Healthy selection: less than a decade after the managed-care revolution began in earnest, new styles of health plans are on the market. Proponents see them as the next major trend in health insurance. (Life/Health).

With managed care no longer able to hold down medical costs on its own, employers and consultants are turning to new health-care plan designs that encourage members to consider value for their dollars. Several such plans are being offered and are growing in popularity.

Falling under the rubric of "consumer-directed," "consumer-driven" or "defined-contribution," the new plans help employers shift more costs of health insurance to employees. In exchange, they provide plan members with tools to explore choices and seek value in health care and offer financial incentives to reduce unnecessary use of the medical system.

Such change in behavior represents a frontier in today's climate of double-digit annual increases in health-plan costs and the likelihood that managed care has squeezed out as many provider excesses as it can. While managed care has focused on doctors and hospitals, it has not provided much incentive for plan members to shop around for the most appropriate providers or to reduce their use of the health-care system. On the contrary, many health maintenance organizations make a doctor visit both cheap and convenient.

"A saying that goes around consultants' circles is that a doctor's visit costs less than a haircut," said Michael Taylor, a Boston-based principal in Towers Perrin's health and welfare practice. Under many plans, a member might pay as little as $10 out of pocket for an office visit and incur little or no paperwork, he noted.

The new plans are similar in many ways to the medical savings accounts that Congress authorized in 1996, a pilot program limited to companies with 50 or fewer employees and the self-employed. The plans provide high-deductible health insurance policies to cover catastrophic costs and a savings account funded by the employer, employee or some combination. The savings account is available for first-dollar coverage, but plan members are encouraged to spend that money wisely, because they are allowed to carry over unspent amounts to the next year. If members spend all of the money, they have to pay medical expenses on their own until the high-deductible insurance kicks in. This further encourages them to use their savings accounts with discretion.

Employers are spearheading interest in consumer-driven plans because most health insurance is employer-sponsored, and the cost increases of mainstream plans are unacceptable for most businesses, Taylor said. A Towers Perrin survey released in November predicted that the cost of large employers' health benefit plans will rise about 14% this year, the highest year-over-year percentage increase since Towers Perrin began conducting the survey more than 10 years ago. (See "Average Cost Increases of HealthCare Plans," page 83.) In testimony before Congress in April, Mercer Human Resource Consulting projected this year's increase at 12.8% for active employees, a figure it also said is the largest increase in more than a decade. Last year, the rise was 12.1%, and Mercer predicted double-digit cost increases for another three to five years.

"The system has to become more consumer-driven financially," said Bob Patricelli, a veteran of the employee-benefits field since the 1970s, including stints with Connecticut General and Cigna, and founder of Connecticut-based Evolution Health LLP. "Employers cannot afford the 13% to 15% increases, so we will see a lot more consumer money in the system. That's actually fair, because consumer out-of-pocket spending has dropped from 34% in 1970 to 16% in 2000. You're faced with the certainty that the pendulum is going to swing."

Small Companies, Big Challenges

Smaller companies may be in an even tougher predicament. According to Brad Benton, a partner in KPMG LLP's health-care practice in Atlanta, many smaller employers are facing health-plan cost increases this year of 20% to 35%. Two years ago, a KPMG survey found reluctance among large employers to try consumer-driven plans. The reasons included employers fearing the perception that they were walking away from their traditional promise of a health-care benefit to employees and an image of a lack of employee interest or acceptance. Employers also were concerned about regulatory issues. But now, rising health-care costs represent "a new and important variable, because employers need to control those costs;' Benton said.

But enrollment in the new plans is still in the early stages. Towers Perrin and consultant Watson Wyatt Worldwide estimate that there are 100,000 members enrolled in such plans. About 15 or 20 large employers offered consumer-driven plans as of April, but in cautious ways, Taylor said. These include pilot programs in which the plan is the only choice, or it may be an option to other plans. Where it is offered as an option, employers are seeing about 4% to 8% penetration, he said.

"There's definitely an up tick in the level of interest, but most employers are standing back," Taylor said. "They don't want to be among the first, but they want to know about it."

Just as smaller carriers offered medical savings accounts, they also are taking the lead in developing and marketing the newer consumer-driven plans. The major players so far are Definity Health, Minneapolis, and Lumenos, Alexandria, Va., both founded in 1998. Most large insurers have little interest in medical savings accounts, but consumer-driven plans are getting some attention. Aetna and United Health, the nation's largest health insurers, have developed consumer-driven plans and have begun to market them. According to Definity spokesman Chris Delaney, Humana is considering a plan, and Cigna may be. Some members of the Blue Cross and Blue Shield Association are also interested, with at least one, Blue Cross & Blue Shield United of Wisconsin, already marketing a plan.

