Behavioral Healthcare Benefit Plan Designs

Behavioral healthcare benefit plan designs are closely aligned with medical plan designs. As with medical plans, behavioral benefit plans are either network-based (HMO, POS or PPO), or non-network based (indemnity). A large employer or purchasing group often will customize a behavioral healthcare carve-out plan to provide a standard plan design to all members regardless of their medical coverage. This greatly facilitates plan administration, but insurance and utilization review laws, and third-party administrator licenses vary from state to state, complicating behavioral plan administration. To fully understand behavioral health-care benefit plan design, it is essential to first understand funding arrangements.

Fully Insured Arrangements

In a fully insured funding arrangement, often called "full risk" or "risk-based," MBHOs assume the financial risk for providing behavioral services paying the claims submitted by providers for behavioral services rendered. Financial risk falls on the MBHO. When service utilization and corresponding claims costs exceed expected levels, the MBHO absorbs those increased costs. Purchasers pay MBHOs a predetermined, fixed (usually monthly) premium for assuming financial risk for behavioral treatment costs. On average, a monthly premium for a fully insured, full-risk behavioral plan, excluding EAP, ranges between 3 and 6 percent of a medical plan's premium, although rates can vary depending upon a group's utilization experience, number of members, geographic location, benefit plan, and state parity laws. The two primary cost drivers for a fully insured funding arrangement are group utilization rates and unit costs for practitioner and facility care.

A variation of a fully insured funding arrangement is a shared-risk arrangement, in which purchasers agree to assume financial risk for claims payment up to a certain amount. Premiums are based on projected claims costs. If claims exceed a prespecified amount, the MBHO assumes those claims costs or a percentage of those costs. If claims come in below the targeted amount, the balance can be shared by the MBHO and client or refunded to the client. There are many iterations of these shared agreements.

Administrative Services Only

Under an administrative services only (ASO) arrangement, an MBHO, for a fee, will handle medical management, utilization review, benefit and other administrative functions, such as claims payment (although some ASO contracts do not include claims payment). Often called a "self-funded" or "self-insured" arrangement, the purchaser assumes the financial risk for the health care costs for its members. Self-funded plans may also be administered by independent organizations called third party administrators (TPAs), which often provide administrative and medical management services in addition to claims processing. The larger the group, the more likely it is to self-fund because the financial risk is spread across more employees and its budget is large enough to absorb the risk. Self-funded groups typically have stop-loss insurance, which protects them from catastrophic losses.

A key advantage of an ASO arrangement is that employers can offer the same benefit to employees working in different states. Because ERISA exempts self-funded health plans from compliance with state laws and regulations, employers that self-fund can avoid individual state regulations such as diverse state mental health parity laws. Self-funded employers may also be able to save money because they can limit the risk pool to their own employees, avoid state taxes on insurance company premium revenues, and have complete control over benefit packages. In addition, some employers may self-fund to access claims data, allowing them to understand the true costs of their health care plans and tailor their plans accordingly. Figure 1 outlines benefit plan design and funding arrangement options.

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Benefit Plan Design	Funding Arrangement
Network Providers (HMO, PPO, POS)	Fully Insured Shared-risk
Non-network Providers (Indemnity)	Administrative Services Only (ASO) Network Management Claims Payment

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Figure 1: Behavioral Health Care Benefit Plan Funding Arrangements

Sample Managed Behavioral Healthcare Benefit Plan Design

Figure  shows an example of a managed behavioral healthcare combined HMO/POS plan design that complies with California's mental health parity legislation.

