By David Josephs, senior vice president of consumer-directed health care, JPMorgan Chase
Over the past decade, health care costs have increased annually at almost double-digit rates. These increases are placing a significant burden on the traditional approach to health care financing. Employers and individuals are seeking ways to plan more effectively for their health care expenses. As a result, the focus on health care expenses is shifting from a routine annual benefit election exercise to establishing an ongoing management approach.
This longer-term approach is being made possible by consumer-directed health care (CDHC) programs, particularly those that offer health savings accounts (HSAs). CDHC programs with HSAs offer employers and their employees access to new financial management structures to address health care expenses.
Taking a Larger Bite
The 2006 Kaiser Family Foundation Employer Benefits Annual Survey predicts that by 2008, total U.S. corporate health care costs will equal total corporate profits. Health insurance premiums are rising at 6 to 9 percent annually—higher than the rate of inflation and wage increases. Outside of direct payroll and major capital expenditures, health care costs are one of the largest expenses businesses face. Employers and employees are both feeling the strain. As rising premiums crimp employers, employees´ out-of-pocket costs are higher than ever. In 2004 and 2005, overall health costs grew at approximately 6.1 percent, but in 2004, the share that employees paid jumped by 12 percent. Out-of-pocket contributions for health insurance have increased annually by an average of 9.8 percent over the past seven years, which has nearly doubled employee contributions.
Amid concerns that out-of-pocket costs are preventing employees from getting the care they need, employers are now looking for longer-term solutions. With more effective, but more expensive, treatments becoming available, health care costs are expected to continue to rise, requiring new financing approaches.
A Catalyst for Change
While CDHC programs offer new health management and funding options, they also represent the potential to change how individuals approach health care. Well-structured programs encourage employees to become engaged more in their own health choices and potential costs.
When organizations provide employees with a stake in how they manage and finance their health, focus shifts from a cost burden to ongoing health and wealth management. The goal is presenting more intelligent choices to employee-consumers when they need health care, and getting their health care providers to provide advice that will help them manage costs.
CDHC benefits design also is shifting the horizon of benefits management. CDHC moves health benefit financing from an annual exercise to ongoing multi-year planning. This shift requires and encourages a change of perspective from individuals, employers, health plans and financial institutions. Just as physicians can advise patients to adopt a healthy lifestyle for long-term preventative care, a CDHC program provides individuals with tools for long-term financial planning—a cushion for dealing with unpredictable future health care financing needs.
HSA-Driven CDHC Programs Grow
Still considered a "new thing," HSAs were created as part of the Medicare Modernization Act of 2003. Public awareness of HSAs continues to increase. While there are similarities between HSAs and other tax-advantaged health spending accounts, such as flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs), there are also significant differences. While all accounts support tax-advantaged contributions, assets in HSAs usually earn interest. In addition, HSA assets can be invested, balances rolled over from year to year and, if an employee changes jobs, the HSA is portable.
HSAs and high-deductible health plans (HDHPs) are a rapidly growing portion of the health care market. A high-deductible health plan is a prerequisite to offering an HSA. Initially comprised of individuals and small companies, the HDHP/HSA market now consists of large companies, which represent half the market, as more products have become available.
A Highly Flexible Account Structure
As the popularity of HSAs grows, so has the number of plan options on the market—and the potential for confusion. HSAs often are described incorrectly as "health care 401(k)s." While both can be viewed as investment tools, HSAs and 401(k)s were designed to satisfy two different life events. Traditional retirement savings tools such as 401(k)s and individual retirement accounts (IRAs), generally have funds flowing in only one direction—periodic contributions are made over time until retirement age, at which point distributions can be made. Distributions from IRAs and 401(k)s cannot be made prior to retirement without significant tax consequences, with a few narrowly-defined exceptions.
While 401(k)s and IRAs are designed for retirement savings, HSAs are designed to meet both current and future health care needs. HSAs offer the ability to accumulate money for future health care costs and the flexibility to withdraw funds as needed. On one hand, they act as investment tools and can earn interest. On the other hand, HSA assets are accessible to fund present-day health care expenses with tax-advantaged dollars.
A Bank´s Role in CDHC Programs
By some observations, CDHC programs represent a competitive environment between banks and insurers. This does not need to be the case. Properly structured CDHC programs can leverage the best that both health insurers and banks have to offer in their respective disciplines. Health insurers provide health management tools, benefit structuring, network information and health care claims processing. Banks can be relied on to do what they do best-provide funding options, facilitate secure transactions and deliver investment opportunities that maximize individuals´ savings potential. Some examples of a bank´s role in CDHC programs include the following:
• A trusted asset guardian
JPMorgan Chase delivers to HSAs the same high level of custodial and trustee services businesses that individuals have come to expect through their other banking relationships—those that are secure, timely and accurate.
• A trusted financial planning adviser
To promote trust and build confidence, it´s essential to help individuals understand their current and future financial needs in the changing health care financing environment. The more you assist individuals in changing their health care financing perspectives from annual to perennial, the more value you add.
• A facilitator of secure financial transactions
Protect assets whether payments are being processed via a debit card, check or a paper form medical claim. In some JPMorgan Chase programs, for example, claims submitted by doctors and hospitals to insurance companies can be paid directly out of the HSA if the account holder elects this option. Payment then goes directly to the health care provider, and the account holder does not need to complete any paperwork.
There are instances where it is critical that banks and health insurance companies work together to provide individuals with a seamless CDHC program experience. One particularly critical area for both parties to integrate is enrollment. The HDHP and HSA must be seamlessly integrated for individuals to take advantage of all the account structure and funding opportunities available to them.
Investment Expertise
Investment depth is necessary to meet the range of needs for individuals with varying levels of risk tolerance. JPMorgan Chase´s investment service, for example, is integrated completely with its cash account offering, providing online administration at the click of a mouse. In addition, customized investment slates can be created to meet the specific needs of employers.
Properly structured plans make it easy for individuals to move assets among investments and obtain cash in case of unexpected medical needs. In addition, many banks now offer lines of credit on HSAs to support health care expenses. In the end, a bank´s role is incumbent on finding flexible ways for employers and individuals to fund accounts, accepting electronic deposits as well as check deposits, supporting bulk funding for employers and helping employers track employer contributions versus payroll deductions.
Significant Advantages
There are significant tax savings for both employers and individuals:
• Contributions to HSAs are tax-free and also are excluded from earnings for the purpose of calculating FICA taxes. In addition, earnings on interest/investment gains within an HSA are tax-free.
• While cost savings is often what first piques an employer´s interest in CDHC plans, the potential to change the nature of health care management is significant.
• Well-structured CDHC programs make user-friendly information readily available to facilitate confident health management decisions—for both the health benefits component and the account management component. Critical to plan success are communications tools that educate employees about investment strategies and enable their healthy lifestyle choices. These include:
• clear enrollment methods
• detailed plan guides
• multiple funding options
• automatic claims processing
• real-time account tracking
• price and quality comparisons
• health research
HSA custodians play an important role as a trusted partner in safeguarding individuals´ health care savings. They provide ease of use, multiple methods of account funding and access, and a suitable range of investment options. A custodian can be considered a long-term partner in the financing of health care needs.
David Josephs is a founding member of JPMorgan Chase´s Healthcare Solutions group. Josephs has developed and launched innovative banking solutions for JPMorgan Chase´s health care clients. Prior to joining the bank, Josephs worked directly for health insurers and as a management consultant to health plans and health care providers regarding strategy, operations and revenue cycle challenges. Contact Josephs at david.a.josephs[at]jpmchase.com or 312-954-3799.
