Competing Societal Views

While most professionals dealing with consumer-driven health care focus on the elements of the plan, to some degree the views on consumer-driven health care plans are influenced by societal and/or political views. Proponents of the concept view the plans as giving plan participants "ownership/individual responsibility" over their own health treatments, spending, and choice of providers and to some degree for their own health status. Skeptics of consumer-driven health care fear this approach will reduce the health insurance risk pool, as healthy individuals move to high deductible policies, leaving the very sick and those with chronic illnesses in a shrinking risk pool and paying higher and higher premiums.

Supporters of consumer-driven health care believe this approach provides individuals with greater independence in the purchase of health care and provider selection. It also enables them to use the providers of their choice regardless of their employer or employment status. Certainly, consumer-driven health care can be a way to break the health care link between employer and employee. Individuals do not need an employer to set up an HSA. The individual only needs to have a high deductible health plan—which may or may not be offered by the employer. Skeptics of the plans see this elimination of employer "paternalism" as dangerous to the employee and to the community. These skeptics fear that without employer "paternalism" and its considerable role in restraining health care cost increases and improving health care quality through their greater bargaining power, health care will become even more expensive and less effective.

What both the proponents and the skeptics seem to ignore are two facts about employers and consumer-driven health care. First, poor health among employees causing both absenteeism and "presenteeism" has significant real dollar costs for employers. Consequently, employers have both an economic interest in keeping employees healthy and on the job and in controlling the cost of the health care necessary to accomplish that. The employer's role in helping employees find the most efficient providers and procedures is part of that cost control effort.

Second, the major obstacle to enrolling substantial numbers of individuals into consumer-driven health care could well be, as one case study found, that the plans must be carefully explained and supported. At least to date, employers are the most effective source of providing the initial introduction, explanation, and coaching necessary to fully maximize the benefits of consumer-driven health care. Individuals are likely to discount or dismiss information offered directly from health plans and insurers as simply a "sales pitch." Government has rarely successfully taken on the mission of pushing a specific insurance plan that government was not financing, nor is there an effective agency in existence today to take on that role. Even if such an agency existed, would it be trusted?

Will We Actively Accept Consumer-Driven Health Care?

Clearly the limited experience to date with consumer-driven health care cannot tell us whether this approach can materially contain costs and improve health or is simply the "new" new thing to cure the problem of escalating health care costs. Certainly, with an estimated 98,000 lives per year lost to medical "mistakes," a significant percentage of medical care determined to be unnecessary or ineffective, and an epidemic of obesity and its accompanying diseases, the sheer waste from not becoming better health care consumers seems abundantly obvious.

But will individuals actually take responsibility and make the effort to drive their health decisions? The experiences with smoking and drunk driving in the last two decades suggest publicity and a change in social mores actually can achieve better individual health behavior. Public campaigns driven by determined individuals as well as organizations but with relatively little involvement from government, considerably reduced smoking and its resulting diseases and reduced drunk driving and its deaths and injuries. These campaigns certainly did not end these health hazards, nor did they lead to a net reduction in health costs, but they did reduce the hazards and slow the rate of cost increases. On balance, consumer-driven health care is not a silver bullet for rampaging health costs, but it could be a shot in the arm for containing health care cost increases and improving health.

Three-Year Study of One Employer with CDHC, PPO, and HMO

In a study of one self-insured employer with 20,000 employees, the researchers compared almost 3,700 "contracts" (each single employee or family coverage was considered a contract) for plan years 2000, 2001, and 2002, covering groups enrolled in an HMO or PPO for all three years and a group enrolled in an HMO or PPO in 2000 and then enrolled in a consumer-driven health care plan in 2001 and 2002. The researchers found those enrolling in the consumer-driven health care plan tended to be wealthier than enrollees in the other groups, with little difference in age and in number of enrollees among the groups.

The consumer-driven health care group began the period with fewer significant medical diagnoses than the PPO or HMO groups. Yet the consumer-driven group's diagnoses by the end of the year equaled or exceeded the HMO group, but remained less than that of the PPO group. Over the period, the consumer-driven health care enrollees had lower total expenditures than the PPO enrollees, but more than the HMO enrollees. Total hospital and doctor costs were significantly higher for the consumer-driven health care group than the HMO or PPO group, but drug costs for the consumer-driven group were significantly lower. The consumer-driven health care group also experienced a significant increase in hospital admissions, even though that plan provided no-cost preventive services.

