Consumer-driven health care: Will it ease skyrocketing costs?
Containing out-of-control health insurance premiums is one of the major challenges facing U.S. employers. A survey of 3,000 benefits specialists by Deloitte Consulting LLP found that 86 percent cite “controlling health and welfare costs” as the company’s top priority related to benefits.
As employers move into open enrollment season, the big questions loom: How can we get a better handle on health costs? What is this “consumer-driven model” we’re hearing about, and is it a viable option for generating hoped-for savings?
Rochester-area employers are expressing interest in the consumer-driven health model, says Richard Bannister, CEO of Providium Consulting Group in Fairport, as the unprecedented tax benefits of health savings accounts (HSAs) become better known. HSAs were created by the Medicare Act of 2003.
Insurers such as Excellus BlueCross BlueShield and Aetna Inc. are offering products that capitalize on the benefits of what Michael Martone, head of Providium’s Health Care Division, calls “the strongest vehicle Congress has created” in the battle to ease overwhelming health-care costs.
Coupled with high-deductible health plans, proponents anticipate that the consumer-driven model will offer many advantages and will save money for employers and employees by:
- Showing consumers the true costs of the procedures and drugs they use.
- Encouraging and equipping consumers to shop carefully for procedures and drugs they’ll pay for out of their money.
- Providing incentives for any unspent balances in HSAs to be rolled over for future health costs.
- Pushing consumers to insist on greater accountability from providers and hospitals, guided in part by professional “health advocates,” hotlines and state-of-the-art websites.
Excellus’ program, FourFront, is a hybrid of traditional managed-care plans and consumer-driven health plans, and will offer a variety of options regarding co-pays, deductibles and out-of-pocket maximums.
How does a health savings account work?
The consumer-driven model features two key components: a tax-favored health savings account and a high-deductible health insurance plan (HDHP).
A health savings account enables individuals to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.
A high-deductible health plan is an insurance plan with a minimum deductible of $1,000 for individual coverage or $2,000 for family coverage. The annual out-of-pocket including deductibles and co-pays cannot exceed $5,000 for individual coverage or $10,000 for family coverage.
Preventive care, however, is not subject to the deductibility rules. Physicals, well-baby visits and mammograms, for example, will cost plan participants nothing.
Using pretax dollars, HSAs are funded annually by employers, employees or some combination. Those dollars are then used, tax-free, to pay the employee’s out-of-pocket costs for eligible medical, dental and prescription costs until the employee’s deductible for the HDHP is met.
Employers will have latitude in the degree to which they fund employees’ HSAs, just as they do in matching employees’ 401(k) plan contributions.
Unlike flexible savings accounts (FSAs) , where contributions are forfeited if not used by the end of the year, amounts contributed to an HSA belong to the individual and are completely portable. Any unused money stays in the account and gains interest tax-free. Once an employee reaches age 65, the amounts can be used for health expenses and to pay certain premiums like Medicare Part A and B and the employee’s share of retiree medical insurance premiums.
Changing consumer behavior
Some say that consumers’ insulation from the true costs of their health care – and their disincentive to shop for more cost-effective providers and treatments - have contributed to skyrocketing premiums. At present, most pay a small co-pay and don’t know whether a procedure costs $300 or $3,000, or a drug costs $50 or $500. Under community rating, those overusing the system pay the same premiums as those underusing the system.
Because every purchase affects premiums, this no-incentive system has helped drive up health costs.
While independent factors such as ever-costlier technology and prescriptions also inflate costs, proponents are hoping that trimming waste and overutilization will result in significant savings. A survey conducted in late 2003 as part of an Excellus Health Policy Report found that 67 percent of the 589 New York employers polled said consumer-driven plans would influence consumers to make more intelligent health care choices. Further, 58 percent of the 589 New York employers polled thought consumer-directed plans would lower health care costs.
Already, where consumer-driven plans are in place, insurers are seeing substantial reductions in outpatient visits and pharmacy costs, Providium’s Bannister says. Preliminary data also show that costs associated with consumer-driven health care are rising at about half the rate of costs associated with traditional health care plans.
The downside of consumer-driven health care
But the consumer-driven model, as currently designed, may not be for everyone.
While younger and healthier participants may find that they save more than they spend, and those participants most capable of using the educational tools provided to research their treatment options will make better choices, others will not fare as well.
Some individuals - often through no fault of their own – simply need a great deal of health care. Those participants would quickly exhaust their HSAs and end up with heavy out-of-pocket expenses.
For this reason, employers who are planning to introduce a consumer-driven program are advised to provide considerable employee education months before open enrollment begins. Employees need to understand the pros and cons of the various health plans so they can make knowledgeable choices. Recognizing that the consumer-driven concept won’t fit the needs of all individuals, some employers may continue offering traditional managed-care plans even as they introduce HSA/HDHP options.
Preferred Care has seen more employer interest in plans that offer higher co-pays rather than high-deductible plans, spokesman Michael Traphagan says. To satisfy that need, Preferred Care will roll out new, high-co-pay plans in 2005.
Unanswered questions
Because the legislation creating HSAs is new, many details remain to be worked out. How will employers fund HSAs? Will employers expect employees to pay their high-deductible plan premiums as well as help fund their HSAs? Will complementary treatments such as acupuncture be eligible? How flexible will the rules be regarding how employees allocate their end-of-year balances?
As lawmakers continue to hammer out these and other details, and as employers experiment with the concept, one thing seems clear: Consumers will find themselves spending increasing time and energy educating themselves about their health-care options.
And that, most will agree, is a plus.
