A recent study by Watson Wyatt clarifies how Health Savings Accounts reduce the rate of increase of cost of health plans for employers. Simply put, the study found employers with lower annual cost increases — in the 1% over two years range — had a high number of employees enrolled in consumer directed health plans. The words the study used were these lower annual cost increases were “strongly linked” to higher employee enrollment.

Here is a simple, mathematical method of proving that finding. (This is not a you do the math kind of thing, the math is done below.)

The average family health insurance plan in the United States cost $12,106 in premiums in 2007, according to Kaiser Family Foundation. This does not count the cost of co-insurance, co-pays or deductibles. This is the average cost of all geographies and all types of health plans. (This dollar amount represents the traditional, low deductible, high premium type of health insurance.)

If an average employer with an average health plan has an average annual rate of increase of their plan — they would see a six or seven percent increase.

So, $12,106 x 0.07 + $12,106 = $12,954.42, which represents a 7% annual increase.

If the same average employer had its employees in an Health Savings Account plan, and their annual premium was $7,100 (lower premium because of a higher deductible) and their annual health plan increase was 7% (unusually high for an HSA qualified health plan given the average annual increases are between 2% and 4%, but am using 7% in this example to prove the finding above) then the new plan would cost $7,100 x 0.07 + $7,100 = $7,597.

Therefore, the 7% annual increase on the traditional low-deductible, high premium plan was $848, and the same percentage increase for the HSA plan was $497.

Therefore, the more employees in the HSA, the lower the actual cost increase to the employer for that health plan, compared to the annual cost increase for the traditional health plan.

Therefore, the higher number of employees in an HSA, the lower the annual health plan cost increase for employers.

But the kicker is that the annual cost increase for HSA plans is in the 2% to 4% range, not 7%.

So, a 4% increase of a premium of $7,100 would be $284 for a new annual cost of $7,384.

As Business Insurance reported recently:

“The median two-year health care cost increase among the best-performing employers was 1.0%, while the poor-performing companies saw their health care costs grow by 10.0% for the same period, a survey has found. The median increase for all surveyed employers was 6.2%.

By comparison, the median two-year trend for the best performers in last year’s survey was 2.5%, compared with 11.0% for poor performers, according to the ‘13th Annual National Business Group on Health/Watson Wyatt Employer Survey on Purchasing Value in Health Care.’”

About half of large U.S. employers (47%) are now offering HSAs and consumer directed health plans to their employees. More have plans to do the same. Nine percent of firms expect a 100% enrollment in consumer directed health plans in 2009.

Any employer or individual planning on choosing or buying an HSA health plan, should make sure it has 100% coverage above the deductible. First, it is an easier type of plans for employees to understand and agree to choose; and secondly, it avoids co-insurance of 20% with no maximum limit, a new plan design that the less healthy have found out about the hard way. An HSA with one hundred percent coverage above the deductible will eliminate this risk for the less healthy, and make the plan more attractive to all employees.

How the Less Healthy Benefit from Health Savings Accounts

In Pennsylvania, one man describes why he believes an HSA would have benefited his sick parents.

“In this three-part series on our health-care system, I already have discussed the problems with our current system and how cost is one of the largest forces driving many of our problems. Now I would like to discuss solutions.

“Health Savings Accounts, which both employers and individuals can contribute to, can be coupled with a high deductible insurance plan to provide a strong alternative to traditional insurance coverage….

“My opinion is shaped by my personal experience.

“Both of my parents were terminally ill with Lou Gehrig’s disease, and our only insurance coverage came through my father’s employer.

“We constantly struggled with in-and-out-of-network issues, as well as which services would be covered. Because insurance would not cover all of the care for my mother, we were eventually forced to sell the family home to cover the monthly costs of care, which amounted to almost $6,000 per month.

“It was personally very frustrating to me that my parents had paid thousands of dollars for insurance policies over the years only to be denied coverage when they really needed it.

“I believe HSAs would have helped my family and many others faced with similar situations. They would allow people to build a pool of money to be used for needed health-care costs.

“Additionally, HSAs are priced competitively when compared to current insurance plans, and may even be cheaper for some businesses.

“HSAs also allow people to better manage their care by allowing them to shop for the best quality and lowest cost for services.

“Finally, HSAs allow individuals to choose the types of care they wish to have. Individuals can choose home-health care or nursing-home care, prescription drugs or herbal medicine, traditional doctors or chiropractors - making this type of plan a better alternative for many families.”

In today’s insurance world, an HSA with 100% coverage above the deductible (for everything, prescription drugs, hospitalization, tests, surgery — everything) eliminates the risk factors to the less healthy of a unknown expenditure during any given year on their health needs. It helps them plan for these costs, and gives them certainty about the maximum possible cost to them each year.

Indiana’s HSAs for Medicaid Makes a Single Mother Happy and Healthy

The Democrats who run the U.S. Senate and U.S. House tried to pass their recent S-CHIP bill with a prohibition on states allowing HSAs to be a choice for the parents of uninsured children.

The state of Indiana, however, already has a HSA plan for the Medicaid population passed and funded. It’s initial roll-out was so popular, the State pulled the ads it was running for enrollment by the eligible population and had to double its staff to process the applications.

The Indiana plan works like this, with a focus on working Hoosiers whose employer does not provide insurance (now about 40% of employers nation-wide):

“Indiana saves its money for those low-income people who don’t earn insurance at work. The state covers catastrophic care: when bills exceed $1,100 a year. For routine care under that, the patient pays out of an account filled mainly with state money to which patients add up to 5% of their incomes.

Anything left over in the account rolls over to next year, reducing how much the patient must pay. Patients’ own money is on the line, and they benefit if they’re thrifty. Preventive care is free, and the money rolls over only if a patient gets an annual checkup.”

Here is a real-life example of how one of the 28,000 Hoosiers (three times the expected enrollment) who signed up for the plan was helped. Shelley Ross is a single working mother of two. Like most people, she needs to see for her job, and she was having difficulty, but being without health insurance, could not correct the problem.

As Patrick McIlheran writes in the Milwaukee Journal Sentinel:

“The price is OK with Ross, who makes about $25,000 a year. At $91 a month, “I’m smiling when I write that check,” she says. “It’s not like I wanted a free ride.”

What she wanted was to see. Her sight in one eye had been worsening until she could make out only shadows. Uninsured, she didn’t visit a doctor, not because of the cost directly but “because I thought, ‘I don’t know what I’d do if I had a brain tumor.’ ”

Now, she says, she has a “bionic eye,” an implanted lens. The program worked the way high-deductible insurance is supposed to, shielding Ross from a truly ruinous, one-time expense. Next year, if her routine expenses are lower and she gets a checkup, she’ll come out ahead.”

For all those who would say that the uninsured do not and cannot understand how HSAs work, just remember HSAs in Indiana for the Medicaid population are playing to a sold-out stadium of 28,000 people, three times the estimated take up rate.