Do Poor Coverage Decisions Affect Employees' Retirement Preparedness?

Workers don't think much about how their choice of medical coverage affects their retirement savings. But perhaps they should.

Employees tend to compartmentalize their workplace benefits decisions. The choice of a medical plan, for example, is detached from their contributions to their retirement plan. Enrollment in medical, dental, and vision coverage, as well as voluntary products (like critical illness and hospitalization coverage), Health FSAs, and Health Savings Accounts is an annual exercise designed to provide protection for the following 12 months. In contrast, retirement is often decades away, with speed bumps like buying a starter or larger home, funding kids' educations, and creating meaningful family experiences (e.g., that Disney World vacation), placed along the way.

But more financially engaged employees realize that money is money, and decisions that they make today - whether on employee benefits or other investing or spending - affects how much they can save and invest for future consumption.

My friend Carl Hall, who has founded Healthy Hive and Lodestar Wealth, has done work in this area. He makes medical price information available in a user-friendly format and stresses that every dollar that a Health Savings Account owner saves on a lab test, an MRI, or treatment venue for an urgent medical need is a dollar that remains in her account to reimburse a future expense.

Voya Financial recently published an interesting white paper that addresses the topic from a different perspective: how the choice of a medical plan itself affects retirement readiness. The study provides important information for employers, benefits advisors, and employees.

The Cost of Coverage

Medical premiums have risen at about double the rate of all other prices during the past two decades. A self-only plan with a premium of $300 per month in 2000 is priced at about $600 monthly today for comparable coverage, though employers may mitigate this increase by increasing employee cost-sharing when workers and their dependents receive care.

Employers don't pay their share (typically between 50% and 85%) of the premium from a bottomless pot of gold. Instead, medical premiums are part of overall employee compensation. When premiums increase, companies may continue to pay their percentage share, but the dollar difference comes from somewhere else in the budget - lower cash wages, reduction in other employee benefits (like continuing education, travel, or free snacks in the break room), business investment (which increase sales and opportunities for pay and career growth for employees), or return on capital to owners (like pensioners and 401(k) plan owners in the case of public companies).

Thus, one way or another, employees pay far more of the increase in premiums than their smaller share in the form of premium payroll deductions.

Overinsured

Voya looked at plans in which employees were enrolled and overlaid average deductible utilization to determine whether employees with a choice of plans would have been better off enrolling on a plan with a lower or higher deductible. This analysis is important because employees tend to prefer plans with lower deductibles, even though they often choose higher deductibles in exchange for lower premiums on automobile collision and comprehensive coverage and homeowners' insurance. The difference, of course, is that auto and homeowners' premiums are visible - you write a check every month - whereas a worker's share of the premium for employer-sponsored medical coverage is a line item on a check stub that's posted electronically and that employees never view.

The data are compelling. According to Voya's analysis, here's what percentage of employees would have been better off enrolled in an average HSA-qualified plan (versus an average PPO, with average defined by Kaiser Family Foundation, a respected independent research organization) and their annual savings by age range:

25 - 34: 84% better off on HSA-qualified coverage with average savings of $566.

35 - 44: 78% better off and average savings of $481.

45 - 54: 67% better off and average savings of $395.

55 - 64: 69% better off and average savings of $326.

This analysis is groundbreaking because it incorporates employer contributions, employee premium payroll deductions, and average utilization of the deductible. Too often, employees consider none of those factors when choosing a plan, instead focusing on the plan deductible and selecting the option that exposes them to the lesser financial responsibility.

Why the Disconnect?

Why do more than two-thirds of employees across all age groups choose the plan that costs them more? Voya cited several causes that are consistent with my experience in the industry:

• Plan name. The legislation that created Health Savings Accounts refers to the underlying medical plan as a high deductible health plan. Most insurers, benefits advisors, and employers call them High-Deductible Health Plans today. That's a huge perception problem. If the legislation referred to the plan as a Low-Premium Plan or the Consumer Value Plan, the perception would be very different. Premiums on all forms of insurance are generally inversely proportion to out-of-pocket exposure, since insurers pay a lower percentage of total claims dollars on plans with higher deductibles. But employees instinctively view high-deductible as bad and low-deductible as good, without calculating total costs. The term high-deductible is a conversation stopper.
• No investment of time. Employees spend very little time - 17 minutes, according to this study - pondering their options during open enrollment. As a result, 89% report that they simply enroll in the same plan year after year after year. Some employers try to break this cycle by requiring an active enrollment (no default to last year's coverage - either choose a plan or lose coverage). But even active enrollments typically move this number only slightly. Instead, employees respond to urgent e-mail reminders near the end of open enrollment and, given their tendencies and the time crunch, actively enroll in the same coverage.
• Deductible aversion. Most employees, as noted above, simply choose the plan with the lower deductible, with little or no research. In the Voya study, that was true of 63% of respondents. Employees with this casual approach to benefits pay a price. The Voya analysis notes that another study by the Quarterly Journal of Economics of employees at a Fortune 100 company spent, on average, 24% more on medical coverage than they needed to. That figure represented 2% of their salary. to put that figure in perspective, 2% of a $50,000 salary is $1,000. Invest an additional $1,000 annually at a 6% return and the balance grows to $34,800 after 20 years and $81,400 after 30 years. All by merely rightsizing medical coverage.