This study's researchers feared the consumer-driven health care plan design skewed enrollee behavior because there was no copayment after the deductible was met each year. The researchers theorized this plan design may have encouraged the consumer-driven health care members to consume the medical accounts, but warned the data were too limited to support such a conclusion. The researchers cautioned their study had three limitations—it covered only one employer, some consumer-driven health care participants may have had "pent up" demand for health services, and the data systems of the three plan alternatives were not consistent, which could have skewed reporting of usage.

On balance these studies provide fairly divergent outcomes, making it impossible to conclude that the plans are guaranteed to succeed or to fail. But certainly, the plan designs indicate that plan design is important, regardless of the consumer-driven focus.

Start-Up Experiences of Three Different Employers | Consumer-Driven Health Care

One set of researchers looked at just one year's experience for three employers—a nation-wide financial services firm, a national health care provider, and a small manufacturer with about 2,600 employees.

The Small Employer Financial Services Firm

This employer offered the consumer-driven health care plan as one of several options. The decision to offer a consumer-driven health care plan was driven primarily by employee concerns about the availability of physicians, rather than employer concern about cost. While focus groups prior to enrollment indicated employees reacted positively to the consumer-driven health care plan concept, enrollment in the first year was only two percent, although in the next year's enrollment period that doubled. But the plan design of a $1,500 deductible and only a $1,000 personal care account certainly could have discouraged many participants.

In fact, the researchers found employees with salaries of $80,000 or more were more than twice as likely to enroll in the consumer-driven health care plan as other employees. Men and those with family coverage also were slightly more likely to enroll in the plan. Only 46 percent of enrollees used all of their personal care accounts and those who left the plan after only one year used less of their accounts (and hence forfeited their right to rollover the balance into the next year) than those who elected to renew consumer-driven health care coverage. Almost all of those enrolled in the consumer-driven plan re-enrolled the next year.

The Small Manufacturer

The manufacturer, a self-described paternalistic employer, was motivated to adopt consumer-driven health care by cost considerations, but did not want to simply shift costs to employees. While the employer preferred to use the consumer-driven health care as a total replacement, concern about provider access led the employer to offer the new plan along with the existing PPO coverage at one of its two major locations. The consumer-driven health care plan garnered a 12 percent enrollment. Benefit personnel stated that getting employees to understand how the consumer-driven health care plan worked was the major obstacle to enrollment. Consumer-driven health care enrollee demographics did not differ from those enrolled in the preferred provider organization (PPO). Nevertheless, 2002 health expenses for the consumer driven health care enrollees were only $1,492 compared to $2,837 for PPO enrollees—about half of the PPO enrollees' cost. For the next plan year, the company planned to provide a consumer-driven health care plan as a total replacement at its second major site.

The National Health Insurer

One of the nation's largest health insurers used its employees in one of its major locations as an experimental group to launch its consumer-driven health care product. The next year the employer offered the product to all employees. The employer was driven by cost concerns and believed it had exhausted all means of cost control other than involving the consumers in cost control. In the first year, the employer began offering five plan options, including two consumer-driven health care plans, one of which was the lowest cost health plan option. The employer contributed a fixed amount for all employees regardless of the plan chosen, which was less than the full cost of any plan option. Although personal accounts such as "health reimbursement accounts" that permit annual rollovers of unused account balances are generally considered to be a necessary incentive in the consumer-driven health care model, this employer's consumer-driven health care plan did not permit such rollovers. Only 6 percent of employees enrolled in the consumer-driven health care option during the first year.

In the second year coverage was offered to all employees, and the cost of the nonconsumer-driven health care plans was more than $50 per month greater than the consumer-driven health care plan. At that point enrollment in the consumer-driven plan increased to 21 percent for those outside the major location.

In terms of risk selection, there were no age differences in those enrolling in consumer-driven health care and other plans. But as seen with other early plans, enrollees tended to be higher-earning workers. Also, those who worked in actuarial, financial, and other risk decision roles were more likely to enroll than other employees. The consumer-driven health care option had remarkably favorable selection, with its enrollees having prior year total claims of only about 50 percent of nonenrollees' claims. The consumer-driven health care enrollees at the end of their first year in the plan showed a 30 percent decline in their claims from the prior year, even with their already low rate of claims. There was no substantial year-end spending in the accounts. Just 31 percent of consumer-driven option enrollees spent their entire accounts. Only 8 percent of those enrollees exceeded the plan deductible.

Who's Using It? | Consumer-Driven Health Care

While the consumer-driven health care concept has gained a recognizable benefits presence within the last three years, health providers have been working on these plans since 1998. By 2001 major insurers had joined the market (see Figure 1). The Federal Employees Health Benefits Plan (FEHBP) inclusion of several consumer-driven plans with HRAs in the open enrollment for the 2004 plan year and with HSAs in 2005 may provide a considerable boost for consumer-driven health care plans among other employers. With thousands of federal employees across the nation and with a reputation as an excellent plan with reasonable premiums and multiple options in most locations, the FEHBP may serve to "legitimize" the concept even among cautious health care purchasers.

