Does Health Care Need a Behavioral Finance ‘Fix’?

An important decision, made in minutes.

No, that’s not retirement plan savings—though various consumer surveys have suggested that many spend more time mapping out their annual vacations than how they’ll fund their retirement needs. 

Rather, that’s how a new whitepaper by Voya’s Thought Leadership Council and SAVVI Financial LLC characterizes the 17 minutes that the average employee spends enrolling in benefits—including health plan selection, voluntary benefits and more. 

Now, in fairness, health care plan choices are, in my experience, less complicated that those associated with retirement. Not that they aren’t complicated, mind you—and there’s certainly concern associated with that choice (and “do overs” are hard to come by). But I suspect for most they are really “only” choosing between two, or at most three, different options—essentially packages carefully constructed by their HR groups (likely with the assistance of a benefits broker). 

When it comes to that individual decision—that choice between packages—anecdotally, at least, it seems often driven by a couple of key considerations: coverage of one’s physician(s) of choice—and cost. With regard to the latter, it is often focused on one particular aspect—premiums—though, as we’ll see in a minute, co-pays and deductibles can also factor in. Regardless, the choice is almost inevitably a “here and now” decision—one that has financial consequence, to be sure—but one that requires only that one look out no further than the year ahead. 

Or does it? That’s ultimately the premise behind that new whitepaper, “Retirement at Risk: The Relationship Between Overspending on Health Care and Retirement Readiness.” The whitepaper’s authors point out that it is a (short-term) decision with long-term consequences—and one that, with the growing consensus of the important links between health and wealth, bears consideration.

The paper basically presents the mathematical consequences of spending (too much) on health care versus how those savings could add up if instead invested for retirement. The math is—well, math. You could apply those financial choices to just about any individual financial decision and the trade-offs represented. 

But where things get interesting is the apparent rationale behind those choices—which, based on spending data, would appear to be somewhat “irrational.”

Simplistically, behavioral finance—something that has been employed so successfully in retirement plans to provide better outcomes—has yet to be applied to health care decisions. For example, the paper notes that when plans were branded to include the phrase “high deductible,” almost two-thirds of study participants chose the PPO plan, despite the fact that the high-deductible plan used in the study scenario was the more optimal financial choice. Strip out that label, and participants were just as likely to pick the plan formally known as high-deductible as the traditional Preferred Provider Option (PPO) plan (47% versus 53%)—because, after all, who wants a “high” deductible? 

The other challenge, of course, is that these HDHPs are (still) the “new” option. And here, as with retirement savings, inertia proves to be a powerful force. In fact, the paper cites a study that found that 89% of study participants… just chose the same plan they had in the previous year.[i]

In fact, while health care (and health insurance) costs have surely been rising, the paper echoes not only the conclusions, but the causations highlighted in “What’s Holding Back HSAs?”, a whitepaper the Plan Sponsor Council of America published in 2019. 

Now, in a perfect, rational world, folks would sit down and ponder the likelihood of filing a medical claim during the coming year—and perhaps think about the out-of-pocket costs if they did. They’d be aware that in 2018, nearly 60% of employees had less than $2,000 in claims—and, according to the Voya whitepaper, approximately 16% had no claims at all. They might even know that, according to a study published in the Quarterly Journal of Economics, the majority of employees at a Fortune 100 company who chose the plan with the lowest deductible—despite the premium costs—ended up spending 24% more on health insurance than they “needed” to. 

That, of course, is not the world we live in—and, helpful as the data presented in the Voya report is—well, health needs and health insurance costs tend to loom large(r) as a here-and-now concern that frequently trumps the (relatively) distant obligations of retirement. The Voya report should serve as a reminder that health care and health care costs are, and should be, an integral part of planning for retirement—and one that can, and should, be part of our current planning as well.

And for those for whom it isn’t yet, a reminder that applying some structural changes a la behavioral finance could help us all make better decisions about health—and retirement—and health care costs in retirement.

- Nevin E. Adams, JD

See also: 5 Ways to a Better HSA.

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[i] Indeed, a recent study by the Employee Benefit Research Institute (EBRI) and Greenwald Research found that 32% of those with a traditional health plan did not know whether they were offered an HDHP.

2020 "Hindsight"

At the end of every year, and as we approach a new one, it’s natural to look back at experiences and lessons learned—and to ponder ways to apply them productively going forward.
Here’s some thoughts from 2020 that I hope will help you do just that.

