Alex Petronella is the Vice President of Operations for Savoy Associates. Having begun his career with Savoy Associates as an Account Executive in 1993, his ability to understand and respond effectively to brokers’ needs has been a critical factor in Alex’s ascension through the organization into his current leadership position.

The following white paper features his first-hand account of planning & implementing an HSA program for the employees of Savoy Associates:

The Planning Process Begins

Since my role as VP of Operations includes many HR responsibilities, including the administration of our own employee benefits, I felt that I had to consider Consumer Directed Health Plans (CDHPs) – a.k.a. High Deductible Health Plans (HDHPs), as part of a thorough evaluation of our own benefit plan options at renewal time.

As a benefits decision-maker of a small employer group, I had to review the current health plan offerings throughout the marketplace as well as the available renewal options, and then determine if the addition of a CDHP would help the organization meet its financial objectives, while maintaining its ability to attract and retain talented employees.

Next, I needed to present and review these issues with the leadership team at Savoy Associates in order to determine the final direction the plans would take, and if this truly made sense both for employer and employees alike.

I then needed to ensure that a proper educational plan was in place, so that employees would fully understand how the plan works, as well as how the financial arrangements and tax advantages would offer a level of benefits which our traditional HMO and PPO options did not.

Making the HSA Decision

As one of the largest general agencies in New Jersey, we were compelled to at least consider an HSA plan of our own; but when we looked at the financials, the obvious decision jumped off the page.

Prior to our renewal, we offered a $20 HMO plan and a 90/80/60 PPO plan, both with a 50% Rx card. The renewal increases were projected at 12% and 19% respectively. After some benefit tweaking, the HMO increase was reduced by 3% and we were able to achieve a 6% reduction in the PPO rate. But a socialized increase of greater than 10% was not going to be acceptable. The next step was to consider the addition of an HDHP and the possibility of implementing it alongside an HSA trust account.

By offering an HSA-compatible plan, Savoy Associates was able to present an option that was 40% less than the renewal and about 25% less than the other suggested renewal alternatives. But the true benefits of this additional line of coverage was three-fold: premium expenses returned to 2004 levels, employee and employer contributions were reduced, and the savings in contribution levels was shifted to the employees’ HSA accounts. Has it been a success? Financially, this plan has provided a great answer for nine of the thirty employees who chose it. And for those who didn’t, at least their education and familiarity with the HDHP concept has begun. However, in looking back, there were questions and issues we faced that only now we can provide a personal perspective on.

Implementation

Implementing an HSA really shouldn’t be that different from implementing a standard plan. However, because there can truly be two separate pieces for a full blown HSA Plan, there are some obvious differences worth reviewing and there are the not-so-obvious nuances you only learn through the implementation process. The first critical point is understanding that the HDHP can be set up without the HSA account, but not the other way around. In fact, an employer who seeks to simply save money through an HDHP may see the HSA-compatible plans as their best option.

Second, the employer can choose to set up an HSA trust account or not – but when an HDHP is implemented, education is the single most important next step that the broker and employer can agree upon. This step, if missed, won’t manifest itself until the first round of EOBs come back to the employee with $0’s under the “Carrier Paid” column.

Third, if the client has fully committed to implementing the HDHP and is going to pair it with an HSA trustee account, two things must happen: they must choose an HSA-compatible HDHP (which means no first-dollar coverage except for Preventive Care), and they must select a financial institution for the “banking/trust” component.

These three initial decision points help to establish the base medical plan(s), a vehicle for funding (or not) gaps created by deductibles and coinsurance levels, and an institution for administering the employees’/consumers’ transactions. So how do the decisions get made and the plan implemented?

Initial Actions and Considerations

1. Start by ascertaining the client’s objectives and threshold for pain. Perhaps they’ve been able to absorb the last few renewal increases, but have now run out of budgetary room or they may be ready to seek longer-term solutions. If they prefer a rich level of benefits, do you know why? Is it because they are competing for highly talented employees in a specialized industry?
   
2. Although it’s easier to consider this option when the renewal actions are high, remember that CDHPs are about total funding. Whichever plan you pick, you are not locked into a funding approach, nor are you locked into a single plan. Most often, these plans work best when they are multi-tiered.
   
3. Small and large accounts alike can benefit from CDH Plans, but one must consider the advantages and disadvantages of these plans and the specific needs of your client. It’s just as important to walk away from this approach if you realize that it’s not the right client or the right fit – at this time.
   
4. When developing the contribution strategy, take benefit levels into consideration. The low premium rates are due to high deductibles, high coinsurance levels, and reductions in other benefit levels.

Questions For Review

What bank should the client use?

Each carrier has a recommended bank and a ‘simplified’ enrollment process for employees – but you are not locked into that relationship. You might want to look at this component when making the decision of which HSA plan to select.

How will employees access their cash?

The client, and more importantly, the employee, needs to understand the various methods available for accessing cash and/or funding medical bills left unpaid due to deductible and coinsurance gaps. Any of the following methods may be used:

• ATM;
• Swipe card; or
• Checking account.

Are there hidden costs?

The best recommendation I can make for avoiding unanticipated costs or resource requirements associated with HDHP/HSA plans, is to completely inventory the issues, create a detailed checklist, and stick to it. Considerations should include:

• Set up costs (which might include FSA plan document modification and testing);
• Monthly HSA administrator or bank fees;
• Investment and/or withdrawal fees;
• Fund transfer costs (in setting up the ACH); and,
• Paperwork and other resource requirements.

Will employees understand the difference between eligible and ineligible medical expenses?

It’s extremely important that client and employee understand that once contributions are made, the employee owns the account. That makes the employee solely responsible for tax reporting issues, and demands that employees are fully informed of their obligation to maintain all medical receipts for which they use funds from their HSA account.

They also need to be careful, especially with the swipe card, that only eligible expenses per IRS Publication 502 are paid for with HSA funds. A specific example might be the employee who picks up their prescriptions, antacids or other qualified expenses, and then also decides to pick up a pack of gum and bag of chips at the same time. They can certainly do that, but they can only use the HSA account and/or swipe card for the qualified medical expenses; the gum, chips etc., must then be paid for separately.

In Summary -- The Results for Savoy Associates

This approach worked extremely well for Savoy Associates. We were able to keep three plans in place so that employees could exercise choice. The premium advantage of adding an HDHP created an outstanding level of premium savings which translated into lower contributions for both employer and employee – AND – there was enough room in the financial result for Savoy Associates to make a contribution to each employee’s HSA account and to let leftover savings flow to the bottom line. It was without question a win-win scenario – and it pushed the starting point for next year’s trend adjustment way down.

If you’re thinking about these plans for your clients, here are some 2006 reminders to leave you with:

The U.S. Department of Treasury adjustments for HSAs in 2006:

• Minimum deductible for individuals is $1,050 and for families, $2,100;
• Maximum out-of-pocket expenses are $5,250 and $10,500 respectively;
• Contributions are capped at $2,700/$5,450 or the minimum deductible of the HDHP; and,
• Individuals age 55 and older may contribute up to $700 in catch-up contributions for 2006.

This information and much more can be found in the Broker Resources section of our website.

Good luck and good selling!