Focus on health: consumer directed health plans--lower medical costs and better health?

With the cost of healthcare increasing at over 13% for 2003 business leaders are increasingly looking for cost savings alternatives. For the past few years the cost savings alternative has been "cost shifting", however with the advent of the new "designer" program called Consumer Directed Health Plans (CDHP) employers are finding ways to curb rising costs and the new plans are integrating the employees by giving them a financial stake in their own care.

In traditional plans, a portion of the workers paycheck is deducted for their healthcare premium. Under the standard PPO plan, after an annual deductible, the insurance picks up most of their health care costs. Under the conventional HMO, using a certain group of selected physicians, most bills are paid by the insurance company. The result of such plans may be viewed historically; in the sixties the employee typically paid 55% of the medical care bill--they now pay about 15%, with the difference being paid by employers.

The new Consumer Directed Health Plans require a hefty $2000 deductible. With the high deductible, the employer puts some of the premium savings into a health care account for employees to use for medical expenses. If employees don't spend the money in one year, it is carried over to future years. Since between 60% and 70% of the employees do not consume their healthcare account even though they have paid all of their expenses, the remaining % works as a credit toward the following year. After the deductible is reached, it works just as a traditional plan, picking up 80% of expenses.

The premise is an exciting one. The employee is now spending his or her money for their healthcare. Once people feel empowered to act on their own behalf, they take responsibility for their own care. Why get an MRI when a simple X-ray might do? Employees are saving by buying generic drugs and requesting fee wavers for lab tests. Consumer Directed Health Care Plans make individuals more conscious spenders.

Of course there is always a drawback ... but one that employers are addressing creatively. People with chronic conditions are often hit the hardest. They go to the doctor more often and spend more on prescription medicines. Since 3% to 5% of employees consume 50% to 60% healthcare costs, employers can waive the deductible along with the use of newly designed disease management programs to help these employees address their chronic conditions.

The results of CDHP are dramatic in that they usually create an increase in employee perceived value; whether they are healthy and simply using the healthcare account or using the plan for chronic conditions. In addition, the reduction in claims as a result of healthier employees is great for the employer and for the company's bottom line. As an example, when Whole Foods, an upscale food market, went to a Consumer Directed Health Plan they saw medical claims fall more than 13%. With fewer and less expensive doctor visits, approximately 90% of the employees had money left over to use the next year.

The plan does more than save money, it encourages people to take better care of themselves. CDHP are a creative step in the right direction toward good health.

Malcolm Cutler, Jr. is president of EPIC Century Benefits, a benefit planning firm based in based in Los Angeles.