3 Things That (Seem to) Scare Plan Sponsors

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. And sometimes it’s just a good time to think about the things that give us pause—that cause a chill to run down our spine. In that category, here are three things to ponder…

3 Retirement Income Impacts That Can Impact Retirement Income 

Most of the focus on retirement savings is on those who haven’t saved enough, or who lack access to the platforms to make saving enough easy. But even those that have done the “right” things can nonetheless have their retirement planning realities tripped up. Here are three retirement income impacts of which (even) “good” retirement savers should be aware.

5 Things People Miss (or Get Wrong) About the CARES Act 

Written when the legislation was less than a week old, and amidst the scramble for answers and action(s)—well, it’s inevitable that some things will get overlooked, and other important things will be misconstrued. Here are five things you’ll (still) want to keep straight. 

5 Steps to Cyber Security 

Recent reports of 401(k) thefts and an ongoing concern about cyber security (should) have everybody on the alert. Here’s some things you, your plan sponsor clients, and their participants should check out—now. 

The Best Defense(s)

In a year full of challenges for plans and plan sponsors alike, we’ve seen a spate of litigation against retirement programs like none in recent memory. So, what’s a plan fiduciary to do? 

10 Things You Might Have Missed About E-Delivery 

The long Memorial Day weekend notwithstanding, many hadn’t yet delved deeply into the Labor Department’s final rule on default electronic disclosure. Regardless, here are some things you might (still) have missed. 

5 Ways to a ‘Better’ HSA

There are lessons in positioning and behavioral finance that we “learned” years ago with 401(k)s that might still be holding back the effective utilization of health savings accounts. 

The Next Chapter

Life has many lessons to teach us, some more painful than others—and some we’d just as soon be spared. But for the graduates of 2020—well, theirs is surely a unique time. So, if you have a graduate—or if you are a graduate—or if you have been a graduate—here are some thoughts…

Wishing you all a very happy, prosperous, and (at some point) “normal” New Year!

 - Nevin E. Adams, JD

What Happens In Vegas…

What are you waiting for?

So, have you registered for the NAPA 401(k) Summit? Hundreds already have. What about you?

I know it’s still a ways off (though April will be here before you know it). Maybe you’re waiting till after the holidays (it won’t be any cheaper). Maybe you don’t care about the convenience of being at the host hotel? Or maybe you’re just one of those who winds up putting things off till the very last minute (I feel your “pain”). One thing I’m sure of – if you’re serious about working with retirement plans – it’s only a matter of time until you do…or risk spending the rest of the year hearing from those who did about the amazing event you missed.

So why should you commit NOW to the NAPA 401(k) Summit?

First off, by now you know that this is the only retirement plan advisor conference developed by plan advisors for plan advisors. The proof of that is, quite literally, in the program that has been developed – for you. This year, as in years past, the steering committee (98% are advisors) has been hard at work for months, developing the program, fleshing out the agenda, lining up speakers, and assigning session “owners” to make sure that you get maximum bang for your buck in terms of information, interaction, and session quality.

Are you worried about helping your clients through a DOL audit? We’ve got you covered. Not sure how to best set a reasonable fee for your services? No problem. Want to incorporate HSAs into your focus? Check. Thinking about selling – or merging – your practice? Expanding your team? Benchmarking? We’ve got your back. Worried about litigation? Cybersecurity? Check, check. No “pay to play” — just the most timely topics, the best speakers, the most dynamic sessions. And nobody, and I mean nobody, brings “the Hill” to the Summit like NAPA!

Secondly, if you’re focused on networking, Summit “After Dark” has literally transformed the concept into a true advisor “experience.” If you’ve been there, you know what I mean. If you haven’t, trust me, you don’t know what you’re missing (though doubtless you’ve heard).

What’s (Really) Different

Beyond all those important reasons, there are two other major considerations in attending this year’s NAPA 401(k) Summit. There is the critical issue of legislative and regulatory reform. The mid-terms have shifted the balance of power – and believe it or not, the prospects for retirement reform might have just improved. What remains to be seen is if the outcome will be positive. And that doesn’t take into account what might emerge on the regulatory side from the Labor Department, the SEC, or both. Regardless – you will want – and need – to know what is afoot, and there is no better place for you to do that than the NAPA 401(k) Summit.

