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Consumer-directed health care is hot. But is it a danger to the medical-insurance system?
Joseph McCafferty, CFO Magazine
August 1, 2003
Quicker than you can say "managed care is dead," controversial new programs called consumer-directed health plans (CDHPs) are catching on —cutting employer costs while transferring to employees more responsibility for purchasing their own medical care.
In fact, little more than a year after a July 2002 Internal Revenue Service decision gave the agency's blessing to health-reimbursement accounts (HRAs) — the funding mechanism for CDHPs — the number of companies using them is soaring, and includes CVS, Amazon.com, Medtronic, and Wells Fargo. In addition, 30 percent of large employers say they are likely to offer plans in the next two years, according to Mercer Human Resource Consulting. Upstart health-care companies such as Lumenos Inc. and Definity Health have emerged to handle early interest. (Definity, which had three clients in 2000, expects to administer CDHPs for 80 companies by year-end.) But traditional health-care insurers and administrators are now also scrambling to offer consumer-directed products.
"This is the most important thing to happen in health care since the emergence of managed care," says Robert H. Booz, vice president of health and managed care at Conning Research & Consulting Inc., an insurance-industry research firm.
CDHPs are in the spotlight because many employers have run out of other options. "A lot of weapons in the arsenal to control costs have been exhausted," says Alexander Domaszewicz, senior consultant at Mercer. After years of negotiating with vendors, wringing out administrative efficiencies, and shifting costs to employees through other means, he says, plan sponsors are now trying consumer-driven plans to attack the demand side of the equation. Early results show the plans — providing individual employee accounts that, when depleted, require members to pay for health needs out of their own pockets — have some success restraining costs. According to research by Conning, employees in a CDHP use 11 percent fewer health-care services.
Opponents of the plans, though, contend that they offer a raw deal for many employees. In the long run, CDHPs won't effectively curb overall health costs, they say, and could even threaten the health-insurance system. "If structured wrong, it's a really great deal for 80 percent and a devastating deal for the 20 percent that use the most care," says Harvard Pilgrim Health Care Inc. CEO Charles Baker of the approach. Some CDHPs fail to provide employees with tools they need to make the right decisions, he says. "We all need to do a better job of getting consumers more involved in the system, but not in a way that makes them feel they have been abandoned."
A Shifting of Costs
In theory, a CDHP is any plan that gives employees a financial incentive to influence consumption of care, and may include tiered co-pays and multiple plan options at different price points. But it is the HRA, an outgrowth of the medical savings accounts of the early 1990s, that is growing the fastest and getting the most attention.
HRAs must be entirely funded by employers, commonly at a $1,000 to $2,000 level. When that amount is exhausted, employees in a CDHP are responsible for paying all medical expenses until they reach the next insurance-covered threshold. This period of out-of-pocket expenses, called the bridge or gap, can range from a few hundred dollars to more than $6,000, depending on the plan. On the other side of the bridge, a preferred-provider network typically kicks in, with the employer paying 80 percent and the employee 20 percent of in-network care, for example. Often the plans are self-funded, with a high-deductible, stop-loss insurance policy to protect employers against catastrophic claims, and employee expenses are capped. In theory, employees will use discretion in health-care purchases, knowing they'll be on the hook when the account runs dry. The IRS decision makes accounts tax-free, and unused portions can be rolled over year-to-year. But accounts usually aren't portable, can't be used for expenses other than IRS-recognized health expenses, and can't be taken out in cash.
Perhaps the biggest criticism of CDHPs is how sharply they can shift costs to employees. With health-related expenses rising at an annual average of 15 percent, employees would have to pick up much of that growth, unless employers actively increase their contributions. While employers with traditional plans also have shifted costs to employees, with CDHPs employees bear the risk of most future increases as well. Further, there are concerns that employees might put off medical procedures because they simply can't afford them. "That will cost the system in the long run," says Booz.
Critics also note that because the plans set aside funds for the healthy and ask those who use health care heavily to pay more, CDHPs could undermine the current health-coverage model. "The nature of health insurance involves the healthy 80 to 85 percent subsidizing the care for the 15 to 20 percent who are not," says John McDonough, executive director of Health Care for All, a consumer-advocacy organization. "When you pull out an explicit portion of money and make it available to the 80 percent, you put a strain on the fundamentals of the system."
With soaring health-care costs jeopardizing profit margins, though, some companies make no excuse for asking these employees to shell out more. "The higher users will pay more under this plan," admits Neil Chinn, vice president of human resources at PWEagle Inc. The Eugene, Oregon-based pipe manufacturer cites a change in philosophy as its reason for adopting a CDHP in July 2002. While once a paternalistic organization, it decided to move toward an "independent facilitator role," with employees making their own decisions, says Chinn. "What we had been doing was subsidizing the minority of employees who use the most health care," he explains, but now the company provides financial incentives for all employees to handle their own health care more wisely.
Is Some Pain Needed?
PWEagle turned to Minneapolis-based Definity, which structures and administers CDHPs. PWEagle offers three options at different price points, with risk levels based on the size of the bridge in the plan. (The "premium" option has a $2,000 bridge for out-of-pocket expenses, with traditional insurance then kicking in.)
