Consumer-driven healthcare is starting to catch on with employers. With cost savings a key consideration, broader adoption is expected in the near future.
As any HR executive knows, one of the fastest-growing HR costs these days is healthcare spending. With premiums steadily rising by double digits year after year, organizations of all sizes are scrambling in search of relief for this chronic pain point.
While many employers are shifting more of the financial responsibility onto workers, others are also making shifts that don’t necessarily further burden employees. Instead, they are asking the insured to play a bigger role in how money is spent through initiatives such as consumer-driven healthcare (CDH). Using vehicles such as health savings accounts (HSAs) and health reimbursement accounts (HRAs), employers say they can better minimize the year-over-year premium hikes hurting their bottom line. At the same time, they contend, these accounts enable employees to make better choices in utilizing healthcare dollars, encourage healthier habits, and reward them for embracing preventative medicine.
Since its inception at the turn of the decade, CDH has quietly but steadily attracted more adopters. What began as an obscure alternative to traditional healthcare insurance, CDH today is estimated to have six million enrollees nationwide, according to one consultant at Mercer HR Consulting. Furthermore, while adoption growth is slowing—not posting triple-digit gains in the early years of CDH—Mercer still believes double-digit growth is certain as the CDH base is headed to 20 million by 2009. Boosted by President Bush’s agenda to promote consumer choices in healthcare, CDH is being singled out by the President as one of the main tools for holding down healthcare costs while still giving consumers choices in how they are treated.
WHAT IS CDH?
Like any new product, there are still many employees and employers unsure what the CDH movement is. In essence, CDH encompasses three key elements: a high-deductible healthcare plan, a health spending or savings account, and decision-making tools for the insured to make smarter choices. Increasingly, CDH is incorporating a new, fourth element: wellness initiatives. All of these work in conjunction to promote greater consumer awareness of healthcare choices and costs. And the belief is that better educated consumers also mean more effective spending.
CDH came about, according to some consultants, out of necessity in the late 1990s. Bill Sharon, a vice president with Aon Consulting’s health and welfare practice, pointed out that employers looked for any alternative to traditional plans to help keep costs down.
“At the end of the 1990s, we had gone through a period of single-digit healthcare cost increases, and then all of a sudden, we were going through double-digit cost increases,” he said. “There wasn’t much to do with managed care. We had buttoned everything down that we could button down. That led to some early pioneer to create this idea of consumerism, where an employee would have more ownership and understand what things cost.”
CDH’s growing popularity stems from its key elements. Because health plans have a high deductible, employer premiums are lower than traditional plans. This is especially appealing to buyers accustomed to double-digit premium hikes during the past few years. Once a CDH plan deductible is met, coverage through a traditional preferred provider organization (PPO) is usually 100 percent.
As of 2006, according to Definity Health Corporation, a plan provider, the IRS requires minimal deductions of $1,050 for an individual and $2,100 for a family. The maximum is $5,250 for a single and $10,500 for a family.
High deductibles are good for the employers but not appealing to employees. That’s where the HSAs and HRAs come into play. Participants can draw against these accounts to offset the deductibles or save for future medical expenses. Because deductibles can run into thousands of dollars, and the insured typically don’t have that amount of cash to initially deposit into these accounts, some employers set aside a pool of funds to cover upfront costs. Workers than continue to contribute to the accounts to cover medical costs.
The two key parts—HRAs and HSAs—are distinctly different. HRAs are employer-funded accounts that offer some tax advantages, the funds can be rolled over from year to year, and plan flexibility means they can be offered along with full-service FSA accounts. For employees, the only caveat is they forfeit unused balances when their employment ends with the organization.
HSAs, on the other hand, are funded by the employees and provide tax savings to the insured. Interest accrued in the accounts are tax-free as are disbursement of the funds for qualifying expenses. Employees can port the funds from one employer to another, and they have the option to use the funds during or after employment.
Because the insured control these accounts, they play a more active role in managing expenditures. It’s an idea with appeal to both employers and some employees, said Meredith Baratz, vice president of market solutions for Definity Health, a part of United Health. She explained that consumer involvement with these accounts, supported by other components that encourage wellness, has clearly demonstrated benefits to both the employer and the insured in terms of lower costs as well as better health.
“The core principle hit a nerve with the employers,” she said. “Drawing the individuals into that process will help control costs.”
According to Baratz, Definity recently published a study of 60,000 workers at four employers and found that costs fell as a result of implementing the consumer plans. From 2003 to 2005, overall plan costs for CDH participants fell three to five percent, while in the same period participants in traditional PPO plans rose eight percent.
One reason is that the third element of CDH plans is providing tools that educate consumers. By understanding their treatment options and the impact their behavior has on their own health and spending, consumers are more likely to curb bad habits or choose a more cost-effective option when selecting their physician or therapy. As a result, wellness programs with incentives for behavior changes have become embedded in many CDH plans. For instance, diabetics are encouraged to take a course in home care practices that help reduce diabetes-related doctors visits and hospitalization. In some case, there are financial rewards for completing a home nursing program.
Steve Davis, managing editor of the Inside Consumer-Directed Care newsletter, an industry publication covering the CDH market, noted that companies are realizing that stressing preventative care and health lifestyles will ultimately reduce their healthcare premium costs. As a result, they are sponsoring on-site programs such as exercise programs to keep employees in better shape and to improve cost-effectiveness of the CDH plan. “The ones that are successful have paired this with a wellness plan or some incentives,” he added.
NOT A NO-BRAINER
While adoption of CDH continues to grow, the rate of growth is slowing for several reasons. Tim Padva, the president of the Wilshire Group, a subsidiary of HRO provider CheckPoint HR, said while his company still touts the virtues of CDH to clients, a number of employers remain skeptical whether these plans are right for them. He said in part cost savings are not especially compelling, and some fear that under-funded HRAs and HSAs could expose the employees to high out-of-pocket costs.
“We are still presenting the plans and talking to employers about it in every case,” he said. “They are disappointed that it’s not necessarily a no-brainer.”
Still, it’s broadly recognized that CDH plans are here to stay, and just about every major insurer is making it available to employers along with traditional HMOs and PPOs. Aon said its survey showed that 28 percent of employers planned to introduce a CDH this year, reflecting a 20 percent increase in adoption rates from the previous year.
As the pressure to reduce HR-related costs grows, companies from all sectors and all sizes will be forced to look to alternative healthcare insurance solutions, and the latest offerings in the CDH market will surely find their way onto employers’ shopping lists.
