How About a 401(k) Program for Health Insurance?

Experts Have Been Talking About the Idea for Years, But a Small Washington Company May Have Found the Winning Formula

By Erik Smith
Staff writer/ Washington State Wire
Link to Original Article: http://www.washingtonstatewire.com
 

OLYMPIA, June 23.—Bob Diehl, president of Diehl Ford in Bellingham, knew there had to be a better way to buy health insurance when one of his staffers decided he just couldn’t afford the health plan at work.
            The employee did a little shopping and discovered he could buy insurance for less on his own.
            Now, wait a second. You’re supposed to get a better deal with the group rate, right?
           “That set off the alarm bells for me,” Diehl said.
            These days Diehl doesn’t even bother shopping for insurance. He lets his employees do that. Each month he makes a payment to their health-plan accounts, and they have their pick of any insurance policy on the individual market. They save money that way, and he saves money, too.
            You know, things are tough in the car business right now, Diehl said. “Some good things come out of this down economy of ours, and one of them is that it forced us to look for a health care plan like the one we found.”
            Diehl is a customer of a unique program offered by LyfeBank, a three-year-old firm based in LaConner, Wash. It’s not an insurance company, but rather a company that sets up health-plan accounts for employees and gives them access to the savings that are available on the individual-insurance market.
            It takes advantage of a federal reform enacted eight years ago that until now has gotten little attention—the “health reimbursement arrangement,” or HRA. It’s one of several big ideas that came out of Congress at the same time, none of which have really caught on, and none of which have really achieved their promise.
            But the LyfeBank program has basically reinvented the concept, and that’s what makes it so interesting. Somehow a small Washington company has figured out how to do something that the nation’s big insurance companies haven’t been able to do, or haven’t been willing. It has found a way to take the HRA concept and make it work.
 
            A Fresh Approach
 
            Here’s the basic thought—if workers could make their own choices about the way their health care dollars are spent, and if they have an incentive to spend wisely, they might do a better job of it than their employers. If they could manage their health care spending the way they manage their 401(k) retirement accounts, they might even bring a bit of a free-market influence to the business—something the industry has been missing. And that might help counter galloping inflation.
            The experts have been talking about the idea for years. Congress even tinkered with the rules in 2002 and came up with a few ways to offer 401(k)s for health insurance. All of them allow workers to sock away pretax dollars, and control at least some of the spending. But the conventional wisdom is that all of the plans have fatal weaknesses.
            Health savings accounts are one approach. They’ve gotten plenty of press, but the problem is that they can’t be used for insurance, which eliminates most of their appeal. Employer “flex plans” allow workers to bank their own money, but in other respects they work like traditional insurance, so there isn’t really a mechanism for employees to take advantage of savings.
            And HRAs are the most flexible of the bunch, allowing workers to sock away pretax money and spend it on any health care expense approved by the Internal Revenue Service—including insurance. But the consensus seems to be that in other respects the federal rules are too restrictive.
            Just this month, one of those experts, Regina Herzlinger, a Harvard Business School professor and author of “Who Killed Health Care?” was telling a Washington Policy Center audience that tax laws stand in the way of the dream system. If only someone could come up with the winning formula, she said. “Would I do it? Yes, I would want to do it. Lots of people would want to do it. It would create a consumer-driven system.”
            Well, what if someone already has?
 
            Employees Call the Shots
 
            LyfeBank says it has unlocked the secret of the HRA. The rules aren’t as restrictive as people think. And it has come up with an innovative program unlike any other HRA on the market. “There really isn’t anything like it,” said LyfeBank’s marketing director, Leslie Parker. “The most important thing is that it gives consumers power.”
            The program lets employees call the shots. Employers make their monthly contributions toward employee health care expenses—typically somewhere around $300 a month for each worker. But instead of using the money to buy insurance, they place the money in employee health care accounts. The employees then can use the money to purchase any plan they want on the individual market. They aren’t limited to a handful of group-insurance policies offered by their employers.
            That raises the possibility of big savings. Group plans are really one-size-fits-all, Parker explains. But why on earth does a 25-year-old man need maternity coverage? Why shouldn’t he be able to pick a high-deductible policy if he wants? For most customers, individual insurance plans offer savings because they can buy a policy tailored precisely for their needs. The mechanism offers a way for workers to use employer dollars to tap the individual market—something that normally isn’t possible. Diehl, for instance, says most of his employees report they are paying about 40 percent less.
 
