Helping Nonprofit Employees Choose Among ‘Consumer-Driven’ Health-Care Plans

JOB MARKET

By Alison Stein Wellner

Stacy Brackeen is extremely organized. Ms. Brackeen, a mother of three who is also director of finance at the Breakthrough Collaborative, a charity in San Francisco that provides educational enrichment programs, is as meticulous about logging her household’s expenses as she is about tracking her employer’s, entering every personal outlay into a spreadsheet. This trait paid off last June, when Breakthrough started to offer an increasingly popular type of employee benefit — a flexible spending account for medical costs, which supplements the charity’s managed-care health-insurance plan.

With flexible spending accounts, workers can opt to have their employer deduct up to $5,000 a year from their paychecks, before taxes. Employers set the ceiling on how much workers can put into these accounts, as long as they stay under the government-imposed $5,000 limit. The money is deposited in the worker’s flexible spending account, which can then be used to cover any medical expenses, without the worker ever paying a penny of tax on it. (A similar plan allows employees to set up tax-free accounts to cover child-care expenses.)

The catch: The IRS says employees must decide at the beginning of the year how much money to deduct from their paychecks each month — and if the money isn’t used up by the end of the year, it is either returned to the employer or distributed equitably to all plan participants. So while less organized employees scramble when a flexible spending account is offered for the first time, for Ms. Brackeen it was easy — she simply clicked “sum” on her household-expenses spreadsheet. Based on her family’s previous spending, she decided to put away $20 a month for medical expenses, to cover the amount she has to pay for doctor visits through her managed-care plan, and supplies like contact lenses and saline solution.

“When I get the receipts from those expenditures, I go online, fill out this form, fax in the receipt, and then in a week or two I’m reimbursed,” she says. “It’s a real easy process.”

Flexible spending accounts, which employers began offering in significant numbers back in the mid-1990s, are just one of a type of employee health-care perks that are growing in popularity: benefits that allow workers to direct the coverage. These benefits also include health reimbursement accounts and the new health savings accounts, which also help employees save money on medical costs and which were created as part of the Medicare Prescription Drug Improvement and Modernization Act in December. Many major health-insurance providers started to offer health reimbursement accounts over the past year, and many more are developing health savings accounts. Some 1.5 million people use some form of consumer-directed health care, according to a 2002 study published in the journal Health Affairs.

So far, many of the participants in these plans work for large, for-profit organizations. But as managed-care insurance costs continue to soar, budget-conscious charities will turn increasingly to consumer-directed plans to help them and their workers save money, says Blair Farwell, vice president of group benefits at Resource Brokerage, in Schaumberg, Ill., which consults with nonprofit organizations on their insurance coverage. Indeed, these plans are expected to become even more popular with all employers over the next few years, accounting for as much as 20 percent of the health-insurance market by 2005, and 50 percent by 2007, according to the Health Affairs report.

For people who work at charities, this means that they could soon be offered participation in an employee-directed health plan. And while flexible spending accounts are fairly straightforward, and tend to be offered in concert with a managed-care plan, health reimbursement accounts and health savings accounts work differently than most traditional coverage.

Reimbursement Accounts

Children’s Mercy Hospitals and Clinics, in Kansas City, Mo., started offering a health-care reimbursement account as one of seven health-coverage options a year ago, says Daniel Wright, vice president of human resources. Of the 2,800 workers who are covered by the institution’s insurance, about 200 signed up for the health-expense reimbursement account in its first year.

Robin Rusconi, manager of regional affairs at the hospital’s fund-raising office, was one of those pioneering employees. She and her husband had just adopted a child, and she was going to have to increase her health-insurance coverage as a result. She was eager to keep her share of the $5,000 annual premium as low as possible, because she was already planning to withhold money from her paycheck in a flexible savings account to cover child care.

