in.

Bjorklund: And sometimes I would imagine that the raises they are getting are not really covering the increase in medical costs.

Dupuis: Well, that is probably highly likely.

Bjorklund: What does the typical employer, if there is such a thing, a typical small employer pay for employees’ health insurance plans and what are some of the typical offerings, Steve?

Dupuis: Well, according to the American Health Insurance Plan Association, which has approximately 13,000 member carriers--these are insurance companies and so forth--they insure 200 million employees nationwide and their statistics suggest that healthcare costs are approximately $312 per month for an individual employee and approximately $814 a month per family. Now those figures are as of 2006 and both Towers Perrin and Watson Wyatt have come up with studies that indicate that the inflation rate for health insurance premiums is approximately 8 percent for 2007 and an additional for 2008 projected.

Bjorklund: This has got to hurt, Marsha?

Black: I think yes, I think it is important to note that those numbers are national averages and they will vary widely by industry and by location and...

Bjorklund: So higher in some areas?

Black: Some higher in some areas, lower in others, that is right. But yes, and the inflation is also a national average so it can vary widely also.

Bjorklund: In this show, we want to talk specifically about a category of health plans called consumer-directed health plans and I would imagine a lot of business owners are not all that familiar with some of the options. Marsha, what are some of the general categories within this umbrella that we are calling consumer-directed health plans?

Black: The two most prevalent today that we see are health savings accounts (HSAs) and health reimbursement accounts (HRAs).

Bjorklund: OK, so...

Black: So those are the two major categories.

Bjorklund: Those are the two major categories. Steve, do you find that the businesses, really a lot of businesses, do not understand what these options are about?

Dupuis: Well, I think these days a lot of business owners have been exposed to these plans because they have been in existence for a couple of years of now. The legislation that created them really popped two or three years ago and initially there was a very good low enrollment in HSA plans specifically but over the past couple of years the enrollment has really gone up a tremendous amount. I mean, it is estimated that, over the next probably 10 years, maybe as many as 12 million employees will be enrolled in these plans.

Bjorklund: So what is good about them for employees?

Dupuis: Well, I think you have to separate them into really the two categories: an HSA plan and an HRA plan. So if we talk about HSAs first, a health savings account really is kind of like an IRA for medical expenses and that is an account an individual can defer his or her own money into it. Now an employer can also contribute to that account but typically it’s employee money and that money is immediately vested to the employee in that account. That account goes with the employee wherever that employee might go. As long as they have a high-deductible healthcare plan underneath it, they can continue to contribute. So I think that is a great benefit and, you know, over a longer period of time, an employee could build up quite a bit of money in an account like that if they were not using the maximum contribution every year to reimburse themselves for unreimbursed medical expenses.

Bjorklund: Well what are some of the bad things for employees?

Black: There is one other thing that I would like to add to what is good though, before you go to...

Bjorklund: Before we go there?

Black: One of the biggest factors that is overlooked is the retiree aspects, availability of the money to people who are 65 and over. They can get the money out of the HSA account without paying any penalty taxes on it for anything but they can continue to pay medical expenses, Medicare premiums, taxes not covered by Medicare or Medicare supplements, prescription drugs, long-term-care premiums, out of that HSA account. So it is really a long-term financial tool as well as a current medical expense.

Bjorklund: And any of the negatives for employees, Marsha, do you want to add to that?

Black: The biggest negative--and, you know, the good news is that the employee has to be actively involved in the process. The bad news is the employee has to be actively involved in the process. It is not a passive account, OK? The employee has to be willing to understand how the high-deductible plan works, manage how they pay for the expenses that they are responsible for and become actively involved in getting the money out of the HSA account and into their checking account, pay attention to what they are paying and how much they are paying. It is an active process and not everyone is comfortable with the administrative aspects.

Bjorklund: I would imagine it is like investment. Some people just want to park their money somewhere and not really pay attention to it and others are playing active roles, so it is similar in that regard.

Black: It is similar in that regard.

Bjorklund: What about employers now? There must be many, many advantages for them, Steve?

