Picwell Blog

Picwell Insights: The Role of “Capacity to Pay” in Employee Benefits Decisions

Sep 22, 2022 8:15:00 AM / by Picwell

Every year, the Federal Reserve conducts a study on the financial health of American households, and one of the most frequently cited statistics from this study comes from the following question:

“Suppose you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense?”Survey Results

For many people, $400 would not seem like a large expense, but whether people can handle such an expense and how they would pay for it says a lot about their financial health. In the latest version of the survey, about 32% of people did not have enough cash on hand to cover a $400 emergency expense, and 11% said that they would not be able to pay for it at all! 

What’s even more concerning? These numbers actually represent an improvement over recent experience.

While this survey question does not specifically call out health care expenses, the fact of the matter is that health care costs are a big source of unexpected emergency expenses. HSA eligible plans must have a deductible of at least $1,500 for individual coverage and $3,000 for family coverage, and many health plans have deductibles that are quite a bit higher than these amounts. Employees who select these plans risk taking on some pretty high medical bills. The questions that they should be asking themselves, then, is “Can I afford it?”

How Picwell Evaluates Employees’ “Capacity to Pay”

At Picwell, we ask this question and account for employees’ responses when we score health plans. Specifically, we ask the following question:

Picwell Capacity to Pay

The way an employee responds to this question gives us another way to think about the risks associated with health plan choices and it allows us to think about the trade-offs between cost savings and risk protection in a more nuanced way. While the risk aversion scenarios that we present within our tool identify how comfortable employees are with risk, these questions identify how prepared they are to take on risk, which is a slightly different concept.

Here’s how people responded to these questions during the Fall 2021 open enrollment period.

Medical Bill Graph

A more intuitive way to look at this data is to take these responses and ask,

How many people could afford to pay for medical bills above a certain level?

This next figure shows us the answer to this question for different dollar amounts.

Affordability Graph


78% of employees could afford a medical bill of $500 or more, which is somewhat better than the Federal reserve study numbers. If we go up to the next threshold, we see that about 60% of employees reported that they could afford an unexpected bill of $1,000 or more. Or, if we look at it another way, about 40% of people could not afford a bill of $1,000.

As the dollar values go up, we see a pretty steady decrease in the capacity to pay for larger and larger unexpected bills, which is pretty much what we would expect. There are a few key thresholds that are worth zooming in on, though. 

Let’s take a look at how many people could afford a surprise medical bill of $3,000 or more.  Deductibles continue to rise, and according to the most recent version of the Kaiser Family Foundation’s Annual Survey on Employer Health Benefits, the average deductible for single coverage HSA eligible plans among small businesses is just over $3,000. However, when we look at our data, we see that only 29% of people could afford a surprise medical bill of $3,000.

Does that mean that only 29% of people should enroll in a health plan with a $3,000 deductible?

No. But employees should certainly consider the risk that comes from enrolling in that type of health plan versus a more expensive, lower deductible option.

How “Capacity to Pay” Affects Employee Benefits Decisions

When employees enroll in plans with deductibles that exceed their “capacity to pay”, they face the potential that they may receive medical bills that could cause extreme financial hardship. However, there are a couple of things to consider when weighing different options:

  • How likely is it that an employee will receive a medical bill that exceeds their capacity to pay?
  • How much more will it cost an employee to reduce their exposure to medical bills that they are not prepared for?

Employees who have a pretty low risk of facing unaffordable medical bills may be better off saving their money and picking a lower premium, higher deductible option. But before jumping to that conclusion, it is important to weigh the different variables in play. And this is exactly what Picwell does. 

How Picwell Accounts for “Capacity to Pay” in Health Plan Recommendations

When an employee uses Picwell to select benefits, the solution is designed to:

Picwell DX

Once added together, the solution can tell an employee which plan is best for them, keeping in mind not just the cost of each plan, but also each employee’s specific health risks and how financially prepared they are to take on these risks. 

In many cases, Picwell might recommend a plan with a higher deductible, but when that is the case, employees can be confident that this plan represents a clear value, even after considering their financial situation. On top of that, employees are given access to resources to help them become better prepared for unexpected medical bills. This personalized guidance can help people not only save money in their Health Savings Accounts but also helps them choose additional, voluntary benefits that can help guard against unexpected costs even further.

Check in next week as we analyze the data around “capacity to pay” to see what it actually looks like for employees and how it ultimately affects the way they choose benefits.

Topics: Benefits Decision Support, Health Insurance, employee benefits, health savings account, empower wise choices,, voluntary benefits, risk aversion


Written by Picwell