But among all the things that really (really) set the NAPA 401(k) Summit apart – one thing stands out, this year more than most. Quite simply, it is that – and unlike EVERY other advisor conference out there – your NAPA 401(k) Summit registration helps support the activities of NAPA – YOUR advocacy, information and education organization – not the bottom line of some corporate media organization or private equity firm.

That’s right – in addition to the insights, information, networking that you may get at some other events, your attendance at the NAPA 401(k) Summit is, and remains, a unique investment in your future – and the future of your profession.

It is, quite simply, a great way – perhaps the best way – to put your money where your mouth is.

So, go ahead – register for the NAPA 401(k) Summit. Today. While you’re thinking about it. Now. You’ll be glad you did.

Because, this time, anyway – what happens in Vegas won’t stay there…

Everything you need to know is at www.napasummit.org.

See you in Vegas!

- Nevin E. Adams, JD

A List of 10 ‘Best of’ Lists

It is something of a tradition this time of year to look back, to reminisce about past events and lessons learned, and sometimes to look ahead.

Here are some insights from columns past that I hope have been of value in 2017 – and will continue to be in the months ahead.

5 Things You May Not Know About Roth 401(k)s

According to a variety of industry surveys, roughly 60% of 401(k) plans now offer a Roth 401(k) option, and Plan Sponsor Council of America (PSCA) data shows that 28.6% of 403(b) plans already allow for Roth contributions. Participant take-up, which just a few years ago hovered in the single digits, is now in the 15-20% range. Here are five other things you may not know about the Roth 401(k).

5 Things People Get Wrong About ERISA Fidelity Bonds

One of the most important – and, in my experience, least understood – aspects of plan administration is the requirement that those who handle plan funds and other property be covered by a fidelity bond.

5 Things You May Not Know About HSAs

Odds are that you’ve heard that health savings accounts, or HSAs, offer individuals a “triple tax advantage” – but here are five things you may not know about HSAs.

7 Reasons Why HSAs Are ‘Hot’

Health Savings Accounts, or HSAs, are hardly a new thing – they were approved by Congress in 2003 and became law in January 2004. But they are getting a lot of attention lately – here’s why.

6 Dangerous Fiduciary Assumptions

There’s an old saying that when you assume… well, here are six assumptions that can create real headaches for retirement plan fiduciaries.

20-20 Hindsights

Here are 20 things I wish I had known when I entered the workforce.

6 Assumptions That Can Wreck a Retirement

The future is an uncertain thing, and planning for uncertainty inevitably involves making some assumptions. Here are six that, done improperly, can wreck your retirement.

12 Ways That the Class of 2021’s Retirement Will Be Different

By the time the Class of 2021 entered school, laptops were outselling desktops, while on the technology front, in their lifetimes, Blackberry has gone from being a wild fruit… to being a communications device… to becoming a wild fruit again. But what about their retirement(s)?

The Value of an Advisor

Most of the attempts to affix a value to having an advisor tend to focus on investment returns or cost savings. Both are valid, objective measures that can have a real, substantive impact on retirement security. But here are five of the best values I’ve gotten from a plan advisor.

Why an Average 401(k) Balance Doesn’t ‘Mean’ Much

In recent days, we’ve gotten updates on average savings rates and 401(k) balances, and while for the very most part the reports have been positive and “directionally accurate,” I’ve always taken such findings with a grain of salt. Not so many in the press. Here are four things to keep in mind about those “average” 401(k) balances.

Even with the passage of time, there’s value in looking back even further. Here’s last year’s list (an 11th):

Things, Remembered – From 2016

Here are some insights – nearly 80 – from columns in 2016 that I hope have helped - and will continue to help lay the groundwork for a productive and prosperous New Year.

Here’s wishing everyone a happy, healthy, and prosperous 2018!

- Nevin E. Adams, JD

"Free" Money?

While I appreciate the convenience of gift cards, giving them always feels a bit lazy. As a recipient, however, I very much appreciate the flexibility and the freedom to buy, within the limits of the card, pretty much anything—sometimes things for which I wouldn’t even have thought to ask much less buy for myself. And, arguably, in at least a couple of cases, things I SHOULDN’T have bought, and probably wouldn’t have bought, if it hadn’t felt like “free” money.

