In today’s competitive marketplace, companies offer their employees an exceedingly wide array of benefits. After all, benefits play a key role in attracting and retaining employees. Some employers choose to focus on the basics: health and dental, paid vacation and sick leave, medical and dental insurance, funding for a retirement plan, while other companies provide more specialized benefits: sabbaticals and tuition reimbursement.
Health insurance: a cornerstone of any benefits plan
Regardless of what benefits package a company decides to offer, healthcare insurance is generally at its core. However, with insurance costs increasingly escalating, companies are grappling with ways to continue to provide this ultra-important benefit without breaking the bank. As a result, many have shifted at least part of the cost burden to employees, often by offering a High Deductible Health Plan (HDHP). Not only does this leave employees on the hook for predictable, anticipated costs that are well under the deductible such as expenses for a regular prescription or co-pays for a routine annual check-up, but it only leaves them responsible for extra, unplanned costs associated with a sudden illness or accident.
High Deductible Health Plans keep premiums down and are growing in popularity
It’s no surprise that companies are increasingly trying to keep the lid on health care costs by offering their employees high-deductible health plans (HDHP). According to the National Center for Health Statistics (Center for Disease Control), by early 2016, the percentage of those under the age of 65 with private health insurance who participated in an HDHP stood at 40%. This represents an increase from 2010, when the comparable figure was 25.3%. To some degree, these HDHP’s have been effective in slowing the rate of increase in premiums.
Costs shift to employees
With all that said, money has to come from somewhere. With an HDHP, the money comes out of the pockets of the individuals with HDHP coverage. (An HDHP is defined by the IRS as a plan having a deductible of at least $1,300 for an individual, and $2,600 for a family. In reality, the deductibles can go far higher.)
Overall, the Commonwealth Fund (a non-partisan foundation that focuses on health and social issues) found that in 2006 those receiving insurance through their employer had an average spend of 6.5% of income on insurance premiums and deductibles. By 2015, those expenditures accounted for 10.1% of income.
Companies step in by offering gap plans as part of their benefits packages
One of the most common package elements among companies that offer HDHP plans – which also protects employees from having to reach too deep into their pockets to cover out-of-pocket expenses - is gap insurance.
Just what is healthcare gap insurance
As the name implies, medical gap insurance supplements a healthcare insurance plan by helping pay for medical costs that accrue before a plan’s deductible level has been reached. Another way of looking at it is “insurance on insurance.”
Gap insurance plans are structured in different ways, but typically cover deductibles, copayments and coinsurance expenses, prescription drug costs and other healthcare-related expenses. Gap insurance may also cover non-medical expenses, such as costs for living expenses during a hospital stay or while recovering at home from a long illness or accident. Others might include income replacement for periods when individuals are unable to work.
Combining gap insurance with an HDHP often turns out to be a cost-effective alternative to offering a low-deductible plan alone.
Why gap insurance vs. a health savings account (HSA)?
Some of the same benefits offered by gap insurance are also available through an HSA. Since you can’t have both a gap plan and an HSA plan at the same time, HSA is an easy frontrunner as contributions accumulate tax free and can be rolled over. The major difference is that, while a company may fund all or part of an HSA (and the contribution maximums for 2017 are $3,400 for an individual, $6,750 for a family, and a catch-up contribution of $1,000 for those 55 years of age or older) the money to fund an HSA typically comes directly from the individual. Not everyone can afford $500+ per month. On the other hand, even someone on a tight budget can generally afford to spend roughly $50 each month for gap insurance that will cover them against their HDHP deductible. (The math works out the same for a company, if they’re fully funding the HSA or gap insurance: it will be cheaper to provide HDHP plus gap insurance than it is to provide HDHP and a fully-funded HSA.)
Gap insurance isn’t perfect
As with any insurance plan, the devil is in the details and certain out-of-pocket expenses (lab work, x-rays, mental health) may not be covered under it (whereas with an HSA, everything categorized as a qualified medical expense will be). You may also be refused coverage because of pre-existing conditions, and, within a gap plan, there may be things like deductibles, co-pays, and more. Anyone interested in gap insurance needs to read the fine print. Still, it remains a good choice for many companies.
The bottom line: a better and more affordable benefits package
For some companies, combining an HDHP with gap insurance may be a financial lifesaver. But, more frequently than not, it is a way to save on that cornerstone benefit of healthcare coverage within the framework of an overall stronger benefits package. The money that traditionally would have gone into premium payments is instead being put into packages that include a richer set of options like dental and vision plans or wellness programs. With options like these, companies can provide a more attractive and flexible benefits package for less than the costs that they’d incur if they were taking full responsibility for the premiums of more high-priced plans with lower deductibles. Gap insurance can help make those HDHP plans more feasible (and maybe even more desirable).
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