2009 –The Year to Bite the Bullet Looking at President Elect Obama’s Vision
by Robert Hopper, Ph.D.

Senator Barack Obama was elected President of the United States on a campaign of change with slogans like “Change we can believe in” and “Yes we can.” Make no mistake about it, Americans want change in healthcare.

President Obama’s Vision

“I want to wake up and know that every single American has healthcare when they need it, that every senior has prescription drugs they can afford, and that no parents are going to bed at night worrying about how they’ll afford medicine for a sick child. That’s a future we can build together.”

As an insurance agent, I look forward to the day when I don’t have to tell a person that she was declined by an insurance company because she was taking preventive medications to lower blood pressure and cholesterol, and a third medication for allergies.

With insurance companies unable or unwilling to solve the uninsured problem, we need to address the 45 million people who go without the security of health insurance. Senator Ted Kennedy is working hard to seal his legacy before brain cancer takes him away, advocating “Medicare for all,” and Senator Max Backus from Montana has proposed a plan for healthcare reform.

Yet, the big message from both Senator Obama and McCain during the campaign was that they would reach across the aisle. In a campaign speech, Obama said he wanted to find solutions that passed with 85% approval from both parties, not just 60%. The new health plan for the future will include the best ideas of conservatives and progressives. Health savings accounts – a favorite of conservatives – stand ready to answer the call and progressives are waking up to their power to control healthcare costs and empower the individual consumer.

The first priority of the new administration will be to stabilize the financial markets. If President Obama is successful in repairing the economy, he builds tremendous political capital for creating universal coverage. Healthcare reform is on the horizon.

President Obama’s Plan

The book, Change We Can Believe In, defines President Obama’s basic concepts. Barack Obama’s healthcare plan builds on and improves the current insurance system and leaves Medicare intact for seniors. For all Americans who like their health insurance, nothing changes except that they will have lower costs – $2,500 for a typical family. For those who do not have health insurance or who do not like their health insurance, they will have a range of private insurance options, which would be accessible through a new National Health Insurance Exchange that is similar to what members of Congress have – as well as a public plan. The public plan would cover all essential medical services including preventive, maternity, disease management, and mental healthcare. Costs will be low, but Americans who cannot afford it and do not qualify for Medicaid or SCHIP will get a tax subsidy to pay for coverage. The health insurance coverage will be portable among jobs, easy to enroll in and use, and of high quality.”
According to Paul Krugman, Noble Prize economist, Princeton professor and New York Times columnist, there are four pieces to this plan:
• Community rating, to prevent cherry picking by private insurers.
• Subsidies to help lower-income people afford insurance.
• A form of mandatory insurance for children.
• Government-run plans so people can opt out of private insurance. Many people think such a federal health insurance system would eventually merge with Medicare and Medicaid to form a larger national system.

The Key Point: Happy Clients!

Insurance companies will continue to compete in the individual and group marketplace. Individuals and businesses that are satisfied with their current health insurance will stick with their agents and insurance companies. Those who are dissatisfied will switch to the government plan.

Agents need to visualize what health plans in the private marketplace will look like in four years. At the current rate of growth, consumer directed plans would be the number one selling plan on the market. Therefore, we agents need to enroll clients in those plans now. We need to encourage employers and employees to bite the bullet and make changes. We will need to bite the bullet as well. If our clients are happy with money building up in their health savings accounts to pay for future claims, they will not want to change back to traditional plans or drift to expensive plans similar to those of Federal employees.

Employers Need to Bite the Bullet; It Will Save Jobs

In today’s hard economic times, employers realize they cannot continue to offer gold-plated PPO and HMO plans with premiums for a family of four averages $12,000 per year and rising. The recession of 2008 to 2009 will give employers the opportunity to rethink why they offer insurance. And with 1,800,000 job losses in the first eleven months of 2008, employees will also be receptive to new ideas, preferring job security to rich benefits.

Now is the time for employers to bite the bullet and make the change from the old managed care model to the new consumer directed healthcare model. They can employ a new concept I call “hybrid financing” to get control of healthcare costs. Think of the hybrid car that uses an electric motor for city driving and a gasoline motor for highway cruising. Employers will fund healthcare in a similar fashion – part insurance, part tax-free cash.

Here is an example of the hybrid financing formula:
• Employers will pay 75% to 100% of the employee’s high deductible health plan premium to protect against large unexpected medical bills. This will be the default health plan.
• Employers will fund a portion of each employee’s health savings account with an amount equal to roughly one-half of the deductible for each employee. This money will be used to pay current expenses and save for future claims.
• Employees will have the option to buy up to a traditional HMO or PPO plan. Here’s the small, but powerful detail: If employees do nothing, they get the default HSA-compatible health plan. Employees need to weigh the costs and decide whether they want cash or co-pays.
• Companies that offer richer benefits can include a funding formula for dependent insurance and an additional HSA contribution for dependents.

Don’t be surprised if employees rarely buy-up. Expect employees to keep the tax-free cash instead of sending that money to the insurance company in exchange for co-pays. Here’s why: When people pay for their own coverage in the individual market, they rarely choose the same rich benefits that employers offer. Even Michael McCallister, president and CEO of Humana, who spoke at the Consumer Directed Health Care Conference in Las Vegas last Spring 2007, agrees, “Employers, you are over-insuring your employees. You are buying plans they would not buy for themselves.” Enormous sums of money every year drain into the coffers of insurance companies because of over-insurance. HSAs divert a substantial portion of this cash back into the pockets of everyday people who in turn spend it or save it...creating a more solid base for the economy.”