Getting It Right

The Voya study concludes that benefits advisors and employers can take certain steps to help break this cycle of employees' re-enrolling in last year's plan and instead taking the time to calculate the financial effect of their alternatives. It recommends these steps:

• Plan name: Ideally, this change starts with the insurer, which could reduce confusion by relabeling plans as HSA-qualified. Not only would this phrase destigmatize the coverage, but it would provide an important distinction between plans with a high deductible that aren't HSA-qualified and those that are. If the insurer doesn't make this change, employers can refer to the plan as HSA-qualified in its materials and talking points. I've attended countless meetings in which employees greet the introduction of the High-Deductible Health Plan with blank stares, shuffling of their paperwork, and focus on their iPhones. Major buzz kill! If you were new to the cell-phone market, would you be more likely to buy the phone that "costs $1,000 that you don't have lying around" or the one that "puts the power of the computer that powered Apollo 11 to the moon and back in your hands 24-7?" Same device, but two very different descriptions. (That's my analogy, not Voya's.)
• Engage employees. Voya recommends an active annual enrollment. Benefit decisions don't default to the in-place coverage if employees do nothing. In my experience, this step doesn't move the needle much after the year of introduction. But it does compel most employees to at least read their materials to determine whether the benefits on their coverage have changed.
• Personalize situations. Many technology companies have introduced decision-support tools in recent decades. They range from static spreadsheets that crunch total costs under best-case, middle-case, and worst-case scenarios to MyHealthMath, which applies an employee's claims experience to each plan offered and provides customer service to answer questions. At a minimum, employers should include examples in enrollment materials that reflect relevant segments of their population, e.g., "Alyssa is 25, single, and moderately active, with no chronic conditions . . ."
• Show the value of saving the difference. This is the step that few employers take today. It's not enough to show a 25-year-old that she'll save $566 per year by enrolling in the HSA-qualified plan. Show her that if she saves $566 per year for 10 years at a 6% return, her balance will grow to $13,800 after 20 years and $24,600 after 30 years. Those amounts are enough to pay about 5.5 or 10 years of today's Part B and Part D premiums in retirement (or perhaps three and four years three decades from now if those premiums rise at 3% annually).

The Effect on Retirement Preparedness

Many employees think of t heir financial obligations in buckets. There's the housing bucket, the travel bucket, the transportation bucket, the student-debt repayment bucket, the insurance/benefits bucket, and the retirement bucket. But those buckets are interconnected. Spending more income in one - whether a higher mortgage or more expensive new car - affects how much money flows to another. People who save money in one bucket - refinancing a home at a lower interest rate or rightsizing medical coverage, for example - suddenly have more discretionary income. They can commit those funds to long-term savings without altering their current lifestyle, thereby increasing their wealth over time.

Rightsizing their medical coverage is an opportunity that too few have considered or exploited. Enrolling in HSA-qualified coverage, opening a Health Savings Account, and diverting funds from pre-tax payroll deductions for medical coverage to pre-tax payroll deductions to fund the account can make a meaningful contribution - literally - to your retirement preparedness.

The Bottom Line

The Voya survey quantifies the percentage of employees who are overinsured (those who would be better off self-insuring more of their claims risk to reduce premiums). It offers some very sound suggestions that benefits advisors and companies can adopt to reduce this number. Companies do themselves and their employees a favor when they strike the same balance between managing premiums and risk.

I'm director of strategy and compliance at Benefit Strategies, LLC, an administrator of Health Savings Accounts and reimbursement accounts. You can read and subscribe to my Health Savings Account GPS blog here and read my weekly HSA Monday Mythbuster and HSA Wednesday Wisdom columns and occasional Healthcare Update column published on LinkedIn. My book, HSAs: The Tax-Perfect Retirement Account, is the definitive guide to navigating the intersection of Health Savings Accounts, retirement planning, and Medicare. It's available in paperback and e-book at Amazon.

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