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Services	HMO	POS[*]
		In-Network	Out-of-Network
Mental Health
Inpatient deductible	None	None	N/A
Inpatient per admission fee	None	None	N/A
Inpatient treatment annual maximum benefit including partial and day treatment	Unlimited days at 100% based on medical necessity	Maximum of 30 days (combined with chemical dependency)	Not covered
Outpatient treatment	30 visits at $0 copayment	40 visits (combined with out-of network) at $0 copayment	40 visits (combined with in-network) per calendar year 50% of UCR up to $40 per visit
Chemical Dependency/Substance Abuse
Inpatient and outpatient (includes detox)	$25,000 per calendar year	Maximum of 30 days (combined with mental health)	$200 deductible per calendar year 50% of UCR up to a maximum of $1,000 per calendar year
Severe Mental Illness Benefit[**]
Inpatient deductible	None	None	N/A
Inpatient per admission fee	None	None	N/A
Inpatient, partial and day treatment	Unlimited days covered at 100%	Unlimited days covered at 100%	N/A
Outpatient mental health visits	Unlimited visits at $0 copayment	Unlimited visits covered at $0 copayment	N/A
[*] Pre-authorization required for all in-network and in-patient services both in and out of network. Chemical dependency and substance abuse combined in- and out-of-network maximum of $35,000 per calendar year. Chemical dependency and substance abuse combined in- and out-of-network maximum of $50,000 per lifetime. [**] Severe mental illness diagnoses include: anorexia nervosa, bipolar disorder, bulimia nervosa, major depressive disorder, obsessive-compulsive disorder, panic disorder, pervasive developmental disorder or autism, schizoaffective disorder, schizophrenia. In addition, the Severe Mental Illness Benefit includes coverage of serious emotional disturbance of children (SED).

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Figure 2: Sample Managed Behavioral Healthcare Combined HMO/POS Plan Design With A Typical Mental Health Parity Benefit

An employee assistance program is a confidential, short-term counseling service to assist employees and their family members with personal problems that negatively affect their job performance. These programs vary considerably in design and scope, and are offered by MBHOs, stand-alone EAP companies, and work/life companies. EAPs originally focused on substance abuse problems, but most today take a comprehensive approach to support members with a range of employee and family issues. Some include proactive prevention and health and wellness programs, and may even be linked to the health plan and MBHO benefit structure. While most EAPs offer a wide range of services, they generally refer members to other professionals or agencies that can offer more, or extended, help in particular areas. EAPs also provide human resource support through management consultation, on-site employee and employer seminars and critical incident stress management after catastrophic workplace events. The average utilization rate for an EAP ranges between six to seven percent, but it jumps to between seven and 10 percent when adding work/life programs. 

Figure 3 shows the benefits offered by a typical EAP.

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24-hour toll-free access to the EAP

Confidential services

Available to all household and dependent family members

Unlimited calls

Five face-to-face counseling sessions (per incident) with EAP provider

Child and elder care referral services

Legal assistance and referral

Financial counseling and debt management

Alternative medicine referral

Concierge services

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Figure 3: Typical Employee Assistance Program Benefit Summary

Behavioral Healthcare Benefit Plans

Typical Plan Features

According to the Substance Abuse Mental Health Services Administration (SAMHSA), the vast majority of employer-sponsored plans cover inpatient and outpatient mental health treatment services. Roughly half of all employers cover intermediate mental health treatment services such as residential treatment and partial (or day) hospitalization. Approximately 60 percent cover intensive outpatient services, which can include psychosocial rehabilitation, case management, and wraparound services for children (developing treatment plans for children that involve their families). Many plans also include a parity benefit—often called a "severe mental illness" benefit—that specifies which disorders are covered under their state parity law. A well-designed benefit package should cover a wide range of clinically effective services and treatments while incorporating financial incentives to substitute lower cost alternatives for higher cost alternatives when it is clinically appropriate to do so.

Benefit Plan Variables

As previously discussed, mental health and substance abuse coverage has long been characterized by limits that do not apply to healthcare coverage in general. The typical employee healthcare benefit plan offers 30 annual inpatient mental health treatment days and 20 annual outpatient mental health visits. Industry studies show that approximately 80 percent of employees have less generous limits, copayments, and coinsurance deductibles for inpatient mental health treatment than for medical treatment. Although nearly 20 percent of all employer-sponsored health plans have no day or visit limits on inpatient and outpatient health care, more than 50 percent of the plans covered just 20 outpatient mental health treatment visits, and nearly 60 percent covered just 30 or fewer inpatient days. While approximately 80 percent of all covered employees have copayments for medical treatment of less than $20 per visit, only 40 percent have copayments of less than $20 for outpatient mental health treatment visits.