So when she learned that the hospital was offering its employees a new kind of health benefit, she was intrigued. Although employers have the option to design reimbursement accounts in slightly different ways, the hospital’s system works like this: In addition to its major medical plan, the hospital puts $500 for single employees into a health-care reimbursement account; it puts in $1,000 for families. (Employers can decide how much to put into these accounts, and typically contribute between $500 and $2,500, according to human-resources experts.)

Only employers may contribute to a health-care reimbursement account. Employees then pay for medical services out of their accounts. When that money is depleted, they must pay their own money until they have spent enough to reach a deductible on a major medical plan, at which point the plan pays their expenses. The area of financial exposure is called “the doughnut hole,” and employers can decide how much money employees will be responsible for covering out of their own pockets. The size of the doughnut hole also influences how much monthly premiums cost for the major medical plan — the larger the doughnut hole, the cheaper the monthly premium paid by employers, employees, or both.

At Children’s, the deductible is $2,000 for single people and $4,000 for families, and the amount in employees’ reimbursement accounts counts toward the deductible. That means that single employees must be prepared to cover $1,000 and families must be prepared to cover $3,000 out-of-pocket for medical expenses.

It sounds like a lot of money, but these plans can actually save some workers cash, because the premium is often lower than that of a traditional managed-care plan, says Mr. Farwell. (It may be especially beneficial to workers who consume less health care per year than the account covers.) What’s more, money in the health-care reimbursement account rolls over from year to year. For example, if a single person had one doctor’s visit in one year, and no major medical expenses, and so only used $100 of his or her health reimbursement account, the remaining $400 would be put into the employee’s account the following year — leaving $900 still to be tapped.

When Ms. Rusconi figured out how the plan would work for her, she discovered that the reimbursement account was a substantial savings over a managed-care arrangement. Indeed, counting the additional $5,000 she withheld from her paycheck in a flexible spending account for the year, she says that her total deduction from her paycheck only increased by $100 from the previous year, when she was only covering her husband and herself. “I’m spending just a little more than I would have with the [managed-care] plan,” she says. “It’s a huge difference.”

It is worth noting that the Children’s plan is generous in one way that many health-care reimbursement accounts are not: It covers the full cost of preventive care, so the charges for any such care that employees receive are not debited from their accounts.

“We don’t want barriers for people doing the appropriate things in terms of preventive medicine,” says Mr. Wright. Without this feature, the plan would have been substantially less attractive to Ms. Rusconi, she says, because her son needed to catch up on his immunizations. In the process, she says, she used up her entire reimbursement account, paid her out-of-pocket amount, and then was able to get reimbursements from the hospital. She says she is re-enrolling for the plan this year.

Savings Accounts

Health-care savings accounts are so new that insurers are still putting together their plans, and thus very few employers are sponsoring them yet, according to the Financial Planning Association, a professional organization. But they are expected to be available in the next year, so learning about them now could prove useful in the near future.

Both employers and employees — or the self-employed — can contribute to health savings accounts and pay no taxes on their contributions. To open such an account, a participant must be younger than 65, not listed as a dependent on someone else’s tax return, and carry a health-insurance plan with a minimum annual deductible of $1,000 for an individual or $2,000 for a family. Total annual out-of-pocket expenses cannot exceed $5,000 for an individual or $10,000 for a family, according to the Financial Planning Association, a professional organization. Annual contributions by the employee, his or her employer, or both cannot exceed the lower of either the plan’s deductible or $2,600 for individuals and $5,150 for families. (The numbers are adjusted for inflation annually.)

Money can grow in a health savings account without being taxed, and money withdrawn from the account is also not taxed so long as it goes toward medical expenses, including doctor’s visits, medications, and so on. The money rolls over from year-to-year, and the accounts are portable — employees can take them with them when they change employers.

Picking a Plan

Financial experts say most employees would do well to participate in flexible spending accounts, says Douglas Neal, a certified financial planner in Houston who often counsels employees of nonprofit organizations. “These plans are the least used and the best,” he says.

