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Consumer-driven health plans are catching on quickly, but are they the answer to runaway medical costs?
Joseph McCafferty, CFO Magazine
February 22, 2005
Employees are leery of them. Physicians deride them. And critics say they pull cash out of a cash-starved system. None of this, however, is keeping employers from offering consumer-driven health plans (CDHPs) to workers. According to a survey conducted by Mercer Human Resource Consulting, 14 percent of large companies say they will likely offer a high-deductible medical plan with an account-based funding mechanism this year. And more than one-fourth say they are likely to offer them by the end of 2006.
While the take-up rate is surprising, the bigger news may be the ongoing shift in the type of accounts companies sponsor. Currently, most companies with a consumer-driven plan offer health reimbursement accounts (HRAs). But health savings accounts (HSAs), which give more control to workers, are gaining in popularity. Within a few years, say experts, HSAs may well be the account of choice for consumer-driven corporate health plans.
So what's the difference between an HRA and HSA? Mostly, who gets the money that goes into them. HSAs are fully owned by employees and can therefore be taken with them when they leave a company. In contrast, HRAs are funded solely by an employer and are generally not portable. The reason employers may begin moving to HSAs is to get employees to buy into the consumer-directed health concept, which some experts believe could eventually lower the cost of medical products and services. Says Alexander Domaszewicz, a consultant at Mercer: "HSAs are the next generation of consumer-driven health care."
Here's how they work: an employer or employee, or both, pay into an account, which is linked to a high-deductible (and thus cheaper) health-insurance plan. The first dollars used by the employee come out of the account. If the money in the account is exhausted, the employee is expected to pay additional costs out of pocket until the deductible is met, which triggers the insurance coverage. The hope is that employees, facing the prospect of using their own money—and armed with better price and quality information—will make decisions based more on value.
"The idea is to educate employees to the true cost of health care," says Rahul Khanorkar, CFO of Equitrac, a Coral Gables, Florida, document-imaging company. Equitrac began offering HRAs in 2003. But Khanorkar says the company does not intend to move to HSAs. The reason, he says, is that HSAs need to be funded up front; HRAs are accrual accounts that affect cash flow only when the money is spent. In addition, money put into a reimbursement account stays there. "The liability doesn't go with the employee when they leave," notes Khanorkar.
That's not the case with HSAs. Employers help participants set up the accounts, but they are controlled by the workers. They can be rolled over from year to year and may be invested in mutual funds or money-market funds.
Employers and employees can fund HSAs tax free, up to $2,650 for individuals and $5,250 for families. Deductibles for such plans run as high as $5,000. Typically, the accounts are tied to a debit card that can be used for all health-care purchases.
Not surprisingly, a number of credit card issuers have jumped into the HSA arena. So, too, have scores of financial services firms, eager to administer accounts and provide investment services. Wells Fargo & Co. offers six mutual funds as vehicles to invest HSA funds. UnitedHealth Group launched its own bank, Exante Financial Services, to also offer investment options.
Large mutual fund managers, including Fidelity and Vanguard, would make a logical fit for the HSA business. But so far, they have stayed on the sidelines. That could be because HSAs generally have low values and a high number of transactions. "As those accounts grow in value," predicts Domaszewicz, "you will see more financial services companies getting into the health-care game." The number of accounts could also grow given their early success: the Mercer study found that CDHPs cost employers 17 percent less than other plans.
At Hannaford Brothers Co., all 10,000 benefits-eligible employees will soon have only one option for health-care coverage: a high-deductible plan tied to an HRA. Hannaford, which runs 140 supermarkets in the Northeast, began offering a CDHP in 2002 as one of three health-plan options. But management decided to make a CDHP the only choice because of its success, says Peter Hayes, Hannaford's director of health-care strategy. Hayes estimates that the company is saving from 5 to 7 percent using the CDHP. More important, he says, workers are more satisfied with the HRA than with other plans.
The Risk Pool
Critics of CDHPs say the plans attract the healthiest population of the workforce. Since constant users of medical services will fear spending more of their own money, the argument goes, they'll likely stick with more-traditional plans. That, in turn, will leave those plans with a high concentration of expensive members, thus inflating the cost of the plans—a concept known as adverse selection.
"It's a little troubling if you are segmenting the risk pool," says Karen Davis, president of the Commonwealth Fund, an independent health-research firm. "It's hard to figure out how you are going to save when you are spending more money on healthy people you didn't have to spend much on before."
That hasn't been the experience of Hannaford, says Hayes. Even before the company began offering a CDHP as the only option, it didn't segment the population. In fact, a number of employees with chronic conditions opted for the CDHP over other options. Hayes attributes this to the plan's features, including tools like nurse help lines and a comprehensive Website with information on providers. Further, employees rarely have to deal with the dreaded gatekeepers that sit atop managed care systems.
In fact, Hayes says it's the access to information, not the cost-controlling mechanism, that will have the real effect on the health system. "The Internet will revolutionize the way health care is delivered in this country," he predicts.
Maybe. It remains to be seen whether consumer-driven plans will truly catch on with employers and employees. Certainly, the approach has its limitations. "If you are looking at this as the answer to all the health-care problems, it's not," says Hayes. "But it's a good first step." Getting employees engaged in the purchase of their health care, he says, is a powerful idea. "Giving them the tools to do that is the key to making it work."
Another key: the honor system. With HSAs, the employee has the responsibility for making sure the account's funds are used for health-related costs. "It's between the individual, the IRS, and God what the money is spent on," says Domaszewicz. "Someone could go down to the corner store and buy a six pack of beer with funds from the account."
Joseph McCafferty is editor of CFO Human Capital.
|By All Accounts
A comparison of HSAs and HRAs.
|Eligibility||Individuals||Must be an employee|
|Health-insurance requirements||High-deductible plan||None (employer's discretion)|
|Who contributes||Employee, employer, or both||Employer only|
|Contribution limits||Lesser of deductible ($1,000 single/$2000 family minimum) or IRS annual limit ($2,650/$5,250)||None (employer's discretion)|
|Funds rollover||Allowed||Allowed (employer can establish limits)|
|Portability||Can take to new employer||Usually no portable (employer's discretion)|
|Nonqualified withdrawals||Yes (taxable with 10% penalty)||No|
|Claims substantiation||Not required||Required|
|Source: Mercer Human Resource Consulting|