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) regulates the majority of private pension and welfare group benefit plans in the United States. The provisions of ERISA prevent states from regulating multistate employers on the provisions of their health benefits. Most notably, this affects the 9.5 million federal employees enrolled in the Federal Employee Health Benefit Plan (FEHBP). It also affects many large, self-insured employers and union trust groups.

HIPAA

HIPAA applies to all health insurance plans, including MBHOs. HIPAA allows employees to continue their health insurance coverage from one group to another. HIPAA's nondiscrimination provisions prohibit a group health plan or insurance company from denying an individual eligibility for benefits or from charging an individual a higher premium based on a health factor, including health status, medical condition (both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. HIPAA also may serve to reduce health care fraud and abuse and protect privacy and is projected to significantly reduce the 29 cents of every health care dollar spent today on administration. The HIPAA Administration Simplification component consists of three areas:

• Data Standards. Enforce standards for the electronic transmission of health care information.
• Security. Protects confidential and private information through sound and uniform security practices.
• Privacy. Maintains confidentiality of member information.

Because behavioral stigma still prevails, HIPAA plays a particularly important part in protecting sensitive patient information gathered during behavioral treatment.

Managed Behavioral Health Care

The term "behavioral health" refers to mental health and substance abuse services provided by behavioral health specialists. Managed behavioral health benefits are subject tothe general forces of managed care while also facing unique issues and challenges of their own. In recent years there has been a heightened focus on behavioral health benefitsbecause they are a key contributor to increased employee productivity and lower medical costs. Of an estimated 250 million Americans with health insurance, 66 percent are enrolled in some type of specialty managed behavioral health program.

Mental Illnesses and Other Behavioral Disorders

The most severe mental illnesses such as schizophrenia, bipolar disorder and major depressive disorder are generally considered biologically based disorders that affect thebrain, profoundly disrupting a person's thinking, feeling, mood, ability to relate to others and capacity for coping with the demands of life. They cannot be overcome through "will power" and are not related to a person's character or intelligence. Nonbiologically based mental disorders can also severely impact an individual's functioning. Early identification and treatment is of vital importance; according to Dr Thomas Insel, Director of the National Institute of Mental Health, between 70 and 80 percent of individuals suffering from depression experience significant reduction of symptoms and improved quality of life through psychotherapy and/or medication.

Mental disorders can loosely be categorized into the following categories:

1. Adjustment disorders (e.g., situational stress).
2. Anxiety disorders (e.g., panic disorder).
3. Childhood disorders (e.g., autism).
4. Eating disorders (e.g., anorexia).
5. Mood disorders (e.g., major depressive disorder).
6. Cognitive disorders (e.g., dementia).
7. Personality disorders (e.g., antisocial personality disorder).
8. Psychotic disorders (e.g., schizophrenia).
9. Substance-related disorders (e.g., alcohol/drug dependence).

The most serious and disabling conditions such as major depression, schizophrenia, bipolar disorder, panic disorders and obsessive compulsive disorders affect five to 10 million adults (2.6 to 5.4 percent) and three to five million children ages five to 17 (5 to 9 percent) in the United States.

The Need for Behavioral Benefits

Behavioral disorders can have a devastating impact on affected individuals, their families and society. Mental illness is the number one cause of disability in the United States, Canada and Western Europe, according to a 2001 study by the World Health Organization. It has now surpassed heart disease, which was the leading cause of disability as recently as 1996. Alcohol consumption accounts for up to 40 percent of industrial fatalities and 47 percent of industrial injuries. A study published in the American Journal ofHealth Promotion found that workers experiencing high stress are more than two times more likely to be absent more than five times per year. Given these alarming statistics, it stands to reason that health care benefit purchasers gain from providing their workforces with relatively inexpensive mental health, chemical dependency and employee assistance programs that cover the full spectrum of behavioral needs. Unfortunately, behavioral benefits are the least understood and most poorly compensated of all thepossible components of a health benefits package.