That very human inclination to spend our own money more judiciously than what we are given underpins the growing interest in consumer-directed health plans, such as the now decade-old health savings account (HSA), or its slightly older cousin, the health reimbursement arrangement, or HRA[i]. Both are designed to provide workers the ability to pay for health care-related expenses with funds drawn from the account – and yet, EBRI’s 2013 Consumer Engagement in Health Care Survey (CEHCS)[ii] found evidence that adults with an HSA were more likely than those with an HRA to exhibit a number of cost-conscious behaviors related to use of health care services.

Specifically, the analysis found that those with an HSA were more likely than those with an HRA to:

• report that they asked for a generic drug instead of a brand name (52 percent HSA vs. 49 percent HRA);
• check the price of a service before getting care (41 percent HSA vs. 34 percent HRA);
• ask a doctor to recommend less-costly prescriptions (40 percent HSA vs. 38 percent HRA);
• develop a budget to manage health care expenses (32 percent HSA vs. 22 percent HRA); and
• use an online, cost-tracking tool provided by the health plan (27 percent HSA vs. 21 percent HRA).

Moreover, the 2013 CEHCS also found that adults with an HSA were more likely than those with an HRA to be engaged in their choice of health plan, when they had a choice. They were, according to the analysis, more likely to report that they had talked to friends, family, and colleagues about the plans; used other websites to learn about health plan choices; and were more likely to have consulted with both their employer’s HR staff and an insurance broker to understand plan choices, among other things.

HRAs and HSAs are very similar, so why might those differences in behavior occur between those covered by the two plan types? Consider that an HRA is an employer-funded health plan that reimburses employees for qualified medical expenses, in contrast to the HSA, which can have both employer and employee contributions. HRAs are generally “notional” accounts maintained by the employer, and while funds unspent at the end of each year can be carried over for future use, that option is at the employer’s discretion.

On the other hand, and as the EBRI report notes, an HSA is owned by the individual and is completely portable, with no annual “use-it-or-lose-it” rule. Additionally, those who do not use all the money in their HSA during their working years can use it to pay out-of-pocket expenses after they retire.

Said another way, for most people the HSA balance probably feels like it is “their” money[iii], and they spend it accordingly, while their HRA feels more like a gift card with an expiration date. It’s certainly not “free” money, but it may feel that way to them.

• Nevin E. Adams, JD

[i] Overall, 26.1 million individuals with private insurance, representing 15 percent of the market, were either in an HRA or an HSA-eligible plan.  See “Who Has “Consumer-Driven” Health Plans?“

[ii] “Consumer Engagement Among HSA and HRA Enrollees: Findings from the 2013 EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey,” is published in the June EBRI Notes here.

[iii] In many cases it is, of course, literally funded by their contributions.

Bargain Based

My father had many admirable personality traits, but he also had his quirks. He was buying in bulk at warehouse stores well before it was “cool” to do so (and before many of the current generation of such stores existed), and he was an earlier adopter of generic food brands. And, yes, sometimes he bought generic food and paper stocks in bulk. While the quality of such offerings has doubtless improved dramatically over the years, I still shudder at the memory of my first sip of generic cola.

My childhood encounters with generic products notwithstanding, I’ve generally not been as particular about generic drugs. Oh, sure, when you have a migraine, there’s still something to be said for the confidence (if not reality) in reaching for the name brand pain reliever. But when it comes to prescription drugs, if there’s a cheaper, generic alternative, I’m generally amenable to the switch.

A greater sensitivity to cost is, in fact, one of the aspects of consumer-directed health plans (CDHP) touted by proponents, who contend that providing participants with an account and subjecting their health insurance claims to high deductibles will induce enrollees who would likely be spending more of their own money (than might be the case with traditional health coverage) to make more cost- and quality-conscious health care decisions. On the other hand, CDHP skeptics caution that these individuals lack the kind of information they need to make good decisions—and, worse, might make cost-centric choices that aren’t the best health care choices, and might even prove to be less cost-efficient (and even more expensive) over the longer term.

Using data from a large employer that implemented a CDHP, fully replacing traditional managed-care health insurance with a health savings account (HSA), new research[i], conducted through the EBRI Center for Research on Health Benefits Innovation (EBRI CRHBI)[ii], found that moving to the HSA-eligible plan reduced the number of brand name prescriptions filled. However, it also found that the move reduced the number of generic prescriptions filled. Previous EBRI research showed that while prescription drug use went down, it also resulted in decreased use of maintenance medications for chronic disease and a worsening of adherence.

