Consumer is primary purchaser
It seems every new decade brings another twist to financing health care. Over the past 30 years, terms such as managed care, diagnosis-related groups, and capitation have become part of the health care industry lexicon. Now come "consumer-directed health plans." Only time will tell whether the latest variation of managed care will stick, but based on employers’ early reaction, it could be here for a while.
A survey by Mercer Human Resources Consulting in Chicago found that 29% of large companies (those with 20,000 employees or more) were likely to offer the option of a consumer-directed health plan to their employees within the next two years.
What are consumer-directed health plans? And why are they poised to become the next big thing in health care?
The answer to both questions starts with the consumer. A generation of Americans has known only a health care system in which insurers pay for much of the care delivered by providers. For many, minimal copayments of $5 to $15 have been the only out-of-pocket expense they’ve known. That means millions of health care consumers place a low value on health care services. If a $10 copayment is all one has to pay for services that may cost 10 times that amount, the consumer has no incentive to keep costs down.
Giving consumers the purse strings
Consumer-directed health plans were born out of the belief that if consumers held the purse strings, they would have an incentive to spend health care-related money more wisely. If consumers have more choices, the right financial incentives, and appropriate information, the theory goes, then they will be better informed and more prudent users of care.
Employers have been struggling to rein in double-digit annual percentage increases in health insurance costs. Rising costs have put a dent in their profits and have contributed to a faltering economy. To say the least, the atmosphere is ripe for change. That change, say advocates of consumer-directed health plans, involves shifting economic pressure from employers to consumers. If consumers must not only choose their health coverage but also pay for it, they will be more cautious about their health care spending.
With this shift in economic pressure, consumers must gather the requisite information about providers and services to make the same kinds of decisions about health plans that their employers have for years. Consumers in these plans face challenges both in the initial decisions they must make and in the ongoing day-to-day choices they make while seeking care. These challenges include:
- understanding information about options;
- identifying information relevant to one’s personal situation;
- knowing the factors to consider in a choice;
- integrating that information into choices, including differentially weighting factors and making trade-offs among factors;
- understanding the implications of choice for personal financial and health risks and considering those risks when making choices.
Consumer-directed health plans are as varied as the number of consumer-directed health plans in the marketplace. According to Donald Sacco, chief strategist for My Health Bank, a Portland, OR-based provider of software and consulting services to consumer-directed health plans, there are three basic components of consumer-directed health plans:
1. Self-service: This can range from simply choosing from a stable of available health plans to on-line services that allow the consumer to make appointments.
2. Financial component: Consumer-directed health plans administer cash accounts and flexible spending accounts that consumers place their money into to pay for future health care expenditures.
3. Education: Self-service plans must make information available to consumers to foster sound decision-making.
Consumer-directed health plans are actually a spectrum of models along a continuum, beginning with simple and traditional co-insurance plan designs and moving toward true defined contributions or vouchers, according to the AARP in Washington, DC. The most common type of consumer-directed health plan combines high-deductible health insurance — typically $1,000 to $2,500 — with an employer-paid account designed to meet part, but usually not all, of that deductible.
The terms "consumer-directed" and "defined contribution" are often used interchangeably, but they are not synonymous. "Consumer-directed" refers to a health plan design feature, and "defined contribution" is better thought of as a kind of contribution strategy. In consumer-directed plans, employees typically have more financial responsibility for the choices they make and are more actively engaged in benefit selection and network design. In defined-contribution plans, employers give employees fixed amounts of cash for health insurance, and employees shoulder any costs above the fixed amounts.
The AARP notes the existence of three types of consumer-directed health plans:
1. Health reimbursement arrangements (HRAs). In these plans, personal spending accounts are established for each employee, and employees may draw upon the accounts for their health care needs. When their accounts are depleted, the employees pay out of pocket until they reach annual deductible amounts, at which time traditional major medical policies (or other insurance arrangements) go into effect.
2. Employee-designed benefits and networks. Employees in this model establish their own networks and design their benefit packages by selecting specific doctors and benefits. They bear the financial risk of their choices. Thus, if the doctors selected charge higher prices, employees will incur greater expenses. Likewise, if employees require benefits not selected, they will have to pay out of pocket when they need such services. This model requires individuals to construct networks consisting of 19 physicians representing the range of specialties patients are likely to require.
3. Customized packages. Employees select from among various networks and benefit packages that have been predetermined by their employers. Employees may choose from broader or narrower networks and richer or less comprehensive benefits. Most of the major managed care insurers (e.g., Aetna, Humana, CIGNA) have begun to offer this model, sometimes combined with HRAs and tiered networks (e.g., PPOs or HMOs) that vary by price.
Models 1 and 2 require fixed contributions in order to work properly; Model 3 does not necessarily require this contribution strategy.
Aetna offers HRA plan
Aetna offers an insurance plan that pays claims only after a $1,250 deductible is met. Employers who bring their workers to Aetna’s self-service plan help out by contributing $250 a year to a special account, known as a health reimbursement or personal savings account. Consumers use this money to pay for any doctor, hospital, or medical service they choose. Unlike Aetna’s own managed care plans, there are no preapprovals or referrals required.
All this means a consumer is given $250 of his employer’s money and then the consumer required to spend the next $1,000 out of his or her own pocket. The only restriction on how the consumer spends the $1,250 is that the money must be spent on medical care. These deductibles and limits don’t apply to preventive care, such as physicals and well-baby care. These services are covered by the insurance plan from the start.
Once the deductible is met, the consumer is then covered by the insurance plan, which is a PPO. At this stage, the consumer faces a copayment of 10% for any care provided by one of the PPO doctors or hospitals (30% if the consumer uses an out-of-network provider). There’s a $1,500 annual cap on copayments. Any money left in the account at the end of the year can be rolled over to the following year.
Budgeting for day-to-day health services
The Destiny Health Plan of Bethesda, MD, offers an example of the HRA model. The plan provides insurance coverage for the higher-cost, lower-frequency services that are less controllable. In addition, it offers a way to budget and plan for day-to-day services. The approach, Destiny says on its web site, is a "common sense insurance solution [that] gives our members incentives to manage their healthcare costs intelligently; it also allows us to offer the control, affordability, value and flexibility not available with conventional health plans."
Here is how it works. The insured benefits are structured to protect members during those times when they clearly need insurance, which are divided into three distinct components:
- hospital and surgery benefit;
- chronic medication benefit;
- personal medical fund (PMF) Safety Net.
Contributions to the PMF are made monthly, and any remaining balance may be carried forward to the next year. Also, members may withdraw the cash when they leave the plan.
The PMF Safety Net is a mechanism that reduces beneficiary risk for day-to-day expenses, recognizing that even day-to-day expenses can accumulate to a costly level. Specifically, Destiny has established annual threshold levels. Beyond these levels, the PMF Safety Net provides further insurance to protect the member against unexpected and potentially cost-prohibitive events. Once a member’s cumulative day-to-day claims exceed his or her annual threshold, the member becomes eligible for insurance benefits.
By integrating the PMF Safety Net and insured benefits, Destiny Health says it has created a comprehensive health plan that covers all areas.
Most day-to-day health care costs are generally within the member’s control, says Destiny. Like all consumer-directed health plans, the reimbursement arrangement gives members the freedom to choose any provider without a referral. Like traditional managed care, the health plan has a network of providers that have agreed to discounted fee schedules. These discounts are applied to benefits paid through members’ personal medical funds.
It seems every new decade brings another twist to financing health care. Over the past 30 years, terms such as managed care, diagnosis-related groups, and capitation have become part of the health care industry lexicon. Now come consumer-directed health plans.
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