Common Misperceptions

Most people are unaware of the possible inadequacy of behavioral health benefits found in insurance plans, since it is falsely assumed that mental health and chemical dependency treatment needs are fully covered under medical plans, and in addition, that employee assistance programs fill in the gaps. Unfortunately, these are common misconceptions. The mandated behavioral benefits in a medical plan are limited to emergency assessment and crisis coverage. Mental health "parity" riders—legislatively mandated add-ons to medical benefit plans—are limited in the scope of disorders they cover. Employee assistance programs focus on workplace productivity, and offer only a limited number of visits for emotional counseling. To fully understand behavioral health benefits and the multitude of ways they are structured, it helps to take a brief look at thegrowth of the managed behavioral health care industry.

Is Quality Of Care Important?

Quality of health care is an important issue for employer and employee purchasers for a number of reasons. First, there are widespread documented errors in the delivery of health care services. Second, there is substantial evidence for extensive overuse and underuse of various health care services. Third, poor quality of care erodes the value of health care purchases. Fourth, failure to exercise due diligence in evaluating quality of care may impact an employer's liability for a bad outcome of care. And, finally, lack of attention to quality of care can have negative consequences for an employer in employee relations and relationships with providers and others in the local business community. 

Errors in the Delivery of Health Care Services

More than a decade ago, the Harvard Medical Practice Study found that injuries caused by medical management occurred in 3.7 percent of hospital admissions in New York State. Among these injuries were drug complications, wound infections, and technical complications. Fully 27.6 percent of these injuries were the result of negligence, and 13.6 percent of the injuries led to death. Extrapolating these results to all U.S. hospital admissions in 1997, as many as 98,000 Americans may have died because of errors during their hospitalization in a single year. Other studies have confirmed the order of magnitude of this estimate for injuries during hospital admissions. Yet, we must assume this is a gross understatement of the impact of medical errors, given that it does not include injuries because of outpatient care.

The Institute of Medicine focused attention on the impact of errors in medicine through the work of its Quality of Health Care in America Project. Its first published report—To Err is Human: Building a Safer Health System—notes: "More people die in a given year as a result of medical errors than from motor vehicle accidents (43,458), breast cancer (42,297), or AIDS (16,516)." The group estimated that preventable adverse events resulted in total national costs of between $17 billion and $29 billion, over one-half of which are direct health care costs. More recently, a study of 20 percent of all Medicare hospital admissions in the year 2000 found that patient safety errors resulted in excess lengths of stay ranging from 1.34 days for accidental puncture or laceration to 10.89 days for post-operative sepsis. The excess charges associated with these errors were $8,271 and $57,727, respectively. Excess mortality was also associated with these patient safety errors, from 2.16 percent for accidental puncture or laceration to more than 21 percent for postoperative sepsis. Clearly, medical errors have a significant negative impact on employer health care costs, as well as employee health outcomes and productivity. These findings beg the question of what employers and individuals can do to help minimize the likelihood and the impact of medical errors in the health care services they purchase and receive a question to be taken up later

Overuse of Health Care Services

Investigators have long noted dramatic geographic variations in the use of health care services, without apparent differences in the health of the populations being served. For example, one study showed that Medicare hospitalization rates were 60 percent higher in Boston than in New Haven, yet Medicare mortality rates did not differ between the two cities. A recent study of Medicare end-of-life spending found that beneficiaries in higher spending regions of the United States received approximately 60 percent more care than beneficiaries in lower spending regions, without finding consistent differences between these groups in quality of care or access to care.

There is a large and growing body of research on the extent of medical care that is inappropriate or unnecessary. Studies of appropriateness of care have found that as much as 32 percent of selected procedures are inappropriate. An excellent example of research supporting this estimate is the series of studies commissioned by the State of New York Cardiac Advisory Committee on the appropriateness of various cardiac procedures in New York State. Evaluation of coronary angiographies (inserting a catheter into coronary arteries and injecting contrast material) found that 20 percent were of uncertain appropriateness and 4 percent were clearly inappropriate. When percutaneous transluminal coronary angioplasty (PTCA) (using a balloon catheter to open blood flow through a coronary artery) was evaluated, 38 percent were of uncertain appropriateness and 4 percent were clearly inappropriate. At some hospitals, as many as 57 percent of PTCAs were either inappropriate or of uncertain appropriateness. In a companion study, inappropriate and uncertain use of coronary artery bypass graft surgery was found to be 2.4 percent and 7 percent, respectively. Though these rates may appear relatively low, they have significant health implications, given that the average mortality rate for patients undergoing surgery in the study was 2 percent, and the complication rate was 17 percent.

