Comparing HDHP, HMO and PPO Value based on Employer Benefit Survey Data

By Clive Riddle, October 7, 2009

The Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2009 was released a couple of weeks ago.  The annual survey is a must read for any professional interested in employer health benefit issues and is packed with data.

I thought it would be interesting to use the data to compare the value of HDHPs to HMOs and PPOs, realizing of course for any individual’s actual situation, you’d need to compare specific benefit and premium parameters of specific plans. Also, this doesn’t take into consideration if there were any employer contribution to an HRA or HSA account in conjunction with the HDHP, or tax advantaged employee contributions were made to the account. But the survey data can still provide an overall sense of the industry-wide value of each plan type on the basis of premium and deductible comparisons.

Here’s ratios of single premium by plan type, compiled from the survey data.

HMO Premiums 1.011
PPO Premiums   1.020
POS Premiums   1.002
HDHP Premium 0.826
Overall Average 1.000 ($402 per month)

So based on the survey data does the HDHP premium, at 82.6% of the overall average premium, justify itself when the deductible cost sharing is taken into account? Let’s compare, based on single premium and deductible data.

HMOs: The survey data indicates that 84% of HMOs have no deductible requirement, and that those who do have an average of a $699 annual deductible. This yields a weighted average (16% * $699) of a $111.84 deductible for all HMOs. The survey data indicates that the average HDHP deductible is $1,838. Thus the net annual difference in deductibles is $1,726.16.

For simplicity, assuming that the HMO and HDHP copay/coinsurance requirements, benefit limitations and maximums after the deductible is met are in the same ballpark (which of course often isn’t the case) we’ll compare the value of an HMO to HDHPs solely on premium versus deductible differential.

The total annual difference in premiums based on the survey data is $892 ($4,878 annual HMO premium versus $3,986 HDHP premium). If you were to consume the entire HDHP deductible amount, the HMO would save you $834 (the deductible difference of $1,726 less the premium difference of $892.

But another way of looking at it is the HDHP would save you $892 if your total annual health expenditures for the year were less than $111.84 (the average HMO deductible amount.) Assuming an equivalent coinsurance rate of 18% after the deductible is met, meaning that 82 cents of each dollar consumed after $111.84 (the HMO avg deductible) would be reduced from the $892 savings for the HDHP. This means that once you spent an additional $1,087.80 ($892 divided by 82%) the savings stop. This equates to total annual health claims of $1,199.64 ($1,087.80 + the $111.84 avg HMO deductible.)

So you’d have to gamble that your annual health claims would costs less $1,200, or 65% of the HDHP deductible requirement in order for the HDHP to save you any money compared to an HMO.

Traditional PPOs: Using the same methodology, the survey data indicates that 26% of PPOs have no deductible requirement, and those who do have an average $634 deductible, yielding a weighted average $469 deductible for all PPOs, and an annual net difference of $1,368.84 compared to the HDHP deductible. The total annual difference is premiums based on the survey data is $936 (the PPO annual premium is $4,922).

So if you were to consume the entire HDHP premium, the PPO would save you $432.84  ($1,368.84 less $936). The HDHP would save you $936 if your total annual health expenditures for the year were less than $469 (the average PPO deductible amount.) Assuming an equivalent coinsurance rate of 18% after the deductible is met, meaning that 82 cents of each dollar consumed after $469 (the PPO avg deductible) would be reduced from the $936 savings for the HDHP. This means that once you spent an additional $1,141.46 ($936 divided by 82%) the savings stop. This equates to total annual health claims of $1,610.46 ($1141.46 + the $469 avg HMO deductible.)

So you’d have to gamble that your annual health claims would costs less $1,610, or 87.5% of the HDHP deductible requirement in order for the HDHP to save you any money compared to a traditional PPO.

Comments

[Dan Ross]

Health care cost is driven by chronic diease, CDC says 75% and Robert Wood Johnson Founddation says 78%. MCOs flip members each 18 months so they have no business interest in overall health/wellness. Using their data for benchmarking benefit design value is tantamount to asking wolves about the value of paper fencing for lamb protection. What's the difference in $750 deductibles concerning treatment of stage 3 breast cancer or kidney transplants? These disease conditions are driving trend, not PC doc visits for flu.

[taco mike]

I found this video in you tube. It talks about the same stuff. I hope to share it with your readers. I personally had no idea what the benefits of these were.And if you pair a high deductible health plan with a HSA to offset the difference, the saving are copius. Check the video out it explains better than I can http://www.youtube.com/watch?v=CzTmC-m2bII

[Paul Jannereth]

Does not look like the numbers above take into consideration the 25-35% tax savings (roughly $550) which makes the worst case for the HDHP only a couple hundred worse than the HMO. Bottom line, most people don't use a lot of health care services, HDHP's are the way to go. Save the $ in an HSA over years to protect yourself. Also, if you're very sick, co-pay's are not factored above and never go away with an HMO. HDHP's do not have copays....