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Consumer-directed health plans: Bane or breakthrough?

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Much has been speculated about consumer-directed health care, particularly since Section 223 of the Internal Revenue Code was signed into law on Dec. 8, 2003. In fact, President Bush, in his State of the Union address on Tuesday, announced his desire to give these health plans a boost by increasing the amount of money individuals can deposit into their health savings accounts, which are used to pay for out-of-pocket expenses, on a tax-free basis.

So, how do these plans work?

In their most generic form, consumer-directed plans generally require significant out-of-pocket expense for consumers through the use of deductibles and monies set aside in health savings or reimbursement accounts prior to the application of insurance to cover medical expenses. These plans may be known as consumer directed health plans (CDHPs) or High Deductible Health Plans (HDHPs).

To increase consumer acceptance of these plans, Section 223 allows individuals to make annual tax-free contributions into Health Savings Accounts (HSAs); in 2006, maximums are $2,700 for individuals and $ 5,450 for family coverage. These are the limits Bush is proposing to raise. Detractors of consumer-directed health plans believe that consumers will not seek necessary care in an attempt to stave off spending and that these plans will simply attract younger, healthier and better-educated people; proponents believe that consumers will be more price-sensitive and judicious in their use of health care services.

And there is not a lot of evidence yet compiled either way.

However, we do know that employer interest in offering these plans as a benefit offering has been increasing since their initial introduction. Results of a national survey undertaken by the Kaiser Family Foundation and the Health Research & Educational Trust reveal a four-fold jump in the number of employers offering a high-deductible health plan, from 5 percent to 20 percent, between 2003 and 2005.

These results are consistent for firms with 3 to 5,000 employees; the percentage of the largest employers (those with 5,000 or more workers) increased from 17 percent to 33 percent in the same timeframe.

A second study, the 10th Annual National Business Group on Health (NBGH)/Watson Wyatt (WW) Survey, reveals that 42 percent of large employers (those with at least 1,000 employees) are now offering high deductible health plans to their employees. The same study also suggests that 26 percent of large employers offer health savings accounts to their employees and an additional 47 percent are considering such an offering in the future.

What is driving this interest?

Skeptics might suggest that this is a vehicle for employers to shift the increasing costs of health care to their employees. Trends in health care costs indicate an inflation rate of between 6 percent and 10 percent -- three times the rate of general inflation in 2005 - in the cost of health care.

Large employers who actively change plan offerings or design and small employers will experience increases at the low end of the spectrum. Others will bear the brunt of large rate increases; average rate increases in excess of 15 percent are not unheard of. While the NBGH/WW study says the employers are more likely to absorb these cost increases themselves, the last few years have proven to be a time for serious reflection on how to make health care affordable.

Others might speculate that insurance trends over the past 30 years have shielded consumers from understanding the actual costs of the care they are seeking: the average consumer today might think that the "cost" of an office visit is $10 because that is their office visit co-pay.

Indeed, actuaries in the U.S. Department of Health and Human Services have shown that consumer out-of-pocket spending has declined from 55 percent of the total dollars spent for health care in 1960 to just fewer than 16 percent of total dollars spent in 2003.

Advocates of consumer-directed health plans would argue that consumers should think about accessing health care with the same care they apply to buying or servicing their automobiles.

So what do the early results show?

The Government Accountability Office (GAO) recently reported to Congress on their analysis of the Federal Employees Health Benefit's consumer-directed health plan option, which has been made available to American Postal Worker Union employees since 2003.

The results of their analysis support the detractor point of view: employees enrolled in the consumer-directed plan were, on average, younger and "healthier" (via self-assessment) than those employees enrolled in the preferred provider plan offering. They also tended to be better-educated: 49 percent reported having a four-year college degree versus 36 percent in the preferred provider plan.

Further, opponents are delighted to note that the consumer health plan enrollees are less satisfied with customer service in their plan.

A 2005 study by McKinsey & Co. also suggests that consumers are less satisfied with their consumer directed health plan than they were with the plan in which they had been previously enrolled. However, their dissatisfaction stemmed from the lack of medical information available to them for decision-making, not customer service.

Many of the McKinsey findings actually suggest that consumer-directed health plans are accomplishing what their supporters proclaim: enrollees indicate that they are more likely to ask about the cost of services, evaluate their treatment alternatives more carefully, inquire about the cost of drugs prescribed and, for those with chronic conditions, carefully follow treatment regimens. Enrollees also indicate an increased propensity to engage in healthy behaviors, including participating in employer-sponsored wellness programs and making sure that they get an annual check-up.

So the jury is still out, but it is clear that consumer-directed health plans will continue to be a source of debate, hopefulness and skepticism for those of us interested in the future of American health care.


O'Tousa is an account executive in Barney & Barney's Employee Benefits Department. For more information, call (858) 550-1151 or e-mail maryo@barneyandbarney.com.

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