These are but a few examples of research suggesting that inappropriate and unnecessary medical care has substantial negative consequences both for employee health and the cost of health care.

Underuse of Health Care Services

Another deficiency identified in health care quality is the failure to apply services known to be beneficial in improving health. In a study of patients hospitalized for acute myocardial infarction (heart attack), Marciniak and colleagues found that between 11 percent and 68 percent of patients nationwide did not receive particular standard treatments for this condition, despite being "ideal candidates" for therapies. An earlier study found that internists and family physicians were less knowledgeable about, and less inclined to practice, state-of-the-art advances in treatment of acute myocardial infarction than were cardiologists.

Similarly, a study of patients with diabetes treated in primary care offices found that between 55 percent and 84 percent of these patients did not receive optimal services recommended for their condition according to national guidelines in use. Optimal use of services varied by location of practice by as much as 238 percent. A recent study of 439 indicators of quality of care for 30 conditions and preventive care among a random sample of adults in 12 U.S. metropolitan areas found that only 54.9 percent received recommended care. Quality of care varied by medical condition, from a high of 78.7 percent of recommended care received for senile cataract to a low of 10.5 percent of recommended care for alcohol dependence.

Some studies suggest that physicians are more likely to underuse health care services when treating women, particularly black women. Research by Roger, et al. found that women with unstable angina (chest pain from blockages in arteries supplying blood to heart muscle) were 27 percent less likely to undergo non-invasive cardiac tests, and a startling 72 percent less likely to receive invasive cardiac procedures. Even within Medicare managed care health plans, black plan members were found to receive poorer quality of care than white plan members, specifically for eye examinations for patients with diabetes, for beta-blocker use after heart attack, and for follow up to hospitalization for mental illness.

There is also evidence to suggest that underuse varies by type of health plan. For example, a study found that Medicare patients with joint pain who were enrolled in HMOs reported less improvement in symptoms than similar fee-for-service Medicare beneficiaries. Yet, other research suggests no significant difference between quality of care in HMO and fee-for-service environments in such areas as hypertension and diabetes.

Failure to apply services known to be beneficial in improving health is a substantial and widespread problem. Clearly, this type of quality problem has negative implications for employee health and productivity. The implications for cost of care are more variable, because some of the underused services may result in a net increase in direct medical care costs, despite being effective in preventing negative and costly health outcomes. Nevertheless, in purchasing health care for ourselves or for employees, these are services we would want to receive as part of state-of-the-art quality in health care delivery. Whether one looks at quality from the perspective of individual providers, practices, or health plans, these landmark studies shed new light on deficiencies in quality of care, and suggest how appropriate to health care is the maxim: "Let the buyer beware."

Employer Liability

One reason employers should be concerned about health care quality is their potential liability for managed care programs they may purchase. The evidence for payer liability for managed care stems from two legal cases: Wickline v. State of California and Wilson v. Blue Cross of Southern California. In Wickline, the court concluded that a third-party payer can be legally liable for negligence in utilization review decisions. In Wilson the court determined that a third-party payer cannot escape liability for negligent utilization review based on the argument that the treating physician bears all legal responsibility for a hospital discharge decision.

In Fox v. Health Net, the estate of Nelene Fox was awarded damages from a managed care organization for its refusal to cover bone marrow transplantation and high-dose chemotherapy for advanced breast cancer. The total jury award was $89 million, $77 million of which was punitive damages. Some observers believed that the impact of this case on the liability of employers and MCOs was limited by the Employee Retirement Income Security Act (ERISA).