Whatever other health insurance employees carry, flexible spending accounts can cover things insurance plans often don’t, such as nonprescription drugs, eyeglasses, and the like. There’s no reason not to use pre-tax dollars, rather than after-tax dollars, to pay those costs, says Mr. Neal. As a bonus, the accounts help participants lower their taxes, which may allow them to adjust the amount of their withholding, or else receive a larger refund at tax time.

Of course, withholding more money than is spent in the course of a year means losing those funds, he notes, so estimate conservatively. Contributions can always be increased the next year if they prove insufficient to cover costs.

Deciding whether to go with a health-care reimbursement or health-care savings account is far more complicated than the choice to start a flexible spending account, says Mr. Neal. Factors that should shape the decision, he says, include employees’ personal finances, and how much they and their families spend on medical expenses. Under a managed-care style plan, participants will probably pay more each month from their paychecks in the form of premiums — and if they are healthy and rarely need medical care, they will not recoup the money that they have spent on premiums. With a health-care reimbursement or health-care savings account, employers’ and employees’ contributions can pile up, ready to be used in the event of future medical needs.

On the other hand, employees could be in trouble if they wind up needing a lot of medical care in the first years of their reimbursement or savings accounts and don’t have the money to cover the gap between the account’s balance and the insurance policy’s deductible. Employees need to understand exactly how much money they are liable for in out-of-pocket expenses in each of the plans that their employers offer, says Mr. Neal. If they cannot cover the amount they are responsible for, he says, it might be wise to choose a traditional managed-care plan and accept the higher premium.

These plans also may not work for participants who use a lot of medical services, such as those who have young children or a large family, or those managing a chronic illness. Because of their need for frequent care, they are unlikely to accumulate money in their health savings or health reimbursement accounts, and will probably be dipping into their own pockets on a regular basis. In such cases, Mr. Neal says, “you’re likely better off to have a plan with a lower co-pay and a good prescription-drug card.”

Employees, he says, should also consider how much time they want to spend managing their own health care. Managed-care plans determine many decisions affecting their participants’ health care, such as whether to cover a brand-name medicine or a generic drug, whether to cover particular medical tests or procedures, and so on. By contrast, consumer-directed plans leave those decisions up to the patients, who are free to opt for a brand name drug, visit as many specialists as they like, and have an unlimited number of checkups — because participants are eventually paying for it out of their own pockets.

In fact, this element of “conscious spending” is the reason many employers believe that these plans will help to lower health-care costs. At Louisiana State University at Baton Rouge, 40 percent of employees who participate in health-care coverage are enrolled in a health reimbursement account, says Forest C. Benedict, the university’s vice president of human resources. “We’ve had a lot of discussion here, with our employees, and we want to make them understand that they have some responsibility to control these [health-care] costs,” he says.

The university’s health-care reimbursement account provider makes extensive health information available online, and Mr. Benedict says he thinks that helps make workers into smarter health-care consumers. They can, for example, weigh the pros and cons of buying with a name-brand pill rather than a generic drug. “We want people to get involved in that kind of assessment,” he says. “What we’re looking for is a patient/physician-directed plan that promotes health and the quality of life, and if we do that well, then we will more effectively manage the costs.”

However, not everyone is convinced that encouraging a bottom-line mentality will help promote good health. Since most health-care reimbursement accounts do not cover preventive medicine, Mila Kofman, professor at the Health Policy Institute at Georgetown University, in Washington, worries that participants in such plans may skimp on routine checkups to save money. “Health care is often not about what I spend on my health this year, but how much does it cost when it’s detected early and treated, how much does it cost when it’s too late?” she says. “There’s no incentive to think about long-term costs.”

Still, says Mr. Benedict, soaring health-care costs aren’t going to be mitigated by increasing managed-care plan deductible amounts, but rather by giving workers more control. “It seems to us that we’re building the skills that make employees between health-care consumers,” he says. “Unless you have skin in this game, we’re not going to manage health-care costs overall.”

Does your organization offer workers flexible spending accounts and other consumer-directed plans to help play for medical costs? Tell how it works at your charity in the Job Market online forum.