Unlike many companies implementing CDHPs, PWEagle offers only this health-care option to its 700 employees. That solves another common CDHP problem: adverse selection. Critics say the plans attract healthy employees because they like the idea of accruing money in an account that they don't think they'll need for some time. That dynamic could leave heavier health-care users to rely on traditional plans, creating higher losses there and swelling premiums.
So far, Chinn says, the CDHP has been a success, at least financially. The company held health-care costs flat during the first fiscal year it was used, while others in the industry experienced increases of 15 to 18 percent. "The cost performance of the plan has been outstanding," says Chinn, who expects only a slight increase next year. For the first time in many years, employees had no increase in premium contributions this year.
The plan has not been without losers, though. "There has been some push-back from the high users of care," concedes Chinn. One employee was forced to take a second mortgage on his house to pay medical bills, and a number of others blew through their personal-care accounts ($2,000 for families and $1,000 for individuals) in the first three months. Without pain, though, Chinn doesn't think the plans would effectively change employee behavior. "If you told someone to go buy any car they want and offered to pay for 80 percent of it, they would come back with a BMW," he says. "But is that really what they need?"
Vancouver, Canada-based customer relationship management software provider Pivotal Corp. says it designed its CDHP, implemented in June, mainly as a better health plan with more services for its 100 U.S. employees. Instead of complaints, "we got calls from employees asking, 'What's the catch?'" says Kevin Conefrey, Pivotal's HR director. The plan requires employees to pay less out of pocket than the company's preferred-provider plan did. Structured by Alexandria, Virginia-based Lumenos, the CDHP provides a small bridge ($300 for a single employee, for example) after the $1,000 HRA is used; then the company covers 100 percent of in-network health costs. "We wanted to provide employees with the same rich benefit that says we care about them," notes Conefrey.
One benefit is the Lumenos Website, which helps employees choose health providers. Lumenos's national network also suits Pivotal employees, who travel a lot. "Employees wanted more control of their health-care options," says Conefrey.
The CDHP also saves Pivotal money. Some high-loss experiences in its previous plan led the company to face a 40 percent premium hike; the CDHP will likely hold the increase to 30 percent.
Equitrac Corp., a Coral Gables, Florida, document-imaging company, turned to a CDHP this year to help offset escalating costs, says CFO Rahul Khanorkar. The alternatives were raising co-pays even higher, increasing deductibles, and reducing coverage. The company adopted a Lumenos plan in which "80 percent of employees do better," says Khanorkar, adding that the impact on heavier users is limited by the $1,000 bridge in the least-expensive plan. Equitrac provides an out-of-pocket maximum comparable to the old one, shielding employees from massive medical bills.
At first Khanorkar worried that employees might put off seeing a doctor for routine medical care because of the plan's design. But, like many CDHPs, it pays 100 percent for medical checkups, mammograms, and other preventive care, so the CFO is reassured. It seems that employees now pay more attention to cost, too, while "in the past, they didn't care if the doctor charged $500 or $1,000, and often they didn't know."
Other employers, though, aren't convinced that CDHPs are the answer to rising costs. Tom Emerick, vice president of benefits at Wal-Mart Stores Inc., says the retail giant has looked at them, but "they're not a good fit for us right now." In his view, "there is nothing inherent that would save health-care dollars." The company prefers controlling costs through proven methods like plan redesign, disease management, and negotiating on pricing. "There is still a lot that can be done in these areas," he says. Wal-Mart is certainly not against getting employees more involved in the equation, though: it offers more than eight plans at most locations.
Consumerism seems here to stay. "Employers want every plan to build in consumer tools, financial incentives, and high support for the chronically ill," says Peter Lee, president and CEO of the Pacific Business Group on Health, a San Francisco coalition of large health-care purchasers. But, asks Conning's Booz of the CDHP approach: "Is this too much involvement? The answer may be yes."
As CDHPs catch on, they are creating some new names in health care.
|Growth in number of clients||2002||2003||2004*|
|Sources: Lumenos Inc. and Definity Health *Projected|
|Taking The Pulse|
Executives expect employee confusion, but see cost-cutting promise in consumer-directed health plans.
|Do the consumer-driven models promote cost reduction through consumerism?|
|Change employee purchasing behavior||71%||10%||19%|
|Shift costs to employees without impacting purchasing patterns||30%||49%||21%|
|Result in immediate employer cost savings||53%||29%||18%|
|Reduce long-term health-care trend||37%||32%||31%|
|These new plan designs seem complex do they really work, and how will they be received?|
|Have complex and confusing designs||63%||21%||16%|
|Make employees pay more for costly providers||76%||13%||11%|
|Reward efficient providers||50%||20%||30%|
|Are well received by some, but not all, employees||68%||22%||10%|
|Do consumer-driven health plans reward the healthy at the expense of the sick?|
|Benefit only healthy employees||41%||38%||21%|
|Are positioned as one of two or more options||72%||15%||13%|
|Source: Deloitte & Touche's Human Capital Advisory Services survey of 287 companies|