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As a 24-year insurance industry veteran, Jay Savan of Towers Perrin has witnessed first hand the evolution of health benefits from traditional insurance to consumer-directed health care (CDHC) plans. In an interview with CDHC Solutions magazine, Savan contends that health reimbursement arrangements (HRAs), high-deductible health plans (HDHPs) and other account-based plans will prove critical to fixing health care.
Savan says the differences between a CDHC plan and a traditional plan has less to do with actual cost than with long-term value and employer risk:
“…[F]rom an indemnification perspective, the difference is twofold. First, the fundamental difference is that traditional plans are essentially 1-year term insurance plans, while CDHC plans are cash-value insurance plans. That is, while all the features of traditional plans are unique to a single year, CDHC plans (can) contain a durable equity element — the health account — that can span multiple years.’
“The 2nd key difference is in the structure of risk: how risk is financed and how it is shared between the plan and the covered member. In insurance terms, there are 2 kinds of risk, fixed risk and variable risk. Fixed risk is represented by the health insurance premium, which is generally ‘fixed’ regardless of how many claims you have during a coverage period. Variable risk is just that — it varies based on your claim activity. These 2 risk elements are negatively correlated, which is to say when 1 increases, the other falls.”
Saban maintains that in the long run, health plan participants are better off financially by assuming more variable risk than fixed risk, even during periods of higher health expenses. Over the course of a lifetime, most people are healthy 80% of the time, and with a proper balance of fixed and variable risk, can see lower health costs even during episodes of illness or accident.
Sharon Mills, MedBen Director of Administrative Services, agrees with Saban’s conclusions. “Because your out-of-pocket expenses are capped under an HDHP, the likelihood is that you’ll save more money — particularly over multiple years — than you would under traditional insurance, even should you be part of the 20% with a higher need for health care.”
Saban also emphasizes that ultimately, health care costs go beyond plan choice to personal habits. Only by improving one’s quality of life can costs be controlled — a viewpoint, Mills says, that MedBen shares. “He makes the analogy of taking care of your car because failing to do so increases the chance of expensive repairs down the road. It’s just common sense that applies equally to our own well-being.”
You can read the complete interview here (free registration is required to view it).