Dupuis: There are many advantages for employers both with an HSA program and with an HRA program. The biggest advantage that employers find is that their healthcare premiums are reduced substantially. What we find in our practice is that healthcare premiums for an employer may be reduced anywhere from, say to 30 to 50 percent per year. And that is a very significant number considering the rising healthcare costs that employers typically pay. That gives the employers a great deal of flexibility to determine what they do with that savings and one of the things, of course, they can do is turn around and make a contribution to an HSA plan, for example, or agree to reimburse employees up to a specified amount under an HRA format. Any money that is not used under the HRA format by employees is typically retained by the employer, so that can be a great advantage to an employer too. It is kind of like allowing a small employer really to partially self-fund their medical insurance but having a fully insured plan underneath the program, which is a great advantage. There is no question about it.

Bjorklund: What about payroll taxes? What is the impact there?

Black: Payroll taxes are not paid on the amounts that go into either one of these accounts.

Dupuis: Right.

Black: They are also not paid because they are considered medical plans and payroll taxes are not paid on medical plans. But that does bring up an important point. When employees are contributing their own money to the savings account portion of this, they are better off if they do it as a payroll deduction, because when they do it pre-payroll tax then the employer does not pay payroll tax on that money either.

Bjorklund: Do employers find that the employees really like having a diverse set of benefits to choose from?

Dupuis: Well I think they do. The one problem that we see, you know, with either of these formats, HSA or HRA, is that there is a substantial learning curve, both for the employer and the employee. When we go to implement a plan like this in an employer business, we usually spend six months in the education process, starting with the employer introducing them to the concept, doing some sort of financial analysis to determine how much money they can really save and so forth. And then, you know--let us say we are looking at a target implementation date of January 1st, we will probably start in September of the preceding year, holding meetings for employees to begin to introduce the concept. So by the time the plan goes into place they are really as familiar as they can be with how they are going to use this plan and how much different it is from a conventional healthcare plan.

Bjorklund: If you have an HR department, is that something that they do? Or is it typically something where specialists like yourselves or a carrier or a third-party administrator would come out?

Black: The HR department sets some meetings up and that is about it.

Bjorklund: You take it from there.

Black: We really are the brokers. Yeah, the brokers are involved heavily in the educational process as are any third-party administrators. The carriers can be, in terms of explaining how the plan itself works, but in general they are not explaining how the savings account part works.

.

Bjorklund: You are listening to Marsha Black and Steve Dupuis, explaining how consumer-directed health plans work. I am Chris Bjorklund and this is AllBusiness podcast. Let’s talk now about these two major categories, HSAs and HRAs, and really kind of get into some of the nitty-gritty and what are the differences between them. And let’s start with the HSAs. Marsha, you want to pick it up?

Black: OK. The HSA accounts, the savings accounts, are actually owned by the employee. It is their personal asset, whether it is their money that goes into it or the employer’s money that goes into it. That account is their personal asset. Whereas under HRAs, the money belongs to the employer and any money that is not used reverts to the employer. So those are two really major differences. The employee cannot put money into an HRA plan. The employee can put money into and does put money into an HSA plan, OK? Another major difference is the control over the plan design itself and the limits that can go into the savings account or that can be contributed to the HRA. HSAs are governed by legislative process.

Bjorklund: So there is a maximum?

Black: There is a maximum plan design that you have to have to qualify for an HSA account. There are some choices underneath those maximums. There are maximums that you can put in to the HSA and that is all done by legislation. The HRA is also governed by the Treasury Department but in broad outlines and the plan design itself for the HRA is actually set by a plan document that the employer sets up and there is no financial limit in terms of the legalities of it. There is no financial limit to how much the employer can make available to their employees and we see a wide range in that arena. The plan designs, there is no limit on the plan designs from the legislative standpoint. The carriers do have some limits and the carriers will limit what plans are available for HRAs.

Bjorklund: Are they both tied to, are both the HSAs and HRAs tied to a high-deductible insurance plan?

Black: HSAs definitely. HRAs usually.

Bjorklund: Usually, OK, good. Steve, you want to chime in here?