 

Figure 1: Consumer-Driven Health Care Vendor Timeline

Viewed from late 2004, less than two years after the authorization for HRAs and only a few months after federal legislation was enacted boosting HSAs and high deductible plans, data are just beginning to be available. While these data offer some positive trends for consumer-driven health care plans, the data are not extensive enough to form a definitive analysis of their long-term effects. For example, most employers had already established and communicated their 2005 health benefit options before the tax-advantaged HSAs and requirements for the accompanying high deductible health plans were enacted into law.

Surveys conducted prior to the 2004 law's enactment of favorable consumer-driven health care features revealed considerable employer interest in consumer-driven health care, albeit with some skepticism. The broad-based Kaiser Family Foundation/Health Research and Educational Trust (KFF/HRET) 2004 Annual Survey of Employer Health Benefits shows 10 percent of employers offering a high deductible health plan option to employees, up from 5 percent in 2003. However, only 3.5 percent of those firms offer a personal or health savings account option along with the high deductible health plan.

According to Deloitte Consulting's 2004 Consumer-Driven Health Care Survey, 19 percent of respondents already offer some type of consumer-driven health plan option, up from 11 percent in 2003. The 2004 KFF/HRET Survey also indicates 27 percent of employers say it is at least somewhat likely they will offer workers a high deductible health plan with a personal or health savings account option in the next two years. That appears consistent with results from Deloitte Consulting's survey, in which 29 percent of respondents said they are currently reviewing consumer-driven options and may offer one in the near future, and 14 percent report they will definitely be offering such a plan in 2005 or 2006. While the KFF/HRET Survey found larger companies are much more likely than smaller companies to be thinking about implementing a consumer-driven health plan option in the near future, this may be because 60 percent of firms with three to 199 workers, reported they were either "not too familiar" or "not at all familiar" with consumer-driven health care. As more consumer-driven health care plan products are marketed to small employers, those employers may embrace the concept.

Health Savings Accounts

In 1997, Congress waded timidly into tax-favored medical savings accounts (MSAs) that could be carried forward from year to year, if coupled with a high deductible health insurance policy. No other health coverage could be offered by the employer. But these Archer MSAs, named for their chief proponent in the Congress, House Ways and Means Committee Chair Bill Archer, were limited to small employers. Congress also originally limited the number of MSAs to no more than 600,000 accounts in the entire country and imposed numerous other limitations. In 2000, the restriction on the number of MSAs was dropped, but in fact the number of MSAs never approached even the legally permitted number of accounts.

Proponents of consumer-driven health care plans were able to move forward using the IRS-authorized HRAs, but these accounts had the considerable disadvantage of permitting only employer funding. Employees who needed more tax-favored money to pay out-of-pocket expenses could not supplement the employer account with pretax dollars. Consumer-driven health care proponents were finally able to convince Congress that an account funded by either employers or employees or both on essentially a tax-free basis could truly provide a boost to consumer-driven health care and increase participants' active involvement because the participant would see the account as "my money" not the employers. Congress adopted HSAs as part of the Medicare Modernization Act (MMA) and the IRS has moved quickly to provide additional guidance on their usage.

Because HSAs offer much more flexibility in funding and encourage participant savings, most employers are likely to want to use an HSA, rather than an HRA or a traditional health care flexible spending account offered under a cafeteria plan. Unlike HRAs and health FSAs, which by law can be coupled with any type of health plan or insurance or stand alone as the only employer health benefit, an HSA can be used only if it is coupled with a high deductible plan that meets specific criteria.

The high deductible plan's annual deductible must be at least $1,000 for individual coverage or $2,000 for family coverage. Out-of-pocket limits, excluding premiums, cannot exceed $5,000 for an individual policy or $10,000 for a family policy in 2004. (This amount will be adjusted for inflation annually.) These out-of-pocket limits could provide for higher deductibles than the $1,000 and $2,000 deductible limit, so long as the combined deductible and copay limits do not exceed the out-of-pocket limits.

Table 1 compares the features of the HSAs (first made available in 2004), the IRS-authorized HRAs, and the long-established health FSAs.

