Experts debate: Are HDHPs still a valid cost-saving option?
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether HDHPs provide a valuable…
Below is a summary of the debate that ensued between the two professors.
High deductible health plans (HDHPs) have often been described as an option that allows employers to offer health insurance without the traditionally high price tag. As the name suggests, employees who participate in HDHPs must satisfy higher deductibles before certain types of health services are covered. HDHP participation also allows employees to simultaneously fund a health savings account (HSA) with pre-tax dollars. HDHPs are also subject to certain annual out-of-pocket limits (currently, $8,050 for self-only coverage and $16,100 for family coverage).
Bloink: HDHPs, when combined with HSAs, give employees more control over their health care spending decisions. Because deductibles are high, employees have greater out-of-pocket expenses — that’s where HSAs come in. However, that combination gives employees an incentive to make smarter health care spending decisions, because those dollars are coming out of their own pockets, in the end creating savings for those taxpayers.
Byrnes: HDHPs are an extremely expensive option for the employee. We’re overlooking the fact that while participation in an HDHP makes an employee eligible to contribute to an HSA, not all employees actually maximize their HSA contributions — or contribute at all. That means they’re spending more on basic health expenses out-of-pocket without the tax savings that are touted as justification for the HDHP structure.
Bloink: Regardless of the fact that HSA contributions are extremely valuable to the employee from a tax perspective, in reality, it feels to the employee as though they’re spending their own money (because they are). That makes it much more likely that the employee will more carefully evaluate their health care spending and make choices that will generate long-term savings.
Byrnes: We also have to remember that many individuals aren’t really equipped to analyze and evaluate whether a particular health care expense is a smart move. They don’t necessarily have the ability to “shop around” and evaluate different options, so end up spending more in the long run with the HSA option.
Bloink: The HDHP/HSA combination gives employees the ability to accumulate health savings balances that can be used in the years when the individual is much more likely to have significant health care expenses. We can’t pretend that health-related expenses are distributed evenly over an individual’s lifetime. Younger employees may be less likely to have significant health costs. The HDHP/HSA structure gives them the ability to save on a tax-preferred basis during those low-cost years to fund higher health expenses later in life, or during a health emergency.
Byrnes: HDHPs also aren’t as cost-effective for employers as we might think. When given an option, it tends to be the higher-income, lower-risk employees who will choose the HDHP/HSA option. Employees who are more expensive from a claims perspective tend to choose lower-deductible options. Yes, the HDHP/HAS structure has its benefits if used in a smart way, but not when it comes to current cost savings.
Robert Bloink, Esq., LL.M., has taught at the Texas A&M University School of Law and the Thomas Jefferson School of Law; in the past decade, Bloink has initiated $2B+ in insurance & alternative asset class portfolios, and previously served as a senior attorney in the IRS Office of Chief Counsel for the Large- and Mid-Sized Business Division. Bloink is also the co-author of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.
William Byrnes, Esq., LL.M., CWM, is an executive professor and associate dean of special projects at the Texas A&M University School of Law. A pioneer of online legal education, he also is the author or co-author of 20 tax books and legal treatises. Byrnes is also the co-author of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.