Definity has the most plan members so far, about 40,000 of the estimated 100,000, Delaney said. As of April, it had 25 clients, eight of which opted for full replacement of their previous plans, and 17 offering the plan as an option. Delaney said his company had three times the clients and three or four times the membership of Lumenos. Clients include the pharmacy chain CVS; a Fortune 100 company that signed on April 22; and Fortune 500 companies Raytheon, Textron, Charter Communications, SuperValu, Aon, Countrywide and Medtronic. Others offering Definity plans include the University of Minnesota, Louisiana State University, Hannaford Bros., Budget Rent-a-Car and Scientific-Atlanta.

Definity's model uses an employer funded personal-care account, a deductible typically around $1,500 and extensive online tools to help members evaluate hospitals, doctors and other providers. The company has an exclusive relationship with Johns Hopkins Medical Center for information, and it makes available to members telephone consultations with nurses at all times.

"We think managed care in its most basic form--the idea of controlling cost through provider contracts and consumer restrictions and barriers--has run its course," said Delaney "The solution now is a model that engages the consumers so that they are involved with providers and understand and make trade-off decisions." In addition to premium increases, employers are moved to try the consumer-driven model when they are dissatisfied with health-care networks in their region, Delaney said.

Definity's personal-care accounts are designed as employer-operated trust-and-welfare accounts as provided for under Section 105 of the Tax Code. Plan members never have possession of the money and can use it only for health and wellness expenses. Unlike medical savings accounts, the personal accounts are not portable; they go back to the employer when the employee leaves. Separate from the personal-care account is employer-provided money for preventive care on a first-dollar basis, a feature consultants say is important in consumer-driven designs to eliminate the inclination of frugal employees to skimp on preventive care. The money covers an "extensive list" of items, including an annual exam, vaccinations, immunizations and screenings.

When given the option, about 10% of employees sign up for Definity's plans, Delaney said. And there is evidence that they are ready to take on the responsibilities of being shoppers as well as consumers, he said. They already use Definity's nurse line twice as often as the national average, conferring with nurses before seeing a doctor or going to a hospital. They use less expensive generic drugs far more often than members of other health plans, and members use their plan's Web site at least once a month on average. Definity's re-enrollment rate so far is 97%, Delaney said, though the company had only three clients last year.

One of Definity's big successes has been Ridgeview Medical Center in Waconia, Minn., where its plan is offered as an option. Delaney said 85% of employees--about 600--chose Definity, and the hospital saved $400,000 in annual plan costs compared with its previous plan.

In addition to being a Definity client, consulting and brokerage giant Aon Corp. is a financial backer, and its consulting arm has a practice in consumer-driven health care. "This is one of the top three or four ideas we bring to employers," said Thomas C. Lerche, senior vice president and the practice leader based in Chicago. "They are hearing and reading about it, and they want to know whether it will save them money or affect recruitment and retention." Much of the interest comes from the Midwest and the East Coast, Lerche said. Paradoxically, there is less interest on the West Coast, where health-care innovations are historically generated, he said.

Apprehensive Employees

Employees approach the new plans with a mix of curiosity and apprehension, Lerche said. "A PPO has a deductible on the front end; this plan puts the deductible in the middle," he said. "It takes some understanding and getting used to. If employees are satisfied with their current coverage, they may not jump. You need some dissatisfaction to initiate change."

Most of the early applications last year were offered by large employers as options, he said. But Lerche expects more interest among smaller employers this year. He expects that it will take two to four years for consumer-driven plans to catch on. "When companies see that the model is effective, you'll see more widespread adoption of it," he said, adding that 15% to 20% of employees are currently ready for the model. "The early adaptors are the savvy; educated individuals who like the freedom and accept the responsibility that comes with these plans," he said. "Others will need to be trained and coached and be given the right tools, a process that will take several years."

Lerche said the large carriers recognize the market interest in these products, but are in a "learning mode" and plan to set up pilot programs to find out which models are most effective. A potential advantage for them is their PPO networks, which are broader and deeper than those of the "boutique" companies and which should be able to offer stronger and more effective pricing, he said. Delaney said Definity's lack of a conventional, provider network left it "unfettered by the trappings of managed care." It also has allowed its "high-energy" and experienced work force of about 130, most veterans of consulting firms and managed-care companies, to focus on its Web-enabled technology and build plan designs "from the ground up."

Aon offered the Definity plan last year to employees in Chicago and Minneapolis. This year, it has extended the option to employees throughout the country. It offers singles a $1,000 spending account of pretax money and a $2,000 deductible, with greater amounts for families. "We've seen some encouraging anecdotal data in the first year, some employee behavioral change," he said. "It's not a cure-all, and it's not going to reverse medical trends, but there are some encouraging signs so far."

