Get ready, they're coming

High-deductible medical plans take hold in work places

It happened almost 25 years ago, but John McDonnell remembers the day he told his father he didn't need to invest in some new retirement gimmick called a 401(k) plan.

A recent college graduate with a degree in marketing and accounting, McDonnell had done the math. After 35 years of work with his first employer, Blue Cross of Connecticut, McDonnell figured he would be sitting pretty with a nice, fat pension.

McDonnell tells this story to make a point. As a partner in Progressive Benefit Solutions of Raleigh -- his fourth employer -- he thinks that health insurance coverage is headed the way of the company pension plan.

He is introducing people to high-deductible, tax-free, investment-driven health accounts. Think of them as the 401(k) of health-care coverage.

"It puts some responsibility for health-care costs back into the consumer's lap," McDonnell said. "It's inevitable."

Not everyone agrees with McDonnell's predictions. The growth of the plans, known as health savings accounts, have failed to match the hype since they were introduced in 2003.

Just the deductible -- the amount employees pay before coverage kicks in -- scares some people away. Many plans set the deductible at $2,000 for individuals and $4,000 for family coverage.

The plans also require that employees learn a new set of rules about how insurance works -- which is enough in itself to kill some workers' interest.

But if people sign up and agree to spend their own money first, industry experts say, competition and scrutiny will help hold down costs.

"If you're spending your own money, you spend it quite differently than if you are spending someone else's money," said Steve Graybill, a senior benefits consultant for Mercer Human Resource Consulting in Charlotte. "That's the whole premise of consumerism."

A recent survey by the Kaiser Family Foundation shows that as many as 25 percent of employers nationally are likely to offer high-deductible plans in 2008. With open enrollment periods about to begin at many companies, McDonnell thinks local numbers could be much higher.

Some companies, such as Dillon Supply in Raleigh, say health savings accounts might be the only option they offer employees within a few years.

"We didn't have very many take it that first year, but once word of mouth got around, the numbers picked up noticeably," said Mary Cribb, human resource manager at Dillon.

Gary Claxton, who co-wrote the 2007 Kaiser Foundation survey, said corporate interest is understandable. Most companies offer coverage through health-maintenance or preferred-provider organizations. However, like employees, they are absorbing higher costs each year, Claxton said. If they want to hold costs steady, the default choice is a health savings account.

"It is still their only new thing to offer, maybe with the combination of wellness programs," Claxton said. "So we're going to see a push for this for the next couple of years."

How they work

Though rules vary by plan, health savings accounts are based on a basic concept.

Employees are required to set up an account in their own name, similar to a 401(k) account. In most cases, the money that goes into that account comes directly from an employee's paycheck, without being taxed.

Once the paperwork is done, deposits and allocations are automatic.

Employees are free to invest the money in mutual funds, money markets or whatever options the company plan offers. That means the value of the account can rise or fall with the market, just as it does in a 401(k).

The money remains tax-free throughout, including any earnings and withdrawals. It can only be used to pay for medical expenses, and there are limits on how much can be invested in a year.