Source: Bloomberg Opinion, Federal Reserve
Bloomberg has dubbed the chart above “the chart of the century” because it captures how certain costs that many, if not all of us, need in our lives are rising faster than wages can keep up.
The chart is a derivative of one that other news outlets have called “the chart of the century” which indexes the inflation rate for various goods which can be seen below.
Source: Market Watch
The most ludicrous of these has to be college textbooks. Why in a digital age are students just accepting that books, which don’t even have to be printed, have to increase in price faster than inflation?
I will leave that topic for another post though. For now I want to focus on the cost of healthcare.
Life Changes Change Inflation
I would like to briefly discuss my own journey with health insurance and the increased cost my family and I have experienced. Health insurance was something I knew I should have. In case I were to have a freak accident, it could end up bankrupting me, so it was better to just not take the risk.
When I started to have a family though and had to cover to other people, obviously the math changed. Not only do the premiums go up when you have family, but there are more visits to contend with and if you have a child, potentially huge hospital bills. All of the sudden, price inflation in this area impacted me a lot more than before.
Even so, this was manageable for me under my old plan. This was a simple traditional plan that used to be much more common in corporate America and was part of the social contract: I split a premium with my employer, pay some minor fees for copays at visits and some payments here and there for expensive procedures, but nothing major. I recall the introduction of a high deductible account at my employer at the time but saw the out of pocket minimums and quickly determined it was not worth it, especially if I were having a child.
Little did I know at the time how lucky I was. When I started at a new job, a high deductible plan was the only option and I was forced into a plan that had a family deductible where I had to pay all out of pocket costs up to $3,500 before my insurance kicked in. That, in addition to the fact that my premiums were almost just as expensive as what I was paying for family coverage at my old job. Needless to say, there was some sticker shock.
Apparently I wasn’t alone either, while I had been enjoying my generous plan at my old job since 2008, deductible plans had been spreading quickly.
Source: Consumer Reports
In fact, it seems in retrospect I lucked out because I caught the traditional plan peak just before it started to decline.
Source: CDC
The chart above shows the trend for all adults with employment based coverage, if you were to strip out the public sector workers and just look at the growth of high deductible plans, you would get the below.
Source: The Fiscal Times
The above shows that as of 2017, a figure approaching half of all private healthcare plans are high deductible. Besides being a growing market, it’s a huge shift for many workers, as they have to bear the brunt of many initial expenses.
A Brief Primer
What is a high deductible plan anyway? Where did it come from and why are so many employers offering it or having it as the only option for their employees?
What it Is – The government has provided guidelines on what is considered a high deductible plan. To mee those standards as of 2019, a plan has to have a minimum deductible of $1,350 for an individual and $2,700 for a family. Individual plans can have higher deductibles but this is just the minimum for the government to say you are allowed to have a health savings account.
In essence, the idea is you pay lower monthly premiums but you also shell out of pocket for most procedures until your spend for that year meets your deductible, then your insurance will kick in.
Why does the government have a say on what amount your deductible is? Because they have offered a tax shelter for those with these plans to encourage to save for them, which is known as the Health Savings Account, or HSA.
This is known as a triple tax deferred account in the sense that you can have it deducted pre-tax from your wages, it can earn interest tax free and it’s not taxable when you spend it, as long as it is spent on medical expenses.
There are maximum out of pockets set for every year as well to make sure the insurance companies don’t just stick you with the bill. These figures are $7,900 for an individual and $15,800 for a family in 2019.
Why So Many Employers Offer It – I think “the chart of the century” explains a lot of it. Just like companies have done with retirement and pushing the costs of pensions onto employees, they have started to do the same with healthcare. Once costs started outpacing inflation consistently, companies were forced to offer skimpier plans to improve their bottom line.
High Deductible Healthcare Plan or HDHP offered a way to push these initial costs on to consumers. What’s best for the health insurance providers is that all the deductibles reset each year so everyone is back to square 1 as soon as the new year hits.
Besides the Price, Other Costs
Sadly, similar to consumer directed retirement plans, HDHP’s are being pushed onto people that really don’t have the skills to budget and plan like others do. This will just continue to further widen the gap as the more educated and better paid, will be able to invest the proceeds of their HSA and further cushion themselves from higher costs. The costs of healthcare that others who have to meet high deductibles with regular post tax savings, don’t have.
It seems that employers just gave up on offering HSAs to many workers who didn’t have the education all together.
Source: CDC
The reason I say those savers will be able to invest the proceeds and cushion themselves is because many HSA plans offer the option to invest in the stock market or bond market. This means that funds will just not sit around being eaten up by inflation. In fact, I have read that some are even starting to use their HSA as another investment vehicle for retirement and just pay all their deductibles with post tax money. If you have the discipline to do this, it could pay off handsomely in the long term.
Even the well off may not be safe though, if you take a look at the growth rate of the size of deductibles, it could give tech stocks a run for their money.
Source: KFF
Conclusion
There is a valid economic argument as to why these things are occurring: people are getting richer and there are only so many doctors to go around. However, the US system is known to be blatantly inefficient compared to other countries. The aging population and the continued cost cutting of large employers to meet financial targets may be other reasons. Either way, it looks like high deductible plans are here to stay.
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