Wait and See

While most employers are taking a wait-and-see attitude, Taylor of Towers Perrin said this behavior is similar to what employers did in the early 1990s, when managed care was new and indemnity plans were conventional. The environment is different now, however, in that so many companies have switched to managed care and they are reluctant to try something new so soon, he said. But having Aetna and UnitedHealth enter the market will increase the adoption of consumer-driven plans, he predicted.

What type of plan provider is better positioned is uncertain, despite the early lead by Definity and Lumenos, he said. "The big boys already have the clients, networks and administration," he said. "They are also part of the original problem; they haven't influenced customer behavior."

But he said Definity and Lumenos are "extremely nimble" in creating plans and responding to market conditions. They are also good at using disease management systems and carve-outs for certain services, he added. Overall, he sees a "healthy competition between the sustainable new guys against the old guys," and he predicts that in a couple of years, the new players will have a credible brand and could become as recognizable as Cigna and Aetna.

Taylor said several Blues members have offered the new plans for at least a year, and many regional insurers are interested in developing them. "You don't want to be selected against," he said. "HMOs could windup with all the bad risks."

But managed care has not run its course, Taylor added. "In the early '90s, it reduced cost trends," he said. "It's not doing that now, but it has the potential to do it in the future."

[FIGURE OMITTED]

Average Cost Increases of Health-Care Plans

Participants in the 2002 Towers Perrin Health Care Cost Survey said they
expected double-digit increases to continue for the next few years.

                           1993  1994  1995  1996  1997  1998  1999

Active Employees           12%   6%    2%    4%    3%    4%     7%
Retirees Under Age 65      14    9     3     4     4     4      6
Retirees Age 65 and Older  12    8     3     3     7     5     10

Combined                   12%   7%    2%    4%    4%    4%     7%

                           2000  2001  2002 *

Active Employees           10%   12%   13%
Retirees Under Age 65      10    17    13
Retirees Age 65 and Older  24    18    19

Combined                   12%   13%   14%

* Projected

Source: Towers Perrin

RELATED ARTICLE: Consumer-Driven Plans Emerge Coast to Coast

Definity Health, one of the leading insurance carriers offering "consumer-driven" plans, has picked up the endorsement of the Pacific Business Group on Health, a San Francisco-based nonprofit coalition of 47 member companies dedicated to improving health-care quality while moderating cost. Its members spend more than $3 billion annually to provide coverage to about 3 million employees, retirees and their families.

The consumer-driven model, also sometimes called "defined contributions," encourages plan members to consider value for their health-care dollars by making them responsible for more of the costs created by their healthcare decisions.

Pacific heralds its arrangement with Minneapolis-based Definity as a "fundamentally different approach to health-care delivery" that will "usher in a new era of accountability for consumers and providers," said Peter Lee, president and chief executive officer. It audaciously calls its offering "The Breakthrough Plan." In coming months, Pacific will work to integrate its quality-measurement systems into Definity's consumer tools, so it can take quality measurement down to the level of the individual physician, lee said.

"One of the things we're trying to promote is to have more transparency and information on performance, quality and efficiency at the provider level," said Emma Hoo, director of value-based purchasing. "We want more focus on engaging the consumer to be more participatory and ask questions about the care they receive and to look at treatment options." Through the coalition, employers will share information so they can learn from each other and establish best practices, she added.

Hoo said Pacific studied vendors, traditional plans and online health carriers before deciding on a consumer-driven model. The plan at each participating employer will be slightly different, she said, and will make use of preferred-provider organizations, point-of-service networks or health maintenance organization offerings.

In the Midwest, Blue Cross & Blue Shield United of Wisconsin recently launched FreedomBlue, its first defined-contribution product. The early response has been overwhelming, said Cathy Harvey, senior vice president of marketing for the Blues' parent, Cobalt Corp. Wisconsin has some regulatory requirements on underwriting that have been driving up rates on traditional plans and causing many employers to drop their health plans, she said, and "phones have been ringing off the hook" as employers inquire about the Blues' new plan. She also said the state has extremely high provider costs.

Employers can expect a 20% to 30% reduction on premium costs, compared with many traditional PPO products, Harvey said. The concept is that the employer selects an annual contribution to a base plan, and employees can "buy up" to better coverage. To transition the cost shifting, employers put money they were previously spending on higher premiums into a flexible spending account. Employees can spend this money pretax, but unspent money in this account cannot be carried over into the next year. "Companies that are paternalistic or are in competitive industries are not likely to choose the plan," she said.

Aetna introduced its defined-contribution product, Aetna HealthFund, in September. It combines a PPO with an employer-funded health savings account that can be rolled over at the end of the year. Included with the product is Aetna Navigator, an online resource that allows members to manage their health and track health-care expenses on a secure Web site. Annual PPO deductibles range from $1,500 to $3,000, and the savings accounts range from $500 to $1,000 or higher. Employers have the option of providing first-dollar coverage for preventive services, and they may offer a flexible spending account, which the employee can fund with pretax dollars.