By Cyril Tuohy
When it comes to consumers making personal health care choices, is there a cautionary tale with their experience managing 401(k) plans?
For years, data collected on self-funded defined contribution plans have shown that employees are not the most astute investors, even when putting money aside for their own golden years.
Few workers make the optimum investment choices, and many don’t save enough, particularly at the beginning of their working lives. Management fees, which have become the subject of recent inquiries by news reports, further erode investment returns.
But if consumers don’t do an adequate job of managing their retirement future through self-direction and the 401(k), is there any reason to believe they’ll do better managing their health care futures?
The 401(k), originally created as a tax shelter for executives to supplement their retirement after they’d maxed out their traditional retirement vehicles, became the de facto retirement darling for companies as they fled the defined benefit business. The 401(k) was never the first choice among employees.
Fast-forward three decades, this time with health care, and once again workers aren’t calling the shots with regard to important and expensive benefit programs that affect them the most.
“It may be referred to as ‘consumer-driven health care,’ but in actuality, consumers aren’t the ones driving these changes. So it’s no surprise that many feel unprepared,” said Audrey Boone Tillman, executive vice president of corporate services at Aflac, which released its third annual WorkForces Report last week analyzing trends and use of employee benefits.
More than half (54 percent) of workers would prefer not to have greater control over their insurance options because they don’t have the time or knowledge to manage those options effectively, the survey found.
In other words, even as management pushes hard for the adoption of consumer-directed models and the tax advantages they bring, workers are hardly on board with regard to doing-more-of-it-yourself options offered by defined contribution health care.
Without a deeper understanding of their options and the consequences of their choices, workers are more exposed to the risk of making costly decisions. Some workers already have learned that the hard way through bad 401(k) retirement choices.
“It’s time for consumers to face reality. Ready or not, they are being put in control of their health insurance decisions ? and that means having to make choices that could have a big impact on personal finances,” Tillman said.
Choices facing employees under a consumer-directed group health plan amounts to whether they prefer funding those expenses using a health savings account (HSA), a health reimbursement account (HRA) or a flexible spending account (FSA).
HSAs, similar to a 401(k) are funded and managed by the employee or employer and operate much like a retirement plan, whereby funds are invested and allowed to grow. HRAs, set up by the employer, pay for expenses not covered by the group health plan and funds can’t be invested. FSA funds can be used with high-deductible and traditional health plan, but the employer owns the account and any funds at the end of the year returns to the employer.
While the jury may still be out as to whether workers make the best health care choices for themselves, given the right tools and incentives in the form of HSAs, HRAs and FSAs, consumers are willing to engage in some serious cost control.
“We found that at least part of the savings in cost per episode reflects choices for less-costly treatments and products, not just a reduction in the number of services,” said Amelia Haviland, senior statistician at the RAND Corp. and lead author of a study on consumer-directed health plans and health care consumption published in 2011.
The savings occurred even when employers helped employees offset out-of-pocket costs by making contributions to their accounts, said Roland McDevitt, a study co-author and director of health research at Towers Watson, a human resource and employee benefits consultancy.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He has also written about food, restaurants and travel. He can be reached at [email protected].
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