In the case of Goodrich v. Aetna U.S. Healthcare, a jury awarded the widow of David Goodrich $120 million for delays in approving coverage of high-dose chemotherapy and bone marrow transplantation for a form of stomach cancer. Although ERISA did not apply to this case because Goodrich was covered under a state-sponsored health plan, the size of the award and legislative action in 10 states to limit ERISA protection raised concerns about the exposure of MCOs and employer-sponsored health plans to litigation and resulting damage awards. More recent developments have mitigated these concerns. A 2003 study of the impact of state managed care liability statutes found that these statutes had produced no appreciable increase in liability exposure. In a 2004 ruling by the U.S. Supreme Court in Aetna v. Davila, the court essentially voided these statutes and found that employer-sponsored health plans cannot be held liable for damages for denial of coverage. While these developments represent a shift toward reduced liability of third-party payers for poor quality, negligent managed care processes, it nevertheless seems prudent for employers to address the issue of quality of care in their medical benefits plans as a matter of risk management.

Employee, Provider, and Community Relations

When medical benefits decisions are made without substantive consideration of quality of care, employees can take away the message that their health and well-being are not valued by their employer. This message can undermine one of the key objectives of offering medical benefits: to promote the recruitment and retention of employees. Incorporating quality assurance and continuous quality improvement (CQI) processes into medical benefits decisions, and effectively communicating these processes to employees, can help avoid the employee relations pitfall of employee dissatisfaction with their medical benefits.

Disillusioned providers also can undermine the extent to which employees value their medical benefits. Employee opinion may be influenced by negative assessments from physicians about the quality of an employer's health plan. In addition, physician performance may be adversely affected by a poor quality health plan, with consequences for employee health and productivity.

Failing to demonstrate a commitment to quality assurance and CQI in health care decisions can leave employers vulnerable to the charge of neglecting corporate social responsibility as well. This can have obvious negative implications for community relations.

Value of Medical Care Expenditures

The value of health care services can be defined as the health benefit per dollar spent. Chassin and the National Roundtable on Health Care Quality observed that errors in the delivery of health care services, as well as overuse of services, can reduce the value of health care services by both decreasing the numerator and increasing the denominator of this equation. Conversely, by reducing errors and overuse, the value of health care services can be increased. (The impact of underuse on value is more variable, as it tends to move the numerator and denominator in the same direction.) Most businesses would not view as prudent the practice of purchasing from suppliers based upon price alone. When viewing health plans and providers as you would view other suppliers to your business, considerations of quality and service, as well as cost, become essential components of the value equation.

Tax-Favored High Deductible Health Plan Requirements

A high deductible health plan, generally defined as one having a deductible of at least $1,000 for individual coverage and $2,000 for family coverage, provides part of the incentive for the employee to be a wise consumer of health care. The individual will have to pay at least this deductible amount either from the "health account" or out-of-pocket before the plan will begin to pay for health expenses. This high deductible policy is the basic tool for engaging the individual as an active "consumer," ideally making an informed decision as to whether treatment may be advisable and then shopping for the most efficient provider to deliver that treatment. "Efficient" cannot be a proxy for "cheapest." The decision must weigh both cost and quality of the outcome.

High deductible health plans could be self-insured by the employer or purchased through state regulated insurance companies. These health plans could offer first-dollar coverage for preventive care. Generally, a high deductible health plan participant cannot be covered by any other health insurance plan except for certain "permitted coverages." Permitted coverage includes coverage for dental, vision, specified diseases, and per diem hospital reimbursements, as well as payments for health care from disability or auto insurance.

Note that the high deductible plan does not have to be offered by or paid for by the employer. Individuals could purchase these plans independently. And under current tax law, the employer could reimburse the individual for the coverage on a tax-free basis and could contribute to the individual's HSA. Such individual purchases, reimbursed by the employer, may be especially attractive to small businesses and independent contractors. Much depends on how the consumer-driven health care plan market grows.

Individually Controlled Account for Health Costs

A key element of consumer-driven health care includes a "personal account" under the control of the individual. This account can be used for health care expenses, including copayments, deductibles, health care items, or services not covered by the plan. These accounts can be structured in several ways and go by various names. However, to take full advantage of favorable tax treatment, most of these accounts will fall under one of three legally recognized accounts:

• health flexible spending arrangement and/or account (health FSAs);
• health reimbursement arrangements (HRAs); and
• health savings accounts (HSAs).