Dupuis: Well, I think the easiest way to look at these plans and remember which is which, is an HSA--HSA really stands for health savings account and so as a savings account, it really and truly is a savings account for employees to reimburse themselves for healthcare expenses. An HRA is a health reimbursement arrangement and that is where the employer makes an agreement, as Marsha said, specified by a plan document to reimburse the employee for healthcare costs up to a certain amount every year. So it is pretty easy to understand which is which if you just remember that RA is the reimbursement arrangement and SA is the savings account. On the HSAs the maximum contribution limit at this point is $2,850 for an individual and up to $5,650 for a family in 2007. In 2008 those limits are going up to $2,900 and $5,800 respectively. Now on the HRA side, again, as Marsha said, the plan documents set the limit or the employer sets the limit and, you know, the plans, really the reimbursement part of the plan, is not limited to those HSA limits. So it can be very effective for the employer.

Bjorklund: With an HSA, I understand Marsha pointed this out earlier that you have to be actively involved in the investment. What if you make some bad investment decisions about your account and then it is possible, I suppose, that you might not have the money in there to pay your co-pays and things before you reach that deductible?

Dupuis: It is certainly possible to do that but typically what happens is most of this money in an HRA, for example, the employer is retaining, obviously, control.

Bjorklund: Control, yeah.

Dupuis: Retaining control and retaining the asset and really does not deposit this money in any kind of an account, you know. Typically the employee submits a bill and through a third-party administrator that bill is paid. The third-party administrator requests contribution to a bank account from the employer and when that contribution is made, the third-party administrator simply reimburses the employee. So typically there is no investment portfolio that the employer retains under an HRA plan. Under an HSA plan, where literally the employee has a savings account and could invest the money in a variety of ways, it is quite typical at this point for most of that money to go into a money-market fund to start with. Now it is true that employees could actually invest that money in mutual funds and so forth but it is normally recommended that they keep at least a year’s deductible or out-of-pocket expense in money-market funds so that that money could come out for the reimbursement of medical expenses, not to be invested in stocks, bonds and so forth.

Black: The other risk that the employee has in an HRA account management or in an HSA account management is how they use the money. What medical expenses they use the money for. They can actually use that money for things other than medical deductibles, co-pays and so on. For example, it can be used for dental expenses, for vision expenses and those expenses do not count toward the deductible. So it is possible that an employee who is in this for the first year, normally very healthy, says, “OK, my kids needs orthodontia, you know, I am going to use the HSA money to pay for orthodontia. My kid, you know, I need glasses, my kids need glasses, etc.” And then have a catastrophic event occur later in the year and not have the money in there to pay it. Well, the deductible still has to be paid, you know, the co-insurance still has to be paid so that comes out of the employee’s pocket.

Dupuis: I think Marsha is absolutely right. That could be a downside of managing your own account. The flip side of that is, for example, if an employee does not use that money for a couple of years, it is quite likely that there could be a significant amount in there over and above the out-of-pocket maximum that an employer or a family could be exposed to given there, and then that money would be there to be used for vision expenses or dental expense or whatever else they wanted to use it for and, in addition, there would be enough in there to pay the deductible.

Black: And so it really comes down to personal management.

Dupuis: Right.

Bjorklund: Now how is that--and this is something I read about HSAs--is that it really helps individuals become maybe more prudent in their healthcare choices.

Black: I have an interesting story about that from one of our clients. She went on it for the first time last year. She has two teenage sons and now when they get a little sore throat or, you know, something relatively minor or a little bit of hayfever, she is doing over-the-counter medication to start with instead of going to doctor right away and getting prescription drugs. Yes.

Bjorklund: She does not run to the emergency room yet.

Black: She does not run to the emergency room.

Bjorklund: I get it. I know about that one.

Black: Yeah.

