Consumer Driven Health Plans

Health Savings Account (HSAs) or other like-structured health insurance programs [e.g., Health Reimbursement Arrangements (HRAs) or Health Incentive Arrangements (HIAs)…] are widely promoted as having the ability to “fix” most, if not all, the ills associated with rising health insurance costs. Unless otherwise stipulated, we have used an all-inclusive CDHP (Consumer Driven Health Plan) acronym to include HSAs/HRAs/HIAs or any other private sector “consumerism” plan. We appreciate your taking the time to review this overview, and we hope that it helps you gain a deeper understanding of CDHPs.

Today’s excessive health insurance costs, along with the pessimistic outlook that most have had for years with respect to identifying health care cost solutions, held that something—anything—needed to be done by the private sector to gain control over rising health care costs. The private sector mantra for employers and their employees; in fact, it’s self-promoted “Silver Bullet”: Employers should offer a total replacement CDHP or at least a CDHP option in addition to one or more traditional health plan offerings. 

A Necessary Pre-Cursor

First, we believe it is very important to note this important fact: We are not anti-CDHP. The concept has merit, but falls well short of being able to deliver the many broad promises being made via the “Silver Bullet” marketing wave that has been created by multiple, varying special interests that stand to gain from increases in CDHP market share. The effort to create mass-market appeal for this type of insurance product has resulted in some creative and sizzling marketing spins. These marketing spins have led unwitting employers to center their focus only on CDHP “pros”, leaving them unaware of, or unable to fully understand, CDHP “cons”.

Unfortunately, we have experienced far too many situations wherein insurance and / or financial services “professionals” are themselves unaware of key CDHP “cons” relating to product and / or risk-shift areas; therefore, these “professionals” are incapable of fully reviewing key areas having a material impact on the decisions made by employers and employees to elect the CDHP direction that they are strongly recommending.

Worse yet, there are other “professionals” that intentionally choose not to adhere to a proper moral and ethical high ground. These “professionals” do not provide full CDHP disclosure though they have the capacity to do so. Consequently, they knowingly do not ensure that employers and employees looking to them for needed guidance gain a thorough understanding of CDHPs and the potential risks they carry—prior to a purchasing decision or election being made by the employer / employee, respectively.

Our goal is to provide readers with a more in-depth, objective CDHP overview. 

Following are a few of the more common and alluring marketing angles, which are leading to unrealistic expectations and low satisfaction levels among CDHP participants:

CDHPs will …

• Improve consumer efficiencies (i.e., promote more appropriate use of health care resources).
• Create a new health insurance model that offers cost transparency at a consumer level.
• Pave the way to affordable health insurance premium levels in the future.
• Become an additional ‘savings or retirement’ nest egg for participants.
• Provide an additional tax shelter.

There is a small measure of substance with respect to the above marketing statements. Just the same, none of these marketing angles can be used universally. Also, none of the above guarantees a long-term solution to increasing health care costs because of changing circumstances that may occur pursuant to the election of a CDHP.

What Do The Facts Hold?

We believe in the merit of encouraging health care consumerism, however, prior to requiring employee engagement in a health insurance model that significantly increases their financial risk, they must (a) receive appropriate CDHP education and (b) have access to necessary consumer-driven resources, which both encourage and empower employees to become better health care consumers. Our experience is that both of these vital areas are largely glossed over—irresponsibly—by a good number of “professionals” who are leading the CDHP marketing effort to create employer and employee level buy-in in this new conceptual direction.

Again, appropriate CDHP education is generally not being provided as needed—in advance of the buying decision or implementation—to ensure an adequate understanding of how this new plan model works (affects both employers and employees…) and the additional financial risks that employees must bear. A study by McKinsey & Company has revealed that only 44% of the existing participants within HSA plans were as satisfied with this plan concept as they had been with their previous—typically more generous—traditional health plan.

According to a 2007 survey by the Kaiser Family Foundation (KFF), CDHP patients are more likely to question providers about the cost of services than traditional health plan patients. Over half of the CDHP enrollees make decisions on whether or not to seek care differently because of their additional financial exposure, and 57% of them stated that this was due to medical cost considerations. This may explain why CDHP enrollees are twice as likely as their traditional health plan counterparts to state that they needed medical care during the past year, but didn’t seek treatment due to costs (23% – CDHP enrollees; 11% – traditional health plan enrollees, per KFF’s survey).

Another recently released 2007 survey from HealthMarkets (HM) demonstrates that most Americans significantly underestimate health care costs. In fact, the HM survey shows that more than 70% of U.S. citizens “know little to nothing” about how much their doctor charges for services compared to other doctors.

