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A wallet's wallop: will consumers force the cost of health care down if they have to use more of their own cash to pay for it? That's one of the big questions behind the move toward consumer-directed health plans. But will this strategy prove any more effective than more traditional options?

Are consumer-directed health plans, a new favorite among pundits and industry leaders, the answer to spiraling health care costs? Perhaps. Even if they don't turn out to be health care's panacea, they are receiving a great deal of attention. At a time when the very definition of a CDHP is in flux, it seems that all of these questions remain to be answered.

Broadly speaking, CDHPs have two parts. A sequenced cost-coverage arrangement, and strong prevention and education. A cash or flexible account offers a certain number of dollars per year available for medical expenses. The plans have a high deductible amount, and once the enrollee meets this deductible, the plan offers a coinsurance benefit for additional costs, usually with a cap for total out-of-pocket expenses.

"Almost all insurers will have some version of this kind of plan eventually, and the number currently doing so has probably doubled since last year," says Helen Darling, president of the National Business Group on Health in Washington DC. "The recent Medicare legislation that enables HSAs [Health Savings Accounts] is a big positive jolt to CDHPs."


With costs rising annually, by an average of 15 percent, health care confronts an affordability crisis. Short of massive restructuring to a single-payer system, health care will require dramatic innovation to remain stable, according to many experts. Clearly insurers would like to demonstrate that the current system can be brought under control, and many are looking at CDHPs as a major tool in doing so.

The notion of putting the beneficiary, as close as possible to the actual costs of medical services, so that they will become more thoughtful and cautious users of them, is the central concept of the plans. This means dropping the co-pay system and letting the individual pay for services from a combination of a funded account and out-of-pocket outlays for the first few thousand dollars.

Aetna and UnitedHealth Group are among major players with CDHPs. With such subscribers as the federal government, the Aetna HealthFund is already touting results (see story page 34). The HealthFund, one of 17 different plans from which federal employees and retirees can choose, illustrates the basics of CDHPs.

As described in the Washington Post recently, the HealthFund is built around three components:

* The first is a fund of $1,000 for individuals and $2,000 for families. Enrollees set up the fund at the beginning of the year and can use the money to pay for their heath care expenses. No referrals are needed. Enrollees can use Aetna's physician and hospital network to lower their costs.

Enrollees who do not use up the entire medical fund can roll it over to the next plan year. The maximum amount that can be kept in the fund is $4,000 for individuals and $8,000 for families.

* The second component in the Aetna HealthFund is its deductible. If the medical fund is exhausted in any given year, the deductible kicks in and enrollees pay for all their health care expenses until they reach $1,000 for individuals and $2,000 for families.

* The third component takes effect after the deductible has been met. Enrollees pay 15 percent of the cost of health care services obtained through the Aetna network and 40 percent of costs incurred out of network. When out-of-pocket costs (including the deductible) reach $5,000 for individuals and $10,000 for families, Aetna covers 100 percent of any remaining expenses that year.

"This is just one example of a CDHP coverage structure. We can be flexible and tailor this benefit for any employer," says Elizabeth Sell, an Aetna spokesperson for consumer-directed health care.

The CDHP offered by United Health Group, also in use since 2002, and called iPlan, has a similar design but with a Flexible Spending Account or Personal Benefit Account. This plan puts special emphasis on an integrated system of health information access, education, prevention and disease management.

"The average number of employees selecting iPlan, when offered as an option, is about 18 percent currently, which is roughly double the industry average," says Meredith Beryl, vice president of marketing and product design at United. "But selection approaches 40 percent at some companies. It really depends on the extent to which the employer accepts this approach to health costs and then sponsors and contributes to their plan. We also have some large employers who are using the CDHP as a single-option, total replacement plan for the health care benefit."


As an expansion of Medical Savings Accounts, which will be phased out, HSAs are suddenly giving much greater flexibility to CDHPs. FSAs have meant that the insured could not carry over an unused account balance. HRAs permit account balances to be carried over and built up from year to year but not necessarily retained if the employee leaves his or her job. But HSAs provide portability (they are owned by the individual, not the employer), year-to-year accrual, no limits on the amount that can be built up (although the employer can limit the maximum balance at which it will continue to contribute), and are tax free so long as the funds are used for medical care. Normally funded by the employer as part of the benefit, HSAs can also receive employee contributions. In addition, HSAs will also make CDHPs available to the self-employed and other individuals not working through an employer benefit (who may roll their MSA into their HSA, if they choose).

