A trend that has already taken place in pensions is now happening in the healthcare sector in the US. For pension benefits, companies have switched from defined benefit (DB) plans to defined contribution (DC) plans.
Now they are no longer offering generous comprehensive healthcare plans but individual solutions that look a lot like 401(k) plans, and which also have an investment component. These plans are called also DC health benefits or ‘consumer-driven’ because the employee chooses how to invest the contributions made by the employer. The Patient Protection and Affordable Care Act (PPACA) – or Obamacare, the reform now being implemented – does not have a negative impact on these private plans.
“On the contrary, the reform has made employers review their policy, and it has probably accelerated the adoption of DC plans,” says Eric Remjeske, president and co-founder of Devenir, an investment company that provides services for the financial side of DC health benefits. Devenir carries out a twice-annual survey about health savings accounts (HSAs), the most popular kind of consumer-driven plans. At the end of last June they had grown to around $18.1bn (€14.7bn) in assets, representing more than 9.1m accounts – a year-on-year increase of 29% for both accounts and assets.
HSAs were introduced in 2003 along with the Medicare reform. They must be opened together with a high deductible health plan (HDHP), which is a health insurance plan with low premiums but high minimum deductible (what the insured must pay before the policy kicks in). Any balance remaining at the end of the year is piled up into the savings account and can be invested in any product already approved for IRAs, such as annuities, stocks and bonds.
A company that adopts the DC health benefits formula gives a set sum to workers, who choose their plan from online marketplaces or private exchanges. The latter are separate from the government-operated marketplaces that are being created in each state under Obamacare, which will serve individual consumers and small companies. Private exchanges can be operated by a variety of companies in the health industry
“Companies can save a couple of thousand dollars per employee if they switch from a typical co-pay plan with no deductible to a high deductible health plan with an HSA,” explains Remjeske. “These plans cost less and reduce waste because when the employees have to pay the first portion of a medical expense before the insurance coverage kicks in, they become more conscious and don’t want unnecessary procedures.
On the other hand, employees can benefit from HSAs, which are the only investments with triple tax benefits: contributions are deductible from income, assets grow tax free and withdrawals made to pay for medical expenses are tax free as well”. They are also portable.
The majority of assets in HSAs are indeed used to pay for medical expenses, but around 12% are invested – $2bn at the end of last June, up 14% from the end of 2012 and 26% year on year, according to Devenir’s survey. The average investment account holder has a $10,484 Total balance. Devenir foresees HSA investment dollars growing rapidly as the balances of HSA users become larger, and it foresees current investment assets doubling by the end of 2015.
Companies switching to DC health benefits choose the private exchange at which their employees can buy insurance. Last year, this cost-sharing strategy was chosen by two big companies, Sears Holdings (246,000 employees) and Darden Restaurants (206,000 staff).
Last month, IBM announced that it will move about 110,000 retirees off its company-sponsored health plan and give them a payment to buy coverage on Extend Health, a private Medicare exchange run by Towers Watson. Consulting firm Accenture projects that around 1m Americans will receive employer health coverage through private marketplaces next year, and the number will increase to 40m by 2018.