As it relates to estimating the cost of health care, usually, the estimates are wrong because they’re too low. Sixty-five (65)% of adults polled stated that, in general, a high-priced doctor charges two to three times as much for the same services provided by a low-priced doctor. In fact, some doctors charge as much as 10 times what other lower cost doctors charge for the same procedure. Unfortunately, while we believe it is positive to pursue greater cost transparency, we must not sacrifice health care quality while pursuing greater disclosure and heightened cost awareness at an individual level.

Few CDHP enrollees use the limited resources available through their plan’s web site to compare prices. For instance, KFF reported that only 19% shopped for prescription drugs online. The low numbers attempting to find consumer resources does not represent lack of enrollee interest or effort. Most CDHP enrollees stated that it is difficult to find reliable cost and quality information about a doctor or hospital, KFF reported. One-half of the CDHP enrollees would switch plans given the opportunity, compared to just one-third of those enrolled in a traditional health plan, KFF found. 

About 39% of CDHP enrollees had no access to another type of plan in 2007, according to a study by the Center for Studying Health System Change (CSHSC). Only 4% of enrollees in employer-sponsored health plans are enrolled in CDHPs.

According to the CSHSC, CDHPs are not significantly cheaper than traditional health plans for employers that contribute to their employee’s HSAs or HRAs. Average monthly employer contributions are approximately 2% less for CDHP enrollees, including the employer’s respective HSA/HRA contribution versus employer contributions for enrollees in a traditional PPO health plan. Despite this, the potential financial burden on CDHP enrollees is significantly higher. Average deductible levels for single coverage are: CDHP – $1,459; HMO – $30, PPO – $261. Also, there is much greater financial risk to CDHP enrollees in areas other than the deductible (such as prescription drug coverage), which are heavily reimbursed under traditional health plans.

The higher deductible risk for CDHP enrollees does not take into account the fact that many (most?) HSA plans include non-embedded deductibles. Many (again, most?) employers that currently offer HSAs have this type of HSA plan, but we know that some may have never before heard of the “non-embedded” description. Non-embedded HSA plans significantly increase financial risk for employees having dependent coverage versus employees having dependent coverage under traditional health plans.

Embedded HSA plans that parallel traditional plans in the deductible and coinsurance areas are available, however, the single deductible must be equal to or greater than the minimum family deductible allowed by 2007 HSA legislation, which was $2,200.

An employee enrolled for single coverage has a single deductible in a non-embedded HSA Plan; however, an employee that has one or more enrolled dependent(s) is subject to the entire family deductible—even if only one member of the family unit covered has high expenses.

Two Claim Illustrations for a Non-Embedded HSA Plan

Non-Embedded Claim Illustration #1

• Plan Deductible: $2,000 Single; $4,000 Family
• Reimbursement Schedule: 100%
• Employee Enrollee Status: Single
• Claim Situation: The employee incurs $2,500 in medical expenses the beginning of the calendar year deductible period.
• Claim Handling*: Claim is adjudicated applying the first $2,000 toward the employee’s deductible. $500 is reimbursed at 100%.

Non-Embedded Claim Illustration #2

• Plan Deductible: $2,000 Single; $4,000 Family
• Reimbursement Schedule: 100%
• Employee Enrollee Status: Employee/Child(ren), Employee/Spouse or Family
• Claim Situation: The employee or any one dependent family member incurs $5,000 in medical expenses the beginning of the calendar year deductible period.
• Claim Handling*: Claim is adjudicated applying the first $4,000 toward the employee’s family deductible. $1,000 is reimbursed at 100%.

Note: Unlike traditional health plans, in a non-embedded HSA plan there is no individual deductible maximum (financial protection) if the employee covers one or more dependents. Further, if the non-embedded HSA plan has a Reimbursement Schedule that is less than 100%, then there are non-embedded HSA plans that require the employee’s coinsurance expenses continue, whether the reimbursable expenses are incurred on the employee and / or any other dependent(s), until the family out of-pocket maximum is satisfied.

Assumptions

1. Medical services were performed by a network provider;
2. Costs illustrated are net of any applicable network discounts being applied;
3. All services are eligible under the Plan; and,
4. All medical costs are within Usual and Customary fee levels.

Continuing On…

Whenever considering a CDHP, an employer should be sure to evaluate the demographic composition of its workforce, in addition to the overall medical risk profile of their employee population. Failure to do such will leave some employees immediately saddled with onerous financial risk, which could lead to challenges that negatively impact an employer’s ability to build and maintain necessary human capital.