Dupuis: Well the consumer-directed part of this is exactly what we were talking about a minute ago and that is that the consumer can really decide how to spend this money and because the money can be spent for what is called any 213-D expense, that is the section of the Internal Revenue code that delineates these expenses that are allowable for reimbursement, because the consumer can spend the money in the HSA or HRA for any of those kinds of expenses, it is really up to the consumer how they manage the money and if they want to spend the money for orthodontia expense for children, for example, that is perfectly legitimate but then they have to, as Marsha said, you know, deal with the fact that the deductible amount might not be in there if there is a catastrophic illness. So it really is consumer directed from that point of view.

Bjorklund: So let’s start talking about how to shop for these HSAs and HRAs and how to set them up. Let’s get into some really concrete things. Number one, do you use a broker?

Dupuis: Typically you would use a broker. Most employers have some sort of a benefits broker onboard and it is typically the benefits broker that introduces the concept to the employer. That, I would say, is where most employers, you know, come across these kinds of plans. It is certainly possible to go to a carrier, a Blue Cross, a Blue Shield, a HealthNet or whoever it might be, take a look at their plan offerings and discover that in fact there is a high-deductible healthcare plan available through that carrier and then, you know, probably further investigation would be warranted and typically that takes place through a broker.

Bjorklund: And what about reading the plans or I found that there is, you know, some literature online. It is a little, I mean, it is a little overwhelming at first but you can go to the, you know, there is some federal sources.

Black: The Treasury Department has some very good FAQ section that is very, very clear. There are administrators who have very good websites that explain about the HSA plans but the definitive word is from the Treasury Department.

Bjorklund: OK.

Black: So if you really want the technical information and you want it pretty clearly, actually it is the Treasury Department website has it.

Dupuis: Yeah. I would say it is a good idea, you know, perhaps we should put that out. It is www.treas.gov and if you just plug in, really, in the search area whatever you want to find out about HSAs or HRAs, the articles will pop up on that Treasury Department website and they are very good. They are very clear and concise.

Bjorklund: Let us cover a few more points about that.

Dupuis: OK, sure.

Bjorklund: Number of employees, if I work, you know, just one employee, just myself, can I set up an HSA, Marsha?

Black: Yeah, HSAs were actually created to be individual accounts. The employer sponsorship is something that came along later, you know, as the legislation was being reviewed. And so any individual who can buy a high-deductible health plan can open an HSA, a savings account, as long as they qualify for the savings account. And there are some regulations surrounding that. HRAs generally are meant for employers. There has to be a separation. There are some tax issues involved. It would take a CPA if you are a small, you know, a one-person employer. And CPAs and attorneys have to rule based on how the business is organized.

Bjorklund: But they should know about this. Yeah.

Black: In general, any company that qualifies as a business and qualifies for an underlying medical plan will qualify for an HRA or the employees, at least.

Bjorklund: What about setting up these accounts? So I have decided to go with it and I have talked to some brokers or a broker has presented me with a number of options, so then what do I do? Meaning me, the employer, what do I do? Training?

Dupuis: Well, first of all, you have to have an underlying high-deductible healthcare plan if you are going to set up an HSA, as Marsha said. And there are some limits on what high-deductible actually means. The minimum deductible allowable is $1,100 for an individual and $2,200 for a family. So a lot of people that are used to conventional healthcare plans would say, “Boy, that is a pretty high deductible to meet in a year.” Considering, in addition to that, there is probably an out-of-pocket maximum on that healthcare plan that may be two times what that deductible is. So the first thing that an employer has to have or adopt is an underlying high-deductible healthcare plan. Then those accounts, the HSA accounts, have to be set up for any employee that chooses this plan and, typically, those accounts can be set up through a third-party administrator, a bank or savings and loan, some even brokerage firms have them these days, and occasionally a carrier will say, “Well, if you are going to adopt a high-deductible healthcare plan then you need to use our third-party administrative group, because we are directly connected via computer and they can reimburse for on reimbursements.”

Bjorklund: So that is a convenient arrangement for some.

Dupuis: Yeah, it is a convenient arrangement. Yeah.

Black: We see that requirement more often with HRAs. HSAs are actually individual accounts, so even if an employer adopts a third-party administrator or has a link to a third-party administration firm, the employee can put their savings account anywhere they want.

