How to Successfully Convert from a PPO to an HDHP: A Win for Employees & Employers

Introduction

Transitioning from a Preferred Provider Organization (PPO) plan to a High-Deductible Health Plan (HDHP) can offer significant financial benefits for both employers and employees.

This article demonstrates the logic behind making the switch, using a tech startup as a case study to show how HDHPs can be a more cost-effective option without compromising employee satisfaction.

Company Background

• Company: TechStartup Co.
• Industry: Technology
• Total Employees: 50
• Employees Electing Health Insurance: 45

Current PPO Plan

• Monthly Premium: $1,200 per employee
• Annual Deductible: $1,000
• Out-of-Pocket Maximum: $4,000
• Employer Contribution: $1,000 per month

Proposed HDHP Plan

• Monthly Premium: $800 per employee
• Annual Deductible: $3,000
• Out-of-Pocket Maximum: $5,000
• Employer Contribution: $1,000 per month (includes $200 gap funded through HSA)

Financial Comparison for Employer's Contribution on Base Plan

Savings and Benefits:

• Annual Savings Per Employee: $4,800
• Total Annual Savings (30 Employees Moving to HDHP): $144,000
• Employer Contribution to HSA (30 Employees): $72,000
• Net Savings for Employer: $72,000

Employee Perspective: Making the HDHP Attractive

To ensure employees see the HDHP as a beneficial option, TechStartup Co. implemented the following strategies:

1. Gap Funding through HSA: The company contributes $200 monthly into each employee's HSA, effectively covering the difference between the premium costs of the PPO and HDHP.
2. Lower Out-of-Pocket Costs: With the HSA contributions, employees can cover their higher deductibles and out-of-pocket maximums more easily.
3. Tax Advantages: HSA contributions are pre-tax, reducing taxable income for employees and allowing funds to grow tax-free.

Case Study: Mike's Experience with New HDHP Plan

Mike, an employee at TechStartup Co., transitions from the PPO plan to the HDHP. Here’s how the change benefits him:

Before: On PPO Plan

• Monthly Premium: $1,200 (with $200 out-of-pocket)
• Annual Premium: $14,400 (employer pays $12,000, employee pays $2,400)
• Deductible: $1,000
• Out-of-Pocket Maximum: $4,000

?After: On HDHP Plan

• Monthly Premium: $800 (fully covered by employer)
• Annual Premium: $9,600 (fully covered by employer)
• Employer HSA Contribution: $2,400 annually
• Deductible: $3,000 (covered by HSA contributions)
• Out-of-Pocket Maximum: $5,000

Example Scenario: Foot Surgery

Mike needs foot surgery costing $7,000.

PPO Plan Costs:

• Deductible: $1,000
• Coinsurance (20%): $1,200
• Total Out-of-Pocket: $2,200

HDHP Plan Costs:

• Deductible: $3,000 (covered by HSA)
• Coinsurance (20%): $800 (covered by HSA)
• Total Out-of-Pocket: $0 (all covered by HSA)?

Summary of Benefits

1. Cost Savings: TechStartup Co. saved $108,000 by transitioning from the PPO plan to the HDHP.
2. Employee Financial Benefits: Employees like Mike save on premium costs and benefit from tax-advantaged HSA contributions.
3. HSA Growth: Employer contributions to HSAs help employees manage higher deductibles and out-of-pocket expenses effectively.

Conclusion

Transitioning from a PPO to an HDHP can be financially advantageous for both employers and employees. TechStartup Co.'s approach demonstrates significant savings while ensuring employees have access to valuable health benefits. The strategic use of HSA contributions makes the HDHP an attractive option, promoting financial well-being and health security.

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