A younger, healthy workforce may be more favorable when considering a CDHP, however, risk tolerance is a critical area that still should be thoroughly reviewed (with employees?) prior to making a buying decision. An employee population that is a mix of both younger and older individuals, or that includes employees who are known to have health concerns, should lead an employer to complete a CDHP impact study in order to establish potential financial risk (consequences) for higher-risk employees.

The following industries stand to experience significant financial gains from increased CDHP market penetration:

• Insurance 
• Agents / Brokers 
• Banking / Financial Services 

Insurance 

CDHPs hold gold mine potential for health insurers and their stakeholders. They create a significant medical risk shift from the health insurers to employers and / or to employees. The health insurers’ consideration for this risk shift is an initial reduction of premium; however, it oftentimes is not commensurate with the associated financial risk shift to employers and / or employees [see Paragraph 5, Page 3].

Some health insurers may offer internal bonuses to their executive level and / or sales and marketing personnel. Due to the prospects for deeper margins and increased profitability within CDHPs, it is reasonable to speculate that some health insurers may be rewarding—by way of additional compensation—the successful efforts of key personnel directly responsible for increasing its CDHP enrollment numbers.

Health insurers may make at least a passive financial return from the deposits in bank accounts linked to their CDHP enrollees that are deposited with the health insurer’s Financial Trustee. CDHP enrollees are free to place their CDHP-linked deposits at any Financial Trustee of choice—in other words, a health insurer’s enrollees are not obligated to make deposits with the health insurer’s Financial Trustee. 

Agents/Brokers 

Health insurers primarily rely on “independent” health insurance brokers and agents to sell CDHPs to their prospective and existing employer clients. Some brokers and agents still hold a true “independent” position, though there are others that are enticed by insurance bonuses or other forms of additional compensation that may not be transparent to employers.

Some health insurers have been and continue to offer bonuses to brokers and agents that sell their CDHPs. As a matter of practice, an employer should ask their broker or agent to confirm whether they are receiving bonus compensation from the health insurer due to their electing to offer a CDHP. An employer can always ask the health insurer to confirm this information. 

Banking / Financial Services 

Payroll companies, financial advisors, bankers and other financial services entities and related representatives are all looking aggressively at what the additional CDHP-linked deposit monies can do to positively affect their financial bottom line. According to a report by DiamondCluster, financial institutions have the potential to make $3.5 billion in revenues, which would be earned by account and asset management fees off CDHP-linked deposits. The institutions where monies are collected and managed will obviously realize financial rewards with each additional CDHP-linked dollar on deposit. And, those who play a role in directing the deposits will also be duly rewarded. This is not necessarily a problem from our perspective. Financial professionals should expect to reap a suitable return if their efforts lead employer and / or employee clients into an improved health insurance scenario. To the degree this is not accomplished, then remuneration received by, or expected to be paid to, the responsible individual / entity having sold the CDHP should be scrutinized by the employer. 

Summary points relating to the insurance agents / brokers and banking / financial service industries:

The profound reality is that there is a ground swell of individuals within multiple existing and / or emerging industries that may very well have the best of intentions in their efforts to provide a decent and honorable service for their clients. Unfortunately, once again, there are potentially negative CDHP details that are just not being appropriately conveyed by many professionals in these sectors that do not know—or worse yet, may not care—about CDHP risk minutiae that could negatively impact many employers and their employees.

Closing Remarks:

First, Some Important Unanswered Questions

Why have employers (for decades now…) continued to rely upon health insurers to identify and implement health care cost solutions? Has there ever been a new health insurance program, concept, or philosophy that provided concrete, permanent health care cost solutions? Why do we continue to believe that an insurance-related direction (program, concept, philosophy, etc.) will ever be more than a band-aid approach? When will we begin to understand that insurance-related “fixes” are reactionary methods that only treat symptoms associated with our health care / health insurance cost challenges?

The primary bottom line that should be of importance to ALL of us is that of the employers and their employees. Every premium dollar paid to health insurers for employer-sponsored health insurance begins with employers and their employees; thus, given that the vast majority of Americans have their health insurance provided through an employer-sponsored plan, the lion’s share of revenue received by health care providers originates from employers and employees as well. Why then do employers and employees have so little control over where and how their premium dollars are spent? Our over-simplified answer: Because corporate America has for too long relied upon other private sector interests to identify for them, proactively and in good faith, long-term solutions that address health care cost drivers (root causes).

