It’s a “Wrap”: Brokers Harm Consumer-Driven Health Care

For months now, I’ve heard stories about a technique that insurance brokers use to sell health insurance to small businesses, which want the lower premiums that come with a consumer-directed health plan, but are nervous about convincing their employees to face a deductible of at least $2,200 for a family policy.

There’s a story explaining this in the Sacramento Business Journal, by Kathy Robertson on August 22. The feature is for subscribers only, but there is a summary on a free website. The technique is called a “wrap-around”. (I think Ms. Robertson misunderstood it a little, because she identified Health Savings Accounts as the tool to execute the wrap-around, but I don’t think it’s possible to abuse an HSA like this. I think it’s more likely Health Reimbursement Arrangements or Flexible Spending Arrangements.)

The broker sells the small business a high-deductible health plan, with a lower premium, but then “immunizes” the employees from the high deductible by having the employer wrap it so that the employee pays only a fraction of the deductible. As a result, the employee faces the incentives of a traditional policy (e.g. $20 co-pay, $250 deductible) and the incentives for consumer-directed health care collapse.

Note: this is completely different than an employer depositing a few hundred dollars in your HSA every year, to motivate you to switch to a consumer-driven health plan. It that case you control the dollars, and the consumer-driven incentives are not destroyed. With the wrap-around, the employee does not see the dollars, but sends the invoice to his employer, just like any other business expense.

Because the wrap-around destroys the incentives for consumer-driven care, claims experience is much higher than in a real consumer-directed health plan. All that the broker and small employer have really achieved is to fool the carrier into thinking it’s written a consumer-driven policy when it’s really written a traditional policy.

The carriers have wised up and are asking brokers to sign contracts that contain commitments not to wrap-around, or they’ll lose their commissions.

What’s the public policy issue? The state must ensure that such contracts are enforceable. Both the sanctity of contract, and the success of consumer-driven health care, depend upon it.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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