            Purest Form of Concept
 
            What makes the LyfeBank program unique is that once an employer pays into the accounts, the employer has no further involvement. The money belongs to the employees and it stays with them when they move to different jobs. Savings can be banked, and the accumulation rolls over from year to year. There’s really only one major difference between it and a 401(k) - the money can’t be borrowed against or removed from the account for non-health care expenses.
            Like the other approaches, the LyfeBank accounts give employees a way to bank their own pretax money for out-of-pocket health care expenses like copays, deductibles and prescription drugs.  Because they aren’t paying from their own pockets with after-tax money, it means they effectively pay less without the fuss of taking an income-tax deduction. LyfeBank’s program makes it easy, by giving employees a VISA debit card they can use at prescription counters and reception desks in doctors’ offices. The cards can only be used for approved expenses. “I don’t have to keep track of receipts,” said Kris Nelson, a project manager for Barghausen Consulting Engineers in Kent. “I love that. It’s so easy.”
              And from there the possibilities get wilder. The LyfeBank program offers a way for employers to contribute toward health expenses for part-timers. Normally they don’t get workplace insurance, Parker explains, because group insurance policies require employers to pay the same premium for everyone, no matter how many hours they work. But under the LyfeBank program, it’s possible for an employer to make a partial contribution. It’s also possible for an employee to pool contributions from multiple employers—so a part-time forklift driver who moonlights as a dishwasher can take money from both jobs and use it to buy insurance.  It’s also possible to pool contributions  for husbands and wives.
             “This sort of thing has never been done before,” Parker said. “Part of the challenge is that you’re taking forty-plus years of insurance business practice and you’re tilting it 45 degrees. So sometimes you make people feel uncomfortable. You’re asking people to take leaps of faith and become open to new concepts.”
 
            Still on Ground Floor
 
            After three years, LyfeBank has signed up a few thousand individual customers in seven states and plans eventually to expand to others. Parker said its customers run the gamut—engineers, salespeople, day-care operators and assembly-line workers. As for long-term prospects, Parker said it appears compatible with the national health care reform program coming down the pike in 2014.
            Insurance brokers say it’s really one of the freshest concepts in health insurance in ages, and that’s really its only stumbling block. “Employees never had a choice before, and having a choice can be overwhelming,” said Robert Anderson, owner of Benefit Strategies in Kennewick. “They worry that they might make the wrong choice. But once it’s up and running, it gives everyone so much freedom in regard to how their money is spent that they love it.”
           The program might not be for everyone, Anderson acknowledges. Companies with a preponderance of older or sicker workers might find that individual costs go up. But for the vast majority of workers it means savings, and it’s one way for companies to make health dollars stretch further.
           One of the interesting things about the program, Anderson said, is that it is totally compatible with some of the up-and-coming health reform ideas now coming to the fore. For instance, it can be used with medical-home programs like the one offered by Seattle-based Qliance, which charges a flat monthly rate for access to its clinic. The accounts make it easy to supplement the medical-home program with a catastrophic policy, providing full coverage for an affordable price.
Bellingham broker Tim Fisher said, “I think this company is right in the middle of health care reform over the next three to four years, and they will keep moving right with it. They’ll be part of the solution.”
           The approach gets a thumbs-up from employers, too. Cindy Schafer, human resources manager at 90-employee Barghausen, said it allows companies and employees to tap into the better rates available through the individual insurance market. “The recession drove us to it,” she said. “But I’m not sure we’d go back.”