A Driving Force Behind The CDHP Movement

The primary emphasis point for most CDHP proponents is that health care costs are rising out of control due to an economic disconnect that exists between health care providers and their patients as a result of today’s traditional health insurance structure. We agree that there is a disconnect driving up health care costs and the number of uninsured across the U.S., however, we disagree with many that are arguing—if only by way of their creative marketing efforts—that the meaningful disconnect lies within fundamental economics (i.e., a lack of health care consumerism).

The CDHP Reality 

There is some gain to be realized by way of true consumerism; however, individuals will not be equipped to become true consumers just because there are varying and relatively new insurance concepts, tax-favorable legislation, and health insurers that now offer limited (financial and qualitative based) health care resource data. Again, the dazzling mix of marketing campaigns hitting the marketplace from a cross-section of multiple, vested industries are designed to create and infuse a sense of hope and confidence in the private sector’s ability to reign in spiraling costs through CDHPs.

We are a long way from positioning individuals to become better consumers. There is too much emphasis on the importance of building consumer skills and resources, which are only important if one develops a need to access the health care system and has a willingness to learn and navigate themselves into becoming true consumers. What we need is for corporate America to implement an effective health risk management program, which will improve both individual and overall medical risk profiles by mitigating health care access for preventable medical conditions. This proactive effort would result in a positive ROI for both corporate America and its employees over the long-term. 

By subscribing to the notion that an insurance-related direction will create the necessary “fix” for our health care / health insurance ills across the U.S., we are not addressing the multiple cost drivers (causes) that are much more important to address if we are to effectively control rising health care costs and the number of uninsured Americans. More importantly, with each passing year that these cost drivers are not being addressed, we are losing precious ground—reality holds that we have limited time remaining to create a positive turnaround, which is being whittled away. 

Our Concerns & Perspective 

We believe that the primary disconnect within the U.S. health care / health insurance system lies in the fact that employers and employees, despite their paying for the vast majority of health care and health insurance, have little influence over the direction of private health insurance today in the U.S. And, while CDHPs may create a few positive changes, they do not hold the ability to provide sustainable control over health care costs and / or inflationary trends going forward. 

The CDHP push is the latest attempt by the private sector (perhaps its last…) to prove that it can gain control over ever-increasing health care costs. Left unchecked, rising health care costs will create overwhelmingly negative outcomes on a widespread level. With appropriate and much needed leadership from corporate America, we can courageously address—and find solutions to mitigate—the actual causes of our health care cost increases versus buying into an insurance-related direction that primarily serves to initiate only a symptom-related reaction to address rising health care costs. We must come to terms with our overall poor medical risk profile in the U.S. Our medical risk profile is primarily due to poor lifestyle habits that are not conducive to good or improved health. We believe this area is the leading cause of rising health care costs. Left unchecked, regardless of whether health insurance is provided through a social or privately run program, it will one day result in unaffordable U.S. health care costs on a massive scale.

Again, an insurance concept will not equip an individual to become a better consumer. Due to the lack of consumer-empowering resources and the (often) irresponsible manner in which CDHP programs are being introduced to, reviewed with, and implemented for, employers and their employees, there are significant, perhaps unquantifiable risks for employers and / or their employees. Employers must ensure that they are able to make a well-informed buying decision based on all important CDHP data—both the “pros” and “cons”—this is the only way that they will be capable of establishing appropriate expectations and understand the CDHP risks and their limitations. 

When might an HSA plan be a good fit?

When Employees Have:

• A good to excellent medical risk profile and reason to believe that they will continue in good health; 

• A higher-than-average financial risk tolerance; 

• The desire, energy, knowledge and disposable time necessary to fully research and identify the best health care values. While it may become easier in the future to identify provider cost differences, there is still much lacking in regard to an individual’s ability to measure provider quality differences. Make no mistake about this vital area, provider quality of care is far more important than provider cost of care in determining the best health care values; and, 

• A reasonable amount of disposable income and/or savings which can be put aside for potential future health care expenses; and 

• An interest in establishing another tax shelter. 

When Employers Have:

• A predominantly white or gray collar workforce that has a favorable medical risk profile and/or a higher than average financial risk tolerance. 

• A desire to diversify their health insurance offerings relative to the needs of their employee population. 

• A pressing financial need to reduce their health insurance spending, regardless of the financial risk shift and other perceived negatives that will be placed upon covered employees. 

• A positive combination of compensation and other fringes that compare favorably to the compensation and benefits packages offered by employers who are aggressively competing for the same employee candidates. An employer’s overall package must be well understood and capable of offsetting any negative financial risk perception that its new and existing employees may have with respect to a HSA Plan. 

• Very limited owners or shareholders (ideal HSA candidates).