When High-Deductible Health Plans (HDHPs) were introduced, they were touted as a revolutionary way to curb rising healthcare costs. Paired with Health Savings Accounts (HSAs), these plans promised to make healthcare consumers more financially responsible and prudent, leading to lower overall costs for everyone.

The underlying concept seemed straightforward: by giving people a greater financial stake in their healthcare decisions and a little bit of “seed” money to get the process started, they would make rational, cost-effective choices.

However, the reality has turned out to be far more complex.

Cost Alone Doesn’t Determine Care

The term “rational” here is borrowed from economics, where it essentially means choosing the optimal level of utility based solely on cost. But when it comes to healthcare, this idealized notion of rationality breaks down.

Consumers often do not make healthcare decisions based purely on cost. Health is a deeply personal and emotional issue with choices frequently influenced by factors other than financial considerations, though financial wellness still plays an important role in helping employees engage with benefits. Even if individuals wanted to make financially astute decisions, our healthcare system is so fragmented and confusing that even the most savvy among us struggle to navigate it effectively.

The Uphill Battle of HDHPs

From their inception, HDHPs were set up to face significant challenges.

Poor Plan Naming

The very name “High-Deductible” is off-putting. Officially termed “Qualified High-Deductible Plans” by the IRS, these plans offer no first-dollar coverage for services, meaning no copays. Imagine being an employee who has to choose between three plans: the Gold PPO, the Silver PPO, and the High-Deductible Health Plan. The terminology alone is enough to make most people shy away from the HDHP option.

Unstainable Incentives

To drive enrollment in these plans, employers often set the contribution rates significantly lower than for other plan options, even when the actuarial value of the plan did not justify it.

The actuarial value measures the “richness” of a plan, or the economic value that the plan provides to participants. By making the HDHP more financially attractive, employers inadvertently targeted healthier, often younger employees at a stage in their life where they’re less deterred by the high deductible and more attracted to the lower premiums.

Understand the Risk, Not Just the Reward

Initially, this strategy appeared to be a success. The healthier demographic of HDHP enrollees meant that these plans performed better financially compared to their Gold and Silver PPO counterparts. This early success led plan sponsors to further incentivize enrollment in HDHPs, believing they had found a cost-effective solution.

But this approach led to an unintended healthcare trend: as more healthy individuals migrated to HDHPs, the risk pool in the Gold and Silver PPOs became less healthy, driving up costs.

• Moving On: The healthiest people from the Gold and Silver PPO plans were migrating to HDHPs year over year.
• Impacting the Pool: However, the healthiest in the Gold and Silver PPO plans were the least healthy in their new HDHP plan.
• Adverse Selection: The net effect was that the cost of all plans, when looked at in isolation, increased at a higher-than-average rate. This phenomenon, known as adverse selection, created a vicious cycle where no plan could maintain stable costs.

So, how could this have been avoided? The key lies in trusting the math and not overly incentivizing enrollment in HSA plans through artificially low contribution rates.

While the case of HSA plans is particularly dramatic, the principle applies universally: contribution rates that are not set correctly can have detrimental effects regardless of the plan types.

It’s crucial to view whatever plans offered by a self-funded employer as a single pool of risk and structure funding and contribution rates accordingly.

Design a Benefits Strategy for Your Unique Needs

While HDHPs paired with HSAs were an innovative attempt to tackle rising healthcare costs, their implementation revealed significant flaws. By understanding the importance of balanced risk pools and appropriately set contribution rates, employers can better manage healthcare costs without inadvertently creating new problems.

This lesson serves as a reminder that well-intentioned strategies must be scrutinized and implemented to achieve desired outcomes. Managing benefits effectively requires viewing plans holistically, aligning contribution strategies with sound actuarial data, and intentionally managing the entire risk pool instead of relying on incentives alone. That’s where experienced guidance matters.

At Holmes Murphy, our Employee Benefits team helps employers balance affordability, employee experience, and long‑term financial stability through data‑driven insights, thoughtful plan design, and proactive risk management. When benefits are built with intention, employers are better positioned to control costs, support their people, and achieve outcomes that last. Connect with us today to reimagine your benefits strategy.