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The New Health Insurance Solution: How to Get Cheaper, Better Coverage Without a Traditional Employer Plan Excerpt from The New Health Insurance Solution: How to Get Cheaper, Better Coverage Without a Traditional Employer Plan

by Paul Zane Pilzer

How Employers Can Save 50 Percent by Giving Employees Tax-Free Dollars to Buy Their Own Health Insurance: Defined Contribution Health Benefits

Because of recent changes in the law and in the health insurance industry described in this book, defined contribution health insurance plans, along with HSAs, have become the most dramatic change to employee health benefits since employers were first allowed to provide tax-free health benefits during World War II.

If your company is among the 60 percent of employers with an employer-sponsored group health insurance plan, you and your employees can save 50 percent by switching to a defined contribution insurance plan. You can do this by canceling your group health insurance plan and giving the money directly to your employees through a Health Reimbursement Arrangement (HRA) so they can buy their own individual/family health insurance. You will be relieved to be out of the health insurance business, and most of your employees will be able to buy better insurance on their own for less than half of what you are currently paying for their health insurance. In addition, they can keep the savings in their own Health Savings Accounts.

If you use many independent contractors or part-time employees who don't qualify for health insurance, or if you are among the 40 percent of employers who don't offer group health insurance because it's too expensive, you can now give your employees the individual/family coverage they really need, funded with pretax salary contributions. Your employees will pay far less than the cost of traditional group health insurance for similar coverage; through a Health Reimbursement Arrangement, you can contribute tax-free as much of the cost as you can afford.

If you are a business owner or manager, you probably knew the problems with employer-sponsored group health insurance before you read this book. What you probably didn't know was that there is now an affordable solution -- canceling your group plan and giving your employees tax-free money to buy their own individual/family policies. This is called a defined contribution health insurance plan versus the defined benefit insurance plan you probably have today.

To better understand the problems with your traditional group health insurance plan, you may want to review Chapter 1, "You Are One Serious Illness Away from Bankruptcy: The Huge Gaps in Your Employer's Health Insurance Plan," only this time read it from the perspective of an employer, not an employee.

Traditional Defined Benefit Health Insurance versus New Defined Contribution Health Insurance

Traditional defined benefit plan: You provide your employees with a defined healthcare benefit -- doctor visits, hospitalization, pharmacy and so on -- at uncertain annual cost. The benefit is administered through your limited-choice employer-sponsored group health benefits plan.

New defined contribution plan: You provide your employees with a tax-free allowance or "contribution" to spend on their own healthcare -- at an annual cost that you control. Employees use this allowance to pay the premiums for their own individual/family health insurance policy, to pay out-of-pocket medical expenses, and to make contributions to their Health Savings Account.

Everyone Benefits, but Healthy and Younger Employees Benefit the Most
As shown in Chapter 2, in 2006 the annual average cost of traditional defined benefit employer-sponsored health insurance is expected to reach $14,000 per family and $4,500 per individual. Nationally, a defined contribution program costs less than half this price for comparable health insurance for the roughly 80 percent of your employees who are healthy. (In a moment, I will show you how a defined contribution program also helps the 20 percent or so of your employees who are unhealthy.)

TIP: To be conservative, I am assuming that the health and age of your employees is roughly equivalent to the general population that currently applies for individual/family policies -- of which about 80 percent are accepted. If your employees are younger or healthier, as many working individuals are, this 80 percent figure may be closer to 90 or 95 percent.

Interestingly, when given the choice to purchase their own individual/family health insurance policies, many of your healthy employees will not want to buy a low-deductible/co-pay policy similar to the one you are now providing them -- even though it will cost them half of what you are currently paying. Instead, they will want a high-deductible HSA-qualified health insurance policy for one-fourth the price of your group plan, and they will want you to contribute the cost savings to their Health Savings Account.

Later in this chapter I explain how to present a new defined contribution plan to your employees in a way that addresses their natural fears that their benefits are being cut and highlights the financial advantages they will enjoy with a defined contribution plan.

Cost Savings on Individual/Family Health Insurance versus Traditional Employer Group Insurance for the 80+ Percent of Your Employees Who Are Healthy

  Single Family
Employer-sponsored group insurance (2006) $4,500 $14,000
Individual/family co-pay (low-deductible) insurance $2,076 $6,492
Individual/family HSA (high-deductible) insurance $1,104 $3,192

These numbers assume an average age of 35 for your employees. As explained in Chapter 5, in some states like California, the monthly premium for a 55-year-old single individual is about twice the premium for a 35-year-old. Older employees will not benefit as much financially from a defined contribution plan (unless your company sets a higher level of HRA reimbursement for older employees), but they will greatly benefit from getting permanent, guaranteed-renewable health insurance that they will not lose when they lose their job. Moreover, the financial risk of an older employee developing an illness is now borne by an insurance carrier or the state versus the employees themselves, your company, and your other employees.

Unhealthy Employees Also Save Money and Get Safer Coverage
What about the other up to 20 percent of your employees who are not healthy or who have an unhealthy family member -- some of these employees may not medically qualify for affordable private individual/family health insurance. These 20 percent of your employees will not benefit as much financially as your healthy employees (unless your company sets a higher level of HRA reimbursement for unhealthy employees); however, they too will be much better off with a defined contribution plan -- because they will now have guaranteed renewable health insurance independent of their employment. As highlighted in Chapter 1, three-fourths of the millions of Americans who have filed medical bankruptcy had health insurance from an employer when they first became ill -- health insurance they lost when they became too sick to continue their job.

Here are the four options for your unhealthy employees or employees with an unhealthy family member:

1. Buy individual/family health insurance coverage from private carriers at uprated premiums 25 to 50 percent higher than for your healthy employees. For a family, only the portion of the premium allocated to the unhealthy family member will be subject to uprating.

2. Join the employer plan of their spouse -- but still get money from your defined contribution program, which they can use for co-pays, put into an HSA, or pay for the cost of participating in their spouse's health insurance.

3. In some states such as Ohio or California, if you cancel your employer-sponsored group health insurance plan, they can apply as a HIPAA-eligible individual to any private insurance carrier and receive a state-subsidized, guaranteed-issue individual/family policy at about twice the premium paid by healthy employees (see Chapters 3 and 7 for information on how they can qualify for state-guaranteed coverage).

TIP: Consult with your benefits counsel before directly advising your unhealthy employees about state-guaranteed coverage -- some states have regulations prohibiting employers with group health plans from actively encouraging their unhealthy employees to get state-guaranteed coverage, and these regulations could apply to your HRA program under certain circumstances.

4. In other states, such as Texas or Illinois, if you cancel your employer group health insurance plan, your employees will instantly qualify for subsidized state-guaranteed insurance with no exclusions for preexisting conditions -- receiving virtually identical coverage as healthy employees from the leading carrier in their state (e.g., Blue Cross Blue Shield of Texas or Illinois). This coverage will cost about twice the premium paid by healthy individuals 

Copyright © 2005 Paul Zane Pilzer

Excerpted with permission of the publisher John Wiley & Sons, Inc. from The New Health Insurance Solution.  Copyright © 2005 by Paul Zane Pilzer.  This book is available at all bookstores, online booksellers and from the Wiley web site at, or call 1-800-225-5945.