The Perils of Out-of-Pocket Health Costs

The Perils of Out-of-Pocket Health Costs


Small businesses offering health insurance tend to require their employees to cover significantly more out-of-pocket than do big companies—and new limits imposed by the health-care law likely won’t ease the pain.

At businesses with fewer than 200 workers, for example, employees pay an average of $1,715 a year out-of-pocket to cover their deductibles—the amount the insured pays before coverage kicks in. That is almost double the average outlay by workers with individual coverage offered by larger employers, according to the Kaiser Family Foundation.

About 58% of insured workers at small firms have annual deductibles of $1,000 or more for employee-only plans, according to Kaiser data. For employees opting for family coverage, the typical deductible ranges from $3,000 to $5,000 on average, insurance brokers say.

Under the Affordable Care Act, new and nongrandfathered health plans for some small employers will be subject to an annual maximum deductible of $2,000 per individual, and $4,000 per family, though some insurers may seek waivers to allow for higher deductibles if they argue that their plans are otherwise unaffordable.

“Plans with four-figure deductibles are the new reality in health insurance,” says Josh Archambault, director of health-care policy at the Pioneer Institute of Public Policy Research in Boston. Large employers are moving to higher-deductible plans, too, though they are starting from a much lower base.

The rising annual employee-deductible pattern shows a central strategy small firms are using to cope with rising insurance premiums. On average, total annual premiums for coverage of a single worker are $5,884 a year, up 74% from a decade ago, Kaiser says. Employees typically cover about $1,000 of that premium cost, in the form of deductions from their paychecks.

Employers offering high-deductible plans point out that because such plans generally feature lower premiums, they are less costly to them—as well as to their healthy employees, because employees can make lower premium contributions. High deductibles “encourage people to use less health care,” adds Gary Claxton, vice president of Kaiser Family Foundation in Washington, D.C. “That’s part of the reason why they’re cheaper.”

Paine’s Inc., an East Granby, Conn., recycling business, offers its 75 employees a health plan with a $2,500 annual deductible for individual worker coverage, up from $1,500 in 2011. For the company’s family plan, the deductible also jumped last year to $5,000 from $3,000.

Mike Paine, the company’s president and the grandson of the founder, says health-insurance premiums have increased annually for the firm in recent years by as much as 13%, forcing him to find ways to trim costs. He says raising the deductible on his employees’ health plan is better than if he were to cut back on the 75% the company contributes toward premiums. Workers have to reach the deductible limit before they begin to get much benefit from their insurance coverage, but he estimates that just a handful of his covered workers end up paying the full deductible amount in a given year.

Some staffers who were recently hit with steep medical bills expressed to him that they were caught off guard, surprised and upset by their out-of-pocket costs before coverage kicked in, he says. Though Paine’s informs employees about deductible increases whenever these occur, in meetings and print materials, most healthy employees tend to not pay attention, he adds.

“The unknown cost” of out-of-pocket expenses for medical care “is less tangible than the amount you are taking out of their paycheck,” says Adam Okun, a New York-based employee-benefits broker. “These employers feel much better charging their employees $1,000 less in guaranteed premium contribution costs and exposing them to higher ‘potential’ costs of, say, a $2,000 deductible,” he says.

Mike Mitternight, the Metairie, La., owner of a commercial heating and air-conditioning company, pays 100% of the premiums for his seven covered employees but not their dependents. He raised the annual deductible on his employee health plan to $2,500 earlier this year from $2,000, in order to lower his premiums. His savings from the switch, he says, enables him to expand his business, Factory Service Agency Inc., and replace aging equipment. He also might use the savings to raise salaries or hire new employees.

Brokers say they have seen employee deductibles as high as $10,000 for individual and $20,000 family coverage at some small firms. However, they also note that with the money small firms are saving on premiums, some are setting up and contributing to health-savings or health-reimbursement accounts for their employees.

“It’s a smart strategy for a small employer,” says John Adair, an insurance broker in Greenville, S.C., because a high deductible is “only likely to affect a few of their employees”—assuming only a few get sick.

“For many small businesses, it’s a question of high-deductible health plans or no coverage at all, and no coverage is even more of a gamble,” says Alison Galbraith, a physician and researcher at Harvard Medical School in Boston.

Rick Snow, owner of Maine Indoor Karting, bumped up the annual employee deductible for his company’s health plan three times since its inception in 2003, to $9,000 for family coverage (selected by two of his 18 employees) and to $4,500 for individual worker coverage, which none of his employees selected.

He did so, he says, because premiums were rising and he thought it was important to keep his employees’ monthly contributions from reaching a level they couldn’t afford. He pays most employees less than $15 an hour and hasn’t been able to give many raises recently due to weak sales. He consulted with his workers before moving to a high deductible plan, he adds: “The general consensus was that it would be better to keep the premium amount lower because they didn’t think they would get sick enough to hit that deductible.”

Eventually, Mr. Snow concluded that the extremely high deductible plan was still too costly—and of little value to anyone except those who might suffer a catastrophic illness or injury. He decided to drop the company’s health plan last year and says the employees who were on it have been uninsured ever since.

While some employee deductibles are more complicated, with separate limits for office visits, hospitalization and diagnostics, the law puts an annual limit on all out-of-pocket costs at $6,350 for individuals and $12,700 for families under all plans, including deductibles and any other shared costs—though the limits have now been delayed until 2015. Under the law, preventive care, such as cancer screenings, must have no out-of-pocket costs.

“At a certain point under the new law, employers are going to have to get more creative about how to keep premiums down without simply raising deductibles,” Ms. Galbraith says.