The bottom line is that hybrid financing gives employers more control of healthcare costs by linking contributions to an affordable high deductible health plan. Since the employer contribution to the employee’s HSA is a fixed amount, it is not subject to the annual increases imposed by the insurance company. This results in more savings each year. And employees retain the ability to choose the plans they want.
Employees Will Bite the Bullet and It Will Taste Good.

In hard times, employees will need to give up the idea that they are entitled to rich benefits. That change will be easy once employees understand who really pays the costs. According to Devon Herrick, health economist and senior fellow with the National Center for Policy Analysis, “Employer-sponsored health coverage is popular because workers mistakenly assume their employers pay part of the premiums. Economists know otherwise. Workers bear the total cost of their health plans through direct contribution and indirect wage reductions.”

Yes, employees pay the full cost of benefits! However, with the new legislation of 2004, health savings accounts allow employers to give cash money directly to employees on a tax-deductible basis. Once employees understand they are paying the full cost of insurance, they will embrace high deductible health plans coupled with health savings accounts and they’ll be better off and more liquid financially!
The role of educating the employee falls on the shoulders of the insurance agent. The agent needs to show employees how they are already paying the full cost of their benefits. Agents also need to show how employees can keep tax-free cash in HSAs instead of paying a substantial amount of premium to the insurance company in exchange for low co-pays and deductibles.

Agents will need to spend more time educating employees on the benefits of these new plans. In addition to describing the health plan features, agents also need to illustrate a variety of claim scenarios to demonstrate that these plans really work well for the healthy and for employees with ongoing expenses. Employees will not embrace these plans until they understand the benefits.

Insurance Companies Will Bite the Bullet and Secure Their Business for the Future

With the growing adoption of high deductible health plans, insurance company revenues will decrease. High deductible health plans are 20% to 60% less expensive than low deductible plans with co-pays in the individual and small group market in California. The revenue to the insurance company decreases around 30% when someone switches from a traditional PPO at $400 a month to a HDHP for $275 a month and puts $125 a month ($1,500 a year) into an HSA. If a significant portion of employers makes that switch, insurance companies face a significant reduction in revenues.

Insurance companies in the over-50 employee market have been criticized for not pricing their plans correctly and not allowing premium reductions that are comparable to the individual and small group market. Expect one smart insurer to price the mid-sized group products correctly and gain lots of business or force the other companies to follow suit.

The saving grace for insurance companies may be that insurance reform will encourage or even mandate that all people have health insurance. Insurance companies will maintain and even grow revenue by insuring more of the 45 million uninsured Americans.

Therefore, insurance companies need to provide incentives for agents to capture the uninsured. Minnesota leads the nation in per capital HSA enrollment, according to Consumer Driven Market Report. I recently talked with a top-producing agent from Minnesota and discovered why. The largest provider of health insurance -- Blue Cross/BlueShield -- switched to “per member” commissions. Whether someone bought a high priced traditional health plan or an affordable HDHP, the agent commission was a fixed dollar amount per member. This agent said he felt more comfortable not having a financial interest in the decision made by the employer. The current commission is based upon a percentage of total premiums, so when an employer replaces the traditional plans with high deductible health plans, premiums decrease 20% to 60% and the agent’s commissions also drop 20% to 60% as well. The Minnesota agent said that commission reduction might account for some agents not encouraging employers to choose HSAs, which keeps costs high for the company and the employees. Many HR -professionals lament that many employees don’t include dependents on the health plan because traditional health plan premiums for dependents are so expensive. Expect to see per member commissions that will increase dependent participation because the additional premium it takes to add dependents to an HDHP is substantially less than it is to add them to a traditional plan.

Agents Will Bite the Bullet and it will Be Bittersweet

In health insurance reform, insurance agents will bear the additional role of educating individuals, employers and employees. As a reward, they will probably experience a reduction in commissions either from selling less expensive plans or by changes in commission. That’s the bitter.

However, if insurance companies follow the lead of others that have already switched to per member commissions, agents will have the incentive to find and insure those without coverage, maintaining and increasing their income. With per member commissions, one of the easiest ways to maintain income will be to enroll dependents in the less expensive HDHPs.

If a national health insurance exchange begins before the end of President Obama’s first term, forward-thinking agents will already have their clients in affordable high deductible health plans and will have vigorously encouraged them to optimally fund their HSAs. Here’s why: Employers rarely switch back to traditional plans once they have successfully implemented consumer driven health plans at their companies. Employees who like the build-up of cash in their HSAs will be happy clients who will not want to switch to a national health insurance exchange.

Employees and Individuals Benefit the Most

HSAs provide a strategy for financing a lifetime of benefits. Here is the basic idea: Employees get insurance to protect against large and unexpected medical bills. Their health savings accounts pay the routine and expected medical bills. Most importantly, employees can set a goal to plan and save for future healthcare expenses, including retirement. Traditional plans simply cannot match those benefits.
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Robert Hopper, Ph.D. owns Hopper Insurance Services in Santa Barbara, CA and writes on healthcare policy. In 2005, AD Banker published his continuing education textbook for the insurance industry on health savings accounts, “The HSA Strategy: The Future of Health Insurance in America.” For more information, visit www.bobhopperinsurance.com.