Cafeteria Plan Health FSAs

Health FSAs have been popular since the mid-1970s and usually operate as part of a "cafeteria plan," as defined under the federal tax code, and so named because these plans allow an employer to offer employees a selection of various benefits. Health FSAs are funded on a pretax basis by the employer or the employee annually in advance of the coming plan year. Amounts contributed to FSAs also are not subject to FICA taxes, adding another level of savings for both the employer and the employee. The big drawback with FSAs is the "use-it-or-lose-it" rule. Health FSAs do not allow unused balances to carry over from year to year. This "use-it-or-lose-it" feature of FSAs has long been recognized—and criticized—as punishing the "thrifty" employee and encouraging unnecessary health care spending.

Health Reimbursement Arrangements

By early 2002, the Internal Revenue Service (IRS) and its parent agency, the U.S. Department of Treasury, were besieged with insurance companies seeking guidance on the tax treatment of a high deductible health insurance product that would be coupled with an annually funded health care account in which the unused balances would be carried over from year to year. These plans and accounts met with a sympathetic view, perhaps because the IRS realized the insurance market was going to offer them with or without IRS guidance. And as health care costs began to escalate again after a few years of relatively modest growth, the accounts seemed to make sense.

The IRS ruled that health reimbursement arrangements (HRAs) funded solely by the employer and permitting unused amounts to be carried over from year to year, would qualify as health benefits exempt from federal income tax. But the IRS specifically prohibited the use of employee contributions, including arrangements that in effect would be financed with employee money.

Presumed Requirements for Success | Consumer-Driven Health Care

Consumer-driven health care must engage and inform the individual on the issues of health care costs by providing information on health care costs, quality, and outcomes, so that individuals can escape the notion that more expensive health care is better care. Consumer-driven health care relies on several presumptions necessary for its success:

• The individual will shop and use health care more carefully when he or she has a greater financial "investment" in that care—and shares in the savings from that shopping and use.
• Once the individual has the health information on the most efficient and least intrusive methods of treatment, no matter who is paying the bill, the patient will choose the least invasive treatment from the highest quality provider with the best outcomes history.
• Accurate quality measures and information sources are being developed and available which make this choice easier.
• These improved sources of information and better health care quality measures are readily available and accessible today through health information technology systems and continue to evolve.

To achieve these goals, proponents of consumer-driven health care believe the employer through the health plan must:

• educate employees as to the true cost of medical services and their role in managing health care spending,
• hold the employee more responsible for medical purchase decisions through innovative plan designs with built-in incentives,
• provide clinical and financial information to enable employees to be true health care consumers, and
• provide proactive clinical management and coaching to optimize provider efficiencies and courses of treatment.

Proponents of consumer-driven health care believe as health care consumers become more financially responsible for the real cost of health care services, both demand and total health care spending will stabilize—and perhaps even decrease.

Elements of Consumer-Driven Health Care

At its most basic level, consumer-driven health care is a variation of the oldest "insurance," which was designed to cover only catastrophic losses and to leave the burden of minor losses on the individual; and, when medical care is needed, selecting the best and lowest cost health care providers.

Consumer-driven health care plans come in various forms. Some simply consist of "tiered" network providers or tiered services. Others literally can permit the insured to design the entire plan, choosing the level of deductibles, copayments, and services covered. The premium is based on those choices. The employer contributes a stipulated dollar amount for the premium and the employee pays the remainder for the plan that he or she designed.

Most consumer-driven health care plans typically combine several of the following elements:

• a high deductible health insurance plan,
• a health account that can be carried over from year to year to cover minor health expenses and/or expenses not covered by the health "insurance,"
• free or very low-cost preventive care,
• information sources and tools both to educate the individual on health issues and to find the highest quality health care providers at the lowest cost,
• a conveniently accessible health "coach" or "consultant" to help plan participants obtain and use existing health information, answer questions about the individual's health issues, and provide guidance on use, choice, and interaction with health care providers, and
• in cases of serious chronic conditions or illnesses, a proactive medical professional who may contact the patient on a regular basis and act as liaison and coordinator among the patient and his or her medical providers.

