Heal Thyself

Consumer-directed health care is hot. But is it a danger to the medical-insurance system?

Quicker than you can say “managed care is dead,” controversial new programs called consumer-directed health plans (CDHPs) are catching on —cutting employer costs while transferring to employees more responsibility for purchasing their own medical care.

In fact, little more than a year after a July 2002 Internal Revenue Service decision gave the agency’s blessing to health-reimbursement accounts (HRAs) — the funding mechanism for CDHPs — the number of companies using them is soaring, and includes CVS, Amazon.com, Medtronic, and Wells Fargo. In addition, 30 percent of large employers say they are likely to offer plans in the next two years, according to Mercer Human Resource Consulting. Upstart health-care companies such as Lumenos Inc. and Definity Health have emerged to handle early interest. (Definity, which had three clients in 2000, expects to administer CDHPs for 80 companies by year-end.) But traditional health-care insurers and administrators are now also scrambling to offer consumer-directed products.

“This is the most important thing to happen in health care since the emergence of managed care,” says Robert H. Booz, vice president of health and managed care at Conning Research & Consulting Inc., an insurance-industry research firm.

CDHPs are in the spotlight because many employers have run out of other options. “A lot of weapons in the arsenal to control costs have been exhausted,” says Alexander Domaszewicz, senior consultant at Mercer. After years of negotiating with vendors, wringing out administrative efficiencies, and shifting costs to employees through other means, he says, plan sponsors are now trying consumer-driven plans to attack the demand side of the equation. Early results show the plans — providing individual employee accounts that, when depleted, require members to pay for health needs out of their own pockets — have some success restraining costs. According to research by Conning, employees in a CDHP use 11 percent fewer health-care services.

Opponents of the plans, though, contend that they offer a raw deal for many employees. In the long run, CDHPs won’t effectively curb overall health costs, they say, and could even threaten the health-insurance system. “If structured wrong, it’s a really great deal for 80 percent and a devastating deal for the 20 percent that use the most care,” says Harvard Pilgrim Health Care Inc. CEO Charles Baker of the approach. Some CDHPs fail to provide employees with tools they need to make the right decisions, he says. “We all need to do a better job of getting consumers more involved in the system, but not in a way that makes them feel they have been abandoned.”

A Shifting of Costs

In theory, a CDHP is any plan that gives employees a financial incentive to influence consumption of care, and may include tiered co-pays and multiple plan options at different price points. But it is the HRA, an outgrowth of the medical savings accounts of the early 1990s, that is growing the fastest and getting the most attention.

HRAs must be entirely funded by employers, commonly at a $1,000 to $2,000 level. When that amount is exhausted, employees in a CDHP are responsible for paying all medical expenses until they reach the next insurance-covered threshold. This period of out-of-pocket expenses, called the bridge or gap, can range from a few hundred dollars to more than $6,000, depending on the plan. On the other side of the bridge, a preferred-provider network typically kicks in, with the employer paying 80 percent and the employee 20 percent of in-network care, for example. Often the plans are self-funded, with a high-deductible, stop-loss insurance policy to protect employers against catastrophic claims, and employee expenses are capped. In theory, employees will use discretion in health-care purchases, knowing they’ll be on the hook when the account runs dry. The IRS decision makes accounts tax-free, and unused portions can be rolled over year-to-year. But accounts usually aren’t portable, can’t be used for expenses other than IRS-recognized health expenses, and can’t be taken out in cash.

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