Bjorklund: So the employee can choose and might there be some advantage for the employee to have that account in a bank versus with another designated third-party administrator?

Dupuis: Well it is possible that there could be some advantages. I would say the only advantage, really, would be the monthly maintenance fee, for example, perhaps what investment options are available. But we touched on the fact that, you know, it is probably highly unlikely that there is going to be a great deal of money in some wild investment option. Generally most of the money is going to be in the money-market fund. From a personal point of view, I would say there is not a great deal of advantage, necessarily, having the account at one vendor location or another. I mean, it may be more convenient if somebody is banking at Bank of America to have their HSA at Bank of America, that is...

Bjorklund: Just convenience.

Dupuis: Sure, sure.

Bjorklund: You touched on fees and now back to the employers. How does it work for the employer with regard to fees? Is it by employee or is it--how does that work?

Black: The fees are in relation to a third-party administration process and the reason an employer would put a third-party administration company in place for HSAs, for example, is to give the employees a place to go other than them to get questions answered, OK--about how HSAs work, qualifying expenses, if they read the Treasury Department and they are not clear about a qualifying expense, that is the place they can get it. The third-party administrator is the place they can go. There is also some ease of transferring money. So that is the reason that they would put something like this in place. And having this be easy for the employer is a really important aspect to it. So the fees for the third-party administration for HSAs range from $3 or so to about $8, something like that, per employee per month.

Bjorklund: Per employee per month, OK.

Black: And the differences are often in the level of service.

Bjorklund: Yeah, the availability of customer-service staff.

Black: Right, of customer service staff, yes. The other difference, nobody works for free, right? So something an administration firm that has maybe a lower fee might also pay out less in interest on the money market accounts.

Bjorklund: OK.

Black: So that is another aspect to look at.

Bjorklund: What about customer satisfaction? What elements in the plan--you touched on one of them already, which is probably the availability of the customer-service staff of the third-party administrator to answer your questions. But what are the other critical elements to maximizing employee satisfaction with a consumer-directed health plan?

Dupuis: Well typically, historically we have seen since these plans came to the United States, in excess of a 90 percent retention rate by employees in these plans. So once they are in these plans, they are reluctant to move back to the HMO format or the typical lower-deductible low-co-pay format that they had before. And we believe and analysts believe, I think in the industry, that the reason employees stay in these plans is because of the accumulation of funds in either the HSA account or, you know, there often is a roll-over feature in an HRA account as well, so the amount of money available for reimbursement that can build up in these plans can be very significant. And once an employee gets that concept in their head, you know, they are very reluctant to move off the plans because they know that virtually 100 percent of their medical expenses are going to be covered or reimbursable and that is a wonderful sense of security for most workers.

Bjorklund: It is fun to see that money grow.

Dupuis: Oh!

Black: Oh yes.

Dupuis: Magnificent!

Black: The key is education and the understanding that Steve was talking about.

Bjorklund: At the outset.

Black: At the outset. And the employer allowing that process to take place.

Bjorklund: Do either of you have any last thoughts you would like to share about consumer-directed health plans as we wrap this up, Steve?

Dupuis: Well I think the thought that I would share is for employers. I think the most important thing to consider when you are considering putting a plan like this in place is understanding that there is a long education curve, a long learning curve. It is really important to, first of all, introduce the plan to employees way ahead of the point that it is actually going to be implemented and it is very important for employers to understand what they are getting and understand what some of the pitfalls are going to be before they get into it. That’s all.

Black: I would concur with that. Often in the transition phase when we are installing one of these for the first time, we will, the consumer-directed healthcare plan will be part of a number of choices that the employees will have in their healthcare. HMOs, traditional PPOs, traditional HMOs and a consumer-directed healthcare plan, it is a pretty common offering and that does help employees get comfortable. You are likely not forced into something.

Bjorklund: Steve Dupuis and Marsha Black, from Black and Associates, are experts in employee benefit planning for small to midsized businesses. If you have comments on this show or would like to recommend guests for future programs, send your emails to podcasts@allbusiness.com. I’m Chris Bjorklund and thanks for listening.