As the EBRI report explains, while reductions in prescription-drug utilization can result in pharmacy expenditure savings for employer plan sponsors, increases in downstream medical costs may eclipse those benefits. In view of the potential for these kinds of unintended offsets, it notes that CDHPs and other plan designs that raise patient cost-sharing for prescription drugs might want to consider some alternative strategies that can bolster adherence and mitigate the potential impact.

Sometimes less is more – but only after you take into account all the costs. And sometimes you find that “less” is no bargain.

• Nevin E. Adams, JD

[i] “Brand-Name and Generic Prescription Drug Use After Adoption of a Full-Replacement, Consumer-Directed Health Plan With a Health Savings Account” was published in the March EBRI Notes, available online here.

[ii] The following organizations provide the funding for EBRI CRHBI: American Express, Ameriprise, Aon Hewitt, Blue Cross Blue Shield Association, Boeing, Deseret Mutual, Federal Reserve Employee Benefits System, General Mills, Healthways, IBM, JP Morgan Chase, Mercer, and Pfizer.

Everybody Into the Pool?

As a teenager, I remember the occasional visits to the local swimming pool. I also remember that about once an hour, the lifeguards on duty would periodically clear the pool, ostensibly to clean out debris, to enforce a certain rest break on the swimmers (and doubtless for the lifeguards), and perhaps to assure that all the swimmers were still able to get out of the pool. Then, after what seemed to my teenage senses like an eternity, the lifeguards would blow a whistle—the “all-clear” signal for everyone to jump back in the pool. They were very strict about this—and kids were routinely banned for an hour, or even the rest of the day for jumping in “early.” As a result, even after the whistle, most of us would hesitate and look around to make sure that we weren’t the only ones going in.

With the Supreme Court’s recent decision on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) behind us, industry surveys suggest that employers are turning to the issue of the next phase of implementation. Moreover, the combination of insurance market reforms and the embodiment of the exchange structure in the PPACA have brought a renewed focus on limiting employer’s health care cost exposure, much as changes in funding requirements and accounting treatment led many to reconsider their approach to retirement benefits.

A recent EBRI Issue Brief¹ notes that it was only about a decade ago that defined contribution (DC) health plans, arrangements that shift choice of health insurance from employers to employees, were the focus of much attention. As far back as the late 1990s, more than 62 percent of health care leaders predicted that employers would move to DC health plans by 2010.

That trend never fully emerged, of course—employers were hesitant to drop group coverage in favor of offering individual policies, some were likely concerned that many employees would not be able to secure coverage in the individual market, some others drawn to the tax advantages. Many viewed the benefit as an important tool in attracting and retaining a strong work force, and surveys, including EBRI’s Health Confidence Survey (HCS), suggest that workers do, in fact, appreciate the offerings.

EBRI’s Paul Fronstin notes that the combination of insurance market reforms and the embodiment of the exchange structure² in PPACA have brought a renewed focus on limiting the employer’s health care cost exposure by providing a fixed-dollar contribution that workers could use to purchase individual policies. He notes that the vehicle that some are interested in using for providing coverage is a private health insurance exchange, through which employers might be better able to accelerate the drive toward a more mass consumer-driven insurance market—and in the process gain more control over their health care contribution costs, while shifting to employees the authority to control the terms (and to some extent, the costs) of their own health insurance.

This should sound familiar to those who have watched similar motivations lead to the shift in retirement plan emphasis from pension plans to defined contribution/401(k) retirement benefits. The question is, will the combination of factors provide employers with the “all clear” sign to undertake changes they have, thus far, been hesitant to take?

And if that all clear sign is given, will employers all jump in at once?

- Nevin E. Adams, JD

¹ In addition to a historical perspective, the July 2012 Issue Brief examines the issues related to private health insurance exchanges, the possible structure of an exchange and how it can be funded, as well as the pros, cons, and uncertainties to employers of adopting a private exchange. MORE.

² Fronstin notes that private exchanges are already in development partly because of the uncertainty related to the status of state-based exchanges. Development of several of these were postponed, pending resolution of the PPACA’s constitutional challenge. Several Republican governors have said they will refuse to establish state-based exchanges, leaving them to the federal government to run. As recently as March 2012, the majority of states had still not taken the necessary steps to establish an exchange.