Already by January of this year, 42 percent of polled insurers in the employee-benefits business had an HSA-based CDHP product ready or under development, according to a report by Eastbridge Consulting Group. Another 25 percent were considering such a product, less than two months after the enabling legislation--"a very quick reaction by the industry," says the report. United Health Group's Beryl adds, "We expect 25 to 30 percent of insurers to have such a product to market by next year."

Especially for a younger individual, couple or family, betting that it will not experience more than routine medical expenses in the course of a year and looking for a low premium, a CDHP, especially with an HSA, will likely be an attractive option. If no pregnancies are anticipated and the individuals are healthy, it can be a way of assuring that office visits are paid for, while saving tax-free against future health care costs and remaining insured against a major or catastrophic event. It can also provide those at or near retirement with a low-cost way to set money aside for future expenses.

For an HSA plan, the annual deductible must be at least $1,000 for individual coverage and at least $2,000 for a family. Individuals and employers can contribute funds to the account up to the amount of the deductible, subject to a cap of $2,600 for individuals and $5,150 for families, with "catch-up" contributions available for folks nearing retirement. Maximum out-of-pocket expenses for allowed costs must be no more than $5,000 for self-only coverage and no more than $10,000 for family.


HSAs are the attractive new kid on the block; however, employers are likely to struggle with the lack of restriction on an employee's use of funds from an HSA. What if an employee decides to take $1,500 out of his employer-funded HSA and use the money to buy a wide-screen television? While he'll have to pay tax on the funds (and a 10% penalty, if under age 55), as the law reads currently, there's nothing to stop him.

"People are jumping to conclusions that HSAs are going to replace HRAs," says Jay Savan, who leads the Health and Welfare Practice at Towers Perrin. "And whether employers might be able to place some controls on use of HSAs that they fund is a huge question. We expect additional guidance from IRS on that this year."

"HSA-based CDHPs are new beasts that we are just looking to understand at the moment," says UHG's Beryl. "In general with CDHPs, though, we don't think there will be any losers, particularly on the question of whether there is cost shifting. We're primarily hoping that people get the right care at the right time so that unnecessaries go down."

Savan believes that, "CDHPs are a fundamental shift in the financing of health care--being pursued largely as a cost-management mechanism. But if designed and communicated well, they have the collateral benefit of better outcomes in terms of health."

What's the long-term payoff according to experts? If consumers are better custodians of resources than they are now, then health care will be better allocated and available to more people throughout their lives.

They point out that a health care benefit is something that takes place over decades. And with CDHPs that have portable or vestible accounts, the insured can shelter a significant portion of allocated resources, typically invested in mutual funds and growing tax-free.

The variety with which insurers can deliver CDHPs is almost endless. The variables include the quality of the consumer-education component; whether FSAs, HRAs, HSAs or proprietary personal or flexible benefits accounts are used; and the degree to which employers cost-share with employees. Despite what a fast-evolving concept CDHPs are at the moment, Forrester Research has already projected that they will account for nearly a quarter of the medical-benefit market by 2010.

With their emphasis on putting the patient back in control, CDHPs are a fascinating, strategic change. "For 25 years we've been fighting an air war [on health care costs]," says Savan. "We haven't gotten the ground soldiers in on the battle, but they are our most formidable weapon."

Point-of-service payment in CDHPs creates transparency in the true cost of care for consumers. In the presence of a large bridge deductible, the plans are incenting beneficiaries to use services more prudently.

RELATED ARTICLE: Early signs of success.

Personal behavior is huge determinant of health care status and health care consumption. But unless individuals feel a closer, more immediate connection to the costs of their decisions, personal behavior is difficult to affect. As long as they are insulated from the total costs of medical care, individuals won't become active, critical--much less frugal--consumers. So goes the reasoning behind CDHPs.

Some insurers say that the proof is already in the pudding, with data on the plans showing increased use of preventive services and decreased use of hospital services. Last year, Humana reported claims trends for its consumer-driven plans to be less than half of those typical for traditional insurance plans. The company attributed the savings to behavioral changes resulting from a shift of control to members.

In February, Aetna released preliminary findings of a study of 14,000 HealthFund members compared to a similar group not enrolled in a CDHP. In a nine-month period last year, HealthFund members experienced a 1.5 percent increase in medical costs, compared to a double-digit increase for the similar population. Preventive care office visits for the CDHP group rose twice as fast, and pharmacy use went down. HealthFund members had a high satisfaction rate, and more than half of them had account dollars left to roll over into 2004.

These results, says Aetna President Ronald A. Williams, "indicate to us that consumers can and will responsibly manage their own discretionary health care spending, while continuing to seek the care that they need."

RUSS ALLEN writes frequently about health care. He can be reached at
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Title Annotation:Benefits
Author:Allen, Russ
Publication:Risk & Insurance
Date:May 1, 2004
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