November 28, 2022

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Why health benefits are becoming the new 401(k)


With health care costs rising painfully fast, the future of health benefits is coming to a head. Some employers, struggling to afford health benefits, may hire fewer full-time employees or send them to the individual marketplace with a stipend. Others may only offer high-deductible health plans along with health savings accounts, where employees can set aside compensation, tax-free, to pay for health services.

Employers face an uphill battle with cost, just as they struggled to afford retirement pensions in the 1980s and ’90s. In many ways, the HSA is beginning to resemble the 401(k)—the retirement plan that replaced pensions.

The 401(k)-ization of health benefits may have unintended outcomes—some good, some bad. To protect employees and retain talent, employers need to understand how this could play out.

HEALTH BENEFITS ARE FOLLOWING IN THE 401(K)’S FOOTSTEPS

To understand why health benefits may follow in the 401(k)’s footsteps, we need some context. Before the 401(k) was invented in 1978, employer-funded pensions ruled retirement financing. With the introduction of the 401(k), employees began to fund their own retirement. Employers were given the option of matching their 401(k) contributions up to a limit.

The amount of savings available at retirement with a 401(k) is determined not by loyalty and salary as with pensions, but by a) how much is contributed over an employee’s career, and b) how successfully an investment firm manages the funds in exchange for a fee.

Thus, the 401(k) expanded access to retirement accounts but shifted cost and risk from employers to employees. Now, the same is happening with health benefits.

THE ACA AND THE REMAKING OF HEALTH BENEFITS

Until recently, employer-provided health plans covered almost everything. Then came the Affordable Care Act. It expanded access to health insurance in much the same way the Revenue Act of 1978 expanded access to retirement plans by enabling the 401(k). However, it had a few catches.

The ACA set a minimum medical loss ratio of 80% for small insurance carriers and 85% for large-group plans. That means payers had to spend 80% or 85% of premium dollars on medical claims or quality improvements. By effectively capping profit margins, the ACA drove carriers to raise premiums, deductibles, and co-pays—and negotiate more aggressively with health care providers.

So, health care systems consolidated to gain leverage with payers and to absorb the costs of digitalization, which the ACA mandated. As I discussed in a recent article, consolidation raises health care costs, as many health networks gain monopoly pricing power. And those higher prices now drive the 401(k)-ization of health benefits.

HSAS ARE THE NEW 401(K)S

The makeup of health plans in the private sector changed dramatically following the ACA. When it went into effect in 2010, high-deductible plans made up 15% of those available, while traditional plans (lower deductible) made up 85%, according to the Bureau of Labor Statistics. As of 2018, 45% of plans were high-deductible and only 54% were traditional.

Meanwhile, both employers and employees took on more health care costs, as data compiled by Statista shows. Between 2009 and 2019, the amount employers spent per employee on health care grew from $7,486 to $10,056 annually. Health care spending by each employee grew from $2,262 to $3,031.

As high-deductible plans became prevalent, the percentage of workers with access to HSAs roughly doubled between 2010 and 2019 (the HSA is only available to employees on high-deductible plans).

HSAs helped employees afford their increasing burden—but only up to a point. With annual contribution limits in 2022 of $3,650 per year for individuals and $7,300 for households, the HSA can’t even cover some households’ deductibles, let alone their out-of-pocket limit. For 401(k) plans, too, the maximum contribution doesn’t pay for a secure retirement the way it once did.

To be a competitive employer, especially in this tight job market, employers must do more than provide a high-deductible plan and HSA and wish employees good luck. As with the 401(k), the U.S. Department of Labor may push employers to accept a fiduciary responsibility for HSAs and health benefits more generally.

WHAT THE FUTURE HOLDS

The ACA gave more Americans access to health coverage than ever before, but it also increased the cost of care. The concern now is that health benefits will follow too closely in the footsteps of the 401(k)—meaning that employees will take on more risk for less reward.

Employers can mitigate this consequence by investing in the data and information employees need to find high-value care and avoid providers that are less safe and overpriced. While employees might be incentivized to spend more wisely if they take on more out-of-pocket costs, they’ll still need all the help and data they can get to navigate this opaque system.

I believe health benefits will function more and more like the 401(k), whether through HSAs or a forthcoming vehicle. Employees may thrive—or flounder—in this new environment, depending on how employers respond.


David Vivero is the CEO of Amino Health, a digital healthcare guidance tool helping patients find high-quality, in-network care.





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