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What direction will consumers take?

May 1, 2006
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No one knows exactly how many consumer-directed health plans (CDHPs) are in the marketplace, nor the precise impact they will have in the next few years. But healthcare industry experts agree that there will be explosive growth in the near future in CDHPs offered by managed care organizations (MCOs) and self-insured employers.

Indeed, results from this past December's 14th annual survey of MCOs by the consulting and actuarial firm Milliman, which specializes in healthcare resource utilization research and consulting, found that 93% of responding HMOs and PPOs expected to offer a consumer-driven health product within the next year. The percentage of consumers choosing CDHPs remains small, with CDHP-based premium revenue representing only 2.5% of all commercial premium revenue in 2005, but that number is expected to double to 5.2% this year, as large numbers of employers and MCOs move to offer the plans, according to Milliman.

CDHP Basics

No single definition of CDHPs exist, which is not surprising given how new they are. The basic idea behind them is a shift away from the traditional HMO model, with employers paying for most services, to a model in which consumers manage healthcare dollars from an employer-provided fund. Consumers gain increased control over their healthcare decisions but take on greater financial responsibility.

In theory, the idea behind CDHPs is simple: give healthcare consumers more choices and more direct control over their healthcare spending. At the same time, give them more direct personal financial responsibility for healthcare spending, through such mechanisms as health savings accounts (HSAs), health reimbursement accounts/arrangements (HRAs), and other financing vehicles.

The concepts of HSA/HRAs and CDHPs are separate, with the HSA/HRA being the financing mechanism and the CDHP being the health plan. CDHPs are generally categorized by greater consumer involvement in plan selection, healthcare dollar allocation, and provider selection, taking into account provider quality and costs. Plans might help keep costs down by having high deductibles, limited benefit structures, and disease management (DM) and EAP involvement.

CDHPs move away from traditional “defined benefit” plans, in which the sponsoring employer pays for a prearranged list of healthcare services. CDHPs move into the arena of “defined contribution,” in which the employer pays for a more broadly articulated set of potential services but within far more strictly defined financial parameters.

In a CDHP employing an HSA, the employer can contribute a set dollar amount to a fund—say, $5,000 per employee per year. As the employee incurs medical expenses, he/she pays for those services out of that defined fund. In many cases, under HSA- or HRA-based mechanisms, the employee is allowed to keep whatever money, tax-deferred, that is not spent, per year, until retirement. So taking the simplified example of the $5,000-per-year allowance, an employee who spends nothing on medical care for three years in a row would be able to add $15,000 to his/her retirement fund during that time.

Typically, an HSA will have a high annual initial deductible that the consumer will have to spend to begin his/her coverage. With some of the earliest CDHPs, that amount is running anywhere from $1,500 or $2,000 up to $3,000 or more per year. Once that amount has been spent, the enrollee will largely have his/her choice of physicians, hospitals, and other providers. The catch is that no one knows whether and to what extent some policy-based limitations might be placed on enrollees of individual CDHPs in the future (e.g., making prescription drug coverage unavailable).

Within the CDHP allowance, most plans give employees very wide latitude for spending on healthcare needs. CDHPs are intended to motivate members to make more informed choices about services and medications, such as requesting generic drugs, when they are paid out of their fund.

For arrangements such as HSAs, consumers will have to purchase catastrophic health insurance separately, but will receive a tax incentive to do so, according to the federal legislation that enabled HSAs.

Early Experience

Those who got in on the ground floor of CDHP design and development are understandably positive about these plans, and Doug Kronenberg, chief strategy officer of Lumenos, a CDHP developer, is among them. “We were one of the originators of consumer-driven healthcare,” Kronenberg says. “We have about 100 major clients, which include large corporations and self-insured employers like Fujitsu.” In the past year, Lumenos was acquired by WellPoint Health Plans, the nation's largest commercial MCO. “We're housed within the WellPoint organization today, championing and spearheading their consumer-driven efforts,” says Kronenberg.

As for how the implementation of CDHPs is going at organizations such as Banta Corporation and Fujitsu, both with a majority of their employees now enrolled in such plans, Kronenberg says, “The notion that people will be more conscious of cost and interested in understanding value is true across the board. When people get engaged in their healthcare and have control over a reasonable portion of what's spent—families will typically get $2,000 to $3,000 over the course of a year—they're more interested in the total value of spending, and the result is that they will be more careful in spending…. So across the board, we'll see a consumer who's more actively involved, more engaged, and who will ask questions.”