Table 1: Comparisons of Health Care Savings, Reimbursement, and Flexible Spending Accounts

	Health Savings Accounts (HSA) (Medicare Act of 2003)	Health Reimbursement Arrangements (HRA)	Cafeteria Plan Health Flexible Spending Arrangements (FSA)
Eligibility Requirements
Who Can Set Up the Account	Individuals or employers, if the account holder is covered by a "high deductible plan" and no other health insurance, except specifically listed coverages.	Only employers.	Only employers.
Funding
Who Can Contribute	Employers and employees.	Only employers.	Employers and employees.
Carry Over of Unused Balances from Year to Year	Yes. No annual or lifetime limits on the amount that can be carried over or accumulated.	Yes. In employer plans, employers may impose annual or lifetime carryover limits.	No.
Transfer of Account Balances	HSAs can accept rollovers from other HSAs and Archer MSAs.	There is no specific mechanism for HRA rollovers, although employers could agree by contract to do so.	No.
Permissible Reimbursements
General Coverage	HSAs can pay for "qualified medical expenses" incurred by the account holder, his or her spouse, and dependents.	Same as HSAs.	Same as HSAs.
Health Insurance Premiums	HSAs generally may not pay other health insurance premiums on a tax-favored basis, except certain premiums paid by. COBRA beneficiaries; individuals receiving federal or state unemployment benefits; and Medicare-eligible individuals (The exception for Medicare-eligible individuals does not apply to Medigap premiums.)	Yes.	No.
Payment for Long-Term Care Insurance Premiums	Yes.	Yes.	No.
Payment for Long-Term Care Services	Yes.	No.	No.
Over-the-Counter Drugs	HSAs may pay if the expense is a qualified medical expense.	Same.	Same.
Tax Treatment
Tax Status of Employer Contributions	No federal income or employment taxes on amount up to funding limits (see below).	Not subject to federal income or employment taxes.	Same as HRAs.
Tax Status of Contributions by Individual	Subject to funding limits, contributions are deductible even if the individual does not itemize deductions Employers can allow employees to make pretax, contributions using IRC §125 cafeteria plans. No deduction for individuals enrolled in Medicare Part A or B or dependents claimed on another's tax return.	Employees cannot contribute to HRAs.	Employee contributions to health FSAs generally are made on a pretax, salary-reduction basis and are not subject to employment taxes.
Tax-Favored Funding Limits	In 2004, the lesser of: The annual deductible under the individual's high deductible health plan, or $2,600 ($5,150 if family coverage), indexed for inflation each year, reduced by the individual's contributions (if any) to Archer MSAs for the year. The funding limit will be increased for individuals age 55 and older by $500 in 2004 and increased by $100 per year to a maximum of $1,000 in 2009.	No limits.(Employers may impose a limit.)	No limits. Employers may set plan-specific limits.(The fact that participants forfeit unused account balances each year imposes de facto limit and the FSA plan document may impose a limit.)
Earnings on Accounts	Earnings generally are not taxable, but may be subject to the IRC § 511 unrelated business income tax rules.	Employers generally maintain HRAs as notional accounts so there are no earnings.	Same as HRAs.
Distributions	No income tax on medical reimbursements or on timely distributions of excess contributions. All other distributions are subject to federal income tax plus a 10% penalty tax, but no penalty tax is applied to distributions after the account beneficiary becomes Medicare eligible, disabled, or dies.	Only to reimburse qualified medical expenses.	Only to reimburse qualified medical expenses.
Employer Compliance Issues
ERISA	Not ERISA plans, even if funded by employers, unless (1) ERISA generally applies to the employer, and (2) the employer limits the employees' ability to move their funds to other HSAs beyond restrictions imposed by IRC; restricts the use of HSA funds beyond restrictions permitted by tax law; makes or influences HSA fund investment decisions; represents the HSAs are ERISA plans; or receives any payment or compensation in connection with HSAs.	HRAs sponsored by employers subject to ERISA generally are ERISA plans.	Same as HRAs.
Nondiscrimination Rules	Comparable employer HSA contributions to all comparable employees participating in an HSA for each coverage period; HSA contributions made through a cafeteria plan are subject to the cafeteria nondiscrimination rules, not the general HSA comparability rules.	HRAs are subject to the general nondiscrimination requirements for self-insured medical expense reimbursement plans.	Health FSAs are subject to both the general nondiscrimination requirements for self-insured medical expense reimbursement plans, and to the cafeteria plan nondiscrimination rules.
COBRA Health Continuation	Not subject to COBRA.	COBRA continuation coverage rules apply.	Same as HRAs.
Trust Requirement	HSA assets must be held in a trust or custodial account.	No trust required.	Same as HRAs.
Vesting Requirement	HSA beneficiaries must be 100% vested in their account balances at all times.	No vesting requirements.	Same as HRAs.

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.