Consumer-driven healthcare undergoes explosive growth as more employers and employees catch on to this alternative way of providing coverage.
Nothing pricks up the ears of business leaders more than discussions around containing healthcare costs. That’s because this is one of the fastest-growing benefits-related expenses these days, and employers are looking to clamp down on premiums paid on healthcare.
According to the National Coalition on Health Care, an alliance of businesses, labor groups, care providers, and other interested organizations, U.S. healthcare spending was $2 trillion in 2005, rising at a rate of 6.9 percent, or about twice that of inflation. Employer health insurance premiums rose 7.7 percent in 2006 to about $11,500 for a family of four. Since 2000, employment-based insurance premiums have risen 87 percent, compared with an inflation rate of 18 percent and wage growth of 20 percent during the same period, according to the Kaiser Family Foundation.
So it should come as no surprise that alternative coverage such as consumer-driven healthcare initiatives are catching fire, attracting the interest of employers everywhere. Since CDH first got started around the turn of the decade—later helped by the Medicare Modernization Act, which created health savings accounts (HSAs)—the market has witnessed an explosion in the number of participants in CDH-based plans. Today, CDH has also become a key offering in the outsourcing market as buyers look to benefits consultants and providers for guidance on implementing account-based coverage in their organizations.
“I can tell you that I have not talked to a client in the past six months who has not talked about moving to a consumer-directed healthcare plan. Cost is an issue around which they need to take a more radical step. The best answer we have is a consumer-directed healthcare plan,” said Karen Frost, the practice lead at Hewitt’s Health and Welfare Outsourcing business.
Frost’s experience reflects the high level of interest today among employers and employees. The number of employees covered under a CDH-based plan and the amount of money put into these plans have risen dramatically since just last year, according to Atlantic Information Services, the publisher of the newsletter, “Inside Consumer-Directed Care (ICDC).” As of last month, the number of lives participating in such plans has grown to 10 million, while the amount of money placed in these accounts shot up to $2.3 billion, up from $1.5 billion a year ago. Industry observers say those figures are expected to continue to increase as growing employer awareness and recent legislative changes spur participation.
And with more employers outsourcing health and wealth design and services, the allure of CDH is sure to become more of a centerpiece of discussion among employers and their outsourced service providers.
CDH Defined
A half-decade into the CDH movement, a growing number of employees and employers are becoming aware. Still, Frost said buyers continue to have many questions. Today, most people recognize CDH for its three key components: a high-deductible healthcare plan, a health savings (HSA) or reimbursement (HRA) account, and decision-making tools for the insured to make smarter choices. CDH is also increasingly encompassing wellness initiatives as part of the overall strategy. All the pieces work in conjunction to promote greater consumer awareness of healthcare choices and costs, backed by the idea that better educated consumers also mean more effective spending and more careful utilization of resources.
The idea behind the CDH movement is to give participants control and responsibility for their own health coverage. Under these HSA and HRA plans, the insured must be mindful of how they utilize spending, are encouraged to live healthier and engage in preventative care, and choose appropriate
care providers. The movement has received strong support from the Bush Administration, which has repeatedly praised the merits of CDH and worked legislatively to encourage health savings.
Because plans boast high deductibles, HSAs and HRAs are a critical component. Participants draw against these accounts to offset the deductibles or save for future medical expenses. Deductibles are usually thousands of dollars. Some employers set aside a pool of funds to cover upfront costs, and workers contribute to them over time.
Employer-funded HRAs offer tax advantages, can be rolled over from year to year, and can be offered with HSA accounts. Employees forfeit any unused balances when they leave their company.
HSAs, however, are funded by the employees and provide tax savings to the insured. Interest accrued in the accounts are tax-free, as are disbursements for qualifying expenses. Employees can move funds from one employer to another, and they have the option to use the funds during or after employment.
Last year, HSA plans received a boost when President Bush signed into law several changes that allowed participants to increase their contributions. In one instance, it allowed participants to contribute the maximum amount allowed by law ($2,850 for an individual and $5,650 for a family in 2007). Previously, contributions could not exceed the lower of either the amount set by the law or the deductible of the participant’s plan. The change means participants can now contribute the full amount regardless of the deductible. Furthermore, the revision also allowed the transfer of funds from HRAs, FSAs, and IRAs into HSAs—all in an effort to encourage healthcare savings.
Despite double-digit gains in the number of CDH participants, they still represent a small minority of all Americans with healthcare plans. Steve Davis, managing editor of ICDC, said the 10 million CDH participants are broken down into two major groups. Around 5.5 million lives are covered under a reimbursed plan, while another 4.5 million put money in health savings accounts.
He noted that the amount of money pouring into CDH plans is increasing as well. So even as more people participate, they are also putting more into savings accounts.
Davis said that studies have shown participants are contributing to their HSAs as a way to save money for future medical expenses and not just to cover their current medical expenditures. So far, it appears one of the largest groups of participants are those between the ages of 40 and 49, who account for about one-third of the total.
Clearly, CDH is leaving its mark on the outsourcing market, with providers such as Hewitt fielding more inquiries from clients and potential clients each day. In fact, the company said in a survey it conducted last year, Hewitt found that nearly 31 percent of employers already had a CDH plan in place, while another 50 percent were looking to add such a plan in 2008 and beyond. Many of these buyers will likely look to providers for guidance on how best to implement a suitable plan for their workforce.
And to help participants make the most appropriate plan choices, outsourcing providers are developing better tools and guidance to improve the enrollment experience. Frost said in the first few years when clients began offering CDH plans, enrollees actually missed participating in HSAs because it was unclear to them this was essential in any high-deductible plan. Now, she added, participants are informed of all relevant information the moment they choose to be in such a plan.
Participation Picks up
With the recent changes in the law, expect participation to accelerate. Industry observers point out that because the legislation was signed so late in 2006, many employers were not able to respond in time to affect their 2007 plan, but look for a number of these organizations to ratchet up their sponsorship in 2008.
Although CDH plans can have an immediate impact on premiums, another benefit might not materialize for some time. Because a cornerstone of these plans is to encourage healthy living and give the insured more input into decision-making about their healthcare, CDH proponents contend that consumers will become healthier—whether through more diligent maintenance of their conditions (for instance, diabetics monitoring their glucose levels, cholesterol, and blood pressure), through exercise and diet, or through initiatives such as smoking cessation. If that happens, care utilization and costs will surely decline, lowering premiums for employers.
“Health coaching is a big component of these plans. That education piece is strong and running well,” said David Stacey, a principal at Hewitt’s Health Management Consulting practice.
ICDC’s Davis added that some studies are already pointing to changes in consumer behavior, which could further spur interest. He cautioned, however, that CDH is not a panacea to every employer’s rising healthcare costs. In fact, he noted, CDH has its share of failures, as well, citing a number of poorly designed plans in place.
“The bad plans include ones in which an employer rules out a high deductible and does no education of the employees and doesn’t educate them about saving money,” he said, adding that management must also actively champion any shift to a CDH plan. “The most successful plans have been the ones with the CEO out in front.”
With rising premiums a priority for most employers, there’s no doubt that CDH and other cost-reduction programs will be closely scrutinized by organizations of all sizes. Judging by the rapid rise in the number of plan participants, there’s also no doubt that consumer-driven healthcare has become a centerpiece in the discussion. Because with the potential to reduce care utilization while reducing costs, a lot of ears will certainly be pricking up the next time CDH is up for discussion.
