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Dawn of the Jumbo Deductible

New health-care plans for workers feature more choices, more self-insuring.
David M. Katz, CFO.com | US
November 30, 2001

It's payback time for employees. Or at least, that's what executives at managed-care companies appear to be thinking.

Caught between double-digit increases in the cost of medical care — and employer carping over premium hikes — commercial health insurers have started to push some of the costs back onto workers. The switch in strategy can be seen in the growing number of "consumer-driven" health-benefit products now being brought to market by insurers. Such plans offer employees more choices — but also expose them to more risk.

Initially, the consumer-driven products were the province of lesser-known benefits services providers such as Definity Health, MyHealthBank, and Lumenos. But consumer-driven health-care plans are now being trotted out by industry giants like Humana and WellPoint.

The entrance of the big players is not overly surprising. During the economic expansion of the late '90s, managed-care providers began losing the ability to to keep medical costs in check. The reason? Employers, seeking to retain talented workers, pressed insurers to enrich their offerings by opening up their networks to more doctors. That, in turn, diluted the negotiating power of the insurers.

To maintain their margins, insurers recently began hiking premiums — sometimes as much as 15 percent. And at the moment, managed-care companies are feasting on those premium hikes. Humana's medical costs on its commercial business have risen between 9 percent and 10 percent for the first three quarters of 2001. But James Bloem, the company's CFO, has been boosting pricing on the company's benefit products based on the assumption that costs will rise 10 percent to 12 percent.

That formula helped produce a 30 percent jump in Humana's third-quarter net income. Similarly, other managed-care providers, including WellPoint Health Networks and PacificCare Health Systems, recorded boosts of more than 20 percent in their operating profits through Q3.

But a day of reckoning my soon be at hand. Layoffs are diminishing the numbers of health-care plan enrollees. Meanwhile, employers hit hard by the downturn are screaming bloody murder about their benefit outlays (see our special report "Controlling Health-Care Costs"). Maintaining profits under such conditions is "a big challenge to anybody in my position," concedes Bloem.

A Plug for Oatmeal
Enter the new consumerism. Humana, for one, is experimenting with plan designs that push employees to choose higher deductibles, providing them with plenty of online information to aid their choice.

Asking employees to assume more cost risk helps carriers deal with their own expense pressures. At the same time, by supplying a broader menu of coverage options, the new plans provide the element of choice insurers say employees crave. And since the choices tend to vary in their cost to employees, the plans provide an incentive to workers to be alert to what they spend on doctors and drugs.

Indeed, the Humana CFO believes the absence of true consumerism is the fatal flaw in the health-care payment system. He thinks employees are too insulated from the effects of their medical buying habits. "There's not enough tension in the line," Bloem insists.

One example: A worker who doles out a mere $5 co-payment for the cholesterol-lowering drug Lipitor has little reason to question the value of the drug, which actually costs between $50 and $100 a month. An employee who had to pay $40 for the same prescription might be more apt to explore the relative merits of eating oatmeal regularly, Bloem says.

The fact that a company with Humana's clout has entered the market could be taken as a sign that consumer-driven plans are set to become a dominant offering. Another sign: Humana is beta-testing its new benefit design on a large portion of its own 14,300 employees.

In May, Humana rolled out MOCHA (More Options and Choices for Humana Associates) for the 4,500 workers in the company's Louisville headquarters. The Humana employees there were first asked a battery of questions about their health-care use and benefits preferences. Workers answered the questions online using a browser-enabled tool called "Plan Wizard," which was developed by Humana and Selectica, a San Jose, California-based software company.

Based on that information, Plan Wizard ranked the relative appropriateness for each employee of six health-plan options. Workers could enroll in a health maintenance organization (HMO), three different conventional preferred provider organizations (PPOs), or two lower-cost PPOs with large employee deductibles.

Humana executives have high hopes for the cost-saving potential of the big-deductible PPO options, known as "CoverageFirst" plans. One of the plans starts with $500 of coverage (with the employee paying $20 per office visit, along with other co-payments). Once the $500 is exhausted, the worker must cough up as much as $1,000. After the employee has hit that deductible amount, the plan pays 80 percent of in-network expenses and 60 percent of out-of-network costs.

In the second PPO plan, workers pay as much as $2,000 in out-of-pocket costs — after the first $500 of coverage. Once the employee has met the deductible, the plan pays 100 percent of in-network bills and 80 percent of charges accrued out of network.


In exchange for covering more of their own medical bills, single employees receive $300 and $340 more a year on their paychecks, respectively. For family coverage, the rewards are $1,000 and $1,100.

While selecting the high-deductible coverage wouldn't be a prudent move for employees with serious health problems, it's a realistic choice for most Humana workers, says Bloem. Although as much as 85 percent of the company's claims dollars are paid to care for employees with serious, chronic illnesses like diabetes, they represent only about 15 percent of the total number of employees, the CFO asserts. The remainder should be able to retain a good deal more cost exposure, he adds.

Humana executives are happy that 6 percent of the employees participating in the Louisville pilot plan picked the large-deductible options. "You're getting employees to shoulder the risk," Bloem says.

As workers take on greater risk, they'll also be faced with benefits-design and cost choices that have, until now, been divided between insurers and employers. Employees will be offered a richer selection of benefits, but it will be up to them to pick the ones that fit their budgets, Bloem says.

The role of the managed-care company will change accordingly. With its new plan design, notes Bloem, Humana "will be more of a concierge to the system than a gatekeeper."




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