To date, most consumer-driven health care plan participants are in employer-sponsored health benefit programs. The critical features of these plans are designed to educate employees as to the true cost of medical services and their role in managing health care spending. The plans use innovative plan design with built-in incentives to give the employee freedom in medical purchasing decisions and hold the employee more financially responsible for those decisions. But, importantly, these plans provide clinical and financial information enabling employees to be true health care consumers and to shop for the best "deal." Most also provide proactive clinical management and coaching to optimize provider efficiencies and courses of treatment.

As health care consumers become financially responsible for more of the real cost of health care services and receive more information on treatments available, outcomes, and the quality of the health care provider, proponents of consumer-driven health care plans believe these plans will motivate employees to purchase more efficient and effective health care. This motivation will then reduce both demand and long-term health expense.

Functional Approach to Evaluating Health Care Plans

A thorough evaluation of employee needs, company compensation philosophy, and other considerations, in a functional approach model, are critical steps before adopting any managed care plan. Like the managed care spectrum analysis, using a functional approach to evaluating health plans provides a way to compare plan sponsor needs and objectives across the spectrum of health plan alternatives.

1. Planning orientation addresses the plan sponsor's readiness to implement a health care program that requires a long-term commitment. Indemnity and PPO plans are better in a shorter-term orientation because changes in plan design can be adopted fairly easily without a large disruption to the membership population. HMO and POS plans are typically less flexible in plan design, and because members are required to select a PCP, they may be more reluctant to switch physicians if the plan sponsor later decides to change managed care plans. Thus, the plan sponsor must be fairly comfortable with the HMO or POS plan at the outset and be willing to avoid frequent intervention.
2. Member satisfaction is often difficult to obtain because there are many aspects to satisfaction: provider access, quality of care, claims processing, member service responsiveness, and adequate and appropriate communications. Managed care plans require greater member understanding of process and procedure than do traditional plans and often limit choice; initial member satisfaction is commonly not high. However, as participation grows, members usually reach a comfort level with how managed care operates. HMO membership survey results show improving satisfaction rates. This seems to be particularly true among longer-term members.^[19] It is important for the plan sponsor to understand and address member concerns with managed care. In today's environment of negative public peception of managed care as an industry, it becomes even more important for the plan sponsor to focus on those items most critical to their employees. This often requires deliberate and frequent two-way communications (e.g., the use of focus groups) and regular surveys to ascertain how changes to the healthcare plan are being perceived.
3. Provider choice becomes more restricted as managed care becomes stronger. Most employees are concerned with being able to select their physicians without outside interference and to choose when, where, and how to receive health care services. Managed care products are deliberately designed to steer members to more cost-effective providers and treatment settings, which limits freedom of selection. HMOs and POS plans, which require the use of a PCP to access services, are the most restrictive. However, members who are pleased with their PCPs may not express dissatisfaction with this aspect of the plan.
4. Cost savings, as discussed in the managed care pricing analysis above, is best achieved with stronger form managed care plans, which have proven abilities to control both the price and use components of the cost equation.
5. Cost containment features are more prevalent and stronger with stronger forms of managed care programs. In particular, it is important to understand precisely what forms of pricing and utilization management are used by the managed care company, to know if those will have an impact on the healthcare cost patterns of the employee population.
6. A broader range of financial reporting/funding alternatives is generally more available with fee-for-service and PPO plans because these plans typically reimburse providers on a "reasonable and customary" or fee schedule basis. Some POS and HMO plans can offer funding alternatives; however, commercial HMOs are typically restricted, by statutory regulation, to offering only prospective funding. Furthermore, the extent to which HMOs reimburse providers on a capitated basis affects the value of experience rating to the plan sponsor; that is, claim payments are more or less equal to the sum of prospective cap payments made to providers. HMOs commonly have had difficulty in providing detailed utilization and cost reports because of the nature of paying on a capitated basis.