Whither "Consumer-Directed Health Plans?"

People who purchase their own individual health insurance may be particularly interested in less expensive high deductible plans paired with a tax-advantaged health savings account (HSA). But it remains unclear whether employers will embrace these so-called "consumer-directed" products, whose objective is to expose enrollees to costs of care and, it is hoped, thereby lower their health care expenditures. HSAs have been embroiled in controversy since being authorized by 2003 tax code amendments. An HSA is established by individuals but may receive employer contributions; income they earn is tax deferred (and never taxed if spent on health care); unlike employer-funded "health reimbursement arrangements" (HRAs), their balances belong to the individual - even when changing jobs or leaving the workforce.

It is difficult to obtain accurate data on the numbers of Americans enrolled in high deductible health plans (HDHP) that qualify to be used with an HSA -- proponents of this model tend to report growth while opponents report low uptake. An objective national survey (by the Kaiser Family Foundation and Health Research and Educational Trust) reports that in 2006 only about 7 percent of American employers offered an HSA-qualifying HDHP or an HDHP with a HRA. Four percent of workers were enrolled in these products -- and only 19 percent of employees who were offered these products along with other health coverage options enrolled in such a plan. The proportion of firms offering and employees enrolling in these products in 2006 were not statistically signficantly different from those in 2005.

One reason employers may be less excited about these products is that their average national total cost (the HDHP premiums plus the employer contributions to an HSA or HRA, if employers make such a contribution) is no lower than that of traditional plans (like HMOs and PPOs). Likewise, employee premium contributions for the HDHP plans are similar to those for other types of coverage, yet the consumer-directed plans include much higher cost sharing.

Employers may also not be very impressed with the cost savings experience of consumer-directed products. While the current HDHP + HSA model has been in place only 3 years, research on experience of HRAs and other earlier types of individual spending accounts reveal mixed results. For example, some studies show that enrollees in these plans incurred lower medical costs while others show no spending differences. And several studies find that people who enroll in such plans are younger and healthier and have higher incomes than those who do not.

The distribution of medical care spending across the population also casts doubt on the ability of HDHP products (with or without a spending account) to reduce overall medical care spending growth -- only 10 percent of Americans account for 69 pecent of health care costs --- because they either have expensive long-term chronic illness or experience high cost acute episodes. Even if these people desire to be "prudent" health care purchasers, they quickly exhaust their deductibles and thereafter no longer have such an economic incentive. In fact, some opponents of the consumer-directed model express concern that high deductible plans create incentives to skimp on early preventive and primary care that will lead to worse health and no reduction in (but possibly higher) overall spending for their later care.

It is too early in the experience of these products to predict whether they will beome a favored health coverage option for employers. Recent HSA amendments may make them more attractive to employers and employees. Because they are tax-advantaged savings vehicles, HSAs may be particularly popular with higher income individuals who buy their own coverage. Because HDHP premiums are lower than those for low deductible plans, small employers who cannot afford more generous coverage may offer them (without funding an HSA). But more research on their prevalence and take-up, costs, and health care spending experience will be needed before many employers turn to consumer-directed products as the solution to their own (and the nation's) health care spending dilemma.

Comments

[Joe F. Rolando]

A sticking point with me about Health Savings Accounts can be found in one of its philosophical purposes. The Bush Administration devised the plans as a way for consumers to keep health care and health insurance costs in check. Consumers have been told to buy buying higher deductible plans and stash away tax favored money to meet up-front insurance costs. That, says the government, is consumerism at its best. Because consumers are making the lion share of the effort to stem costs, it is easy to deduce that they are being blamed for overusing the system, causing medical care demand to exceed supply. But the consumer is only one element of a very complex problem. Other culpable parties are government, health care providers and pharmecutical and insurance companies. Their help in keeping down costs has been conspicuosuly missing or, at best, not as visible as consumers' efforts. It could be that marketplace resistance to HSAs stem from consumer's disgust that the other culpable parties are not being held to the same level of reponsibility as they for controlling health care-insurance costs.

[Frank W Blackwell]

I am the lead group health consultant in our office which provides insurance services to the California Medical Association, the California Optometric Association and the California Pharmacist's Association. I have worked in the employee benefits arena for 25 years and have worked with thousands of clients on their group health and retirement plan needs.

We have been active in promoting HDHPs and HSAs as an attractive alternative for folks over 45 years of age who prefer PPO products.

When I read your blog, I believe that you fall into several logic traps which tend to frame the "debate" regarding Health Savings Accounts.

For example, you title and text lump together HSAs with HRAs although they are obviously vastly different ways to approach health insurance. In the third paragraph you mix these terms together as if they were the same thing. The Archer Medical Savings Account was the predecessor of the HSA, and since this was a federal demonstration project there is indeed data and experience that shows that combining a high deductible with a savings account can be an attractive alternative for certain individuals.

I am not a big fan of HRAs, and I believe to call such plans consumer directed is usually incorrect. The employer still sponsors the plan and the employer funds expenses lower than the deductible so that the insured does not really have any more control than they would under any other type of employer sponsored health care plan.

An HSA participant on the other hand, has complete control over funds in their HSA, and our experience has been that an individual covered by the HDHP/HSA combination will indeed become more involved in the pricing and negotiation of services received.

One has to be careful when citing "average" cost as a reason for the success or failure of HDHPs and HSAs. Another global statement which can lead one into difficulty is the idea that HDHPs and HSAs are for the young and healthy.

In fact, here in California, for groups under 50 lives, the price differential between "normal" PPO plans such as the Blue Cross PPO 30 and HDHPs such as the Blue Cross PPO 2400 are usually close to the same percentage regardless of age. Because more mature individuals are charged higher premiums, the actual dollar amounts saved by increasing the deductible increase with age.

A person in their 20s with single coverage may only save $700 or so dollars per year by moving to the higher deductible. A person with single coverage in their 60s may be able to save $3,000 or $4,000 or more annually, which is more than enough to fully fund their HSA deductible with money left over.

We recently implemented a group scenario for a physician group with 13 physician partners and 50 plus rank and file employees. The average age of the physicians was 55 years old. By moving the physicians out of their expensive PPO plan to a plan with a higher deductible the group was able to fully fund the deductible amounts on the employer level and save almost $100,000 annually of a $500,000 premium even after the full funding of the HSAs.

This leads to a couple of observations that we have made that do not usually show up in print in blogs such as yours. The first is that the reason that you don't see explosive growth of HSAs is not because there is something wrong with them, but that they work for who they work for but they don't work for everyone. For example, if you work for a large company and they pay 80% of your health premium, any savings generated by moving to a higher deductible accrue mostly to the employer, not the employee. Unless the employer passes through the savings to the employee in HSA contributions, the employee simply faces a benefit takeaway which is unattractive. If the average age of the person wishing to have an HSA is very low, even if the employer passes through the savings, there may not be enough savings to adequately fund the increased out of pocket expense under the HDHP.

Even if there is enough money to fully fund the deductible, many individuals do not have the desire and/or financial acumen to manage their health care decisions. Most folks who have HMO coverage and like it fall into this category.

Another reason for the limited market penetration of HSAs and HDHPs at this time is the complexity of putting a banking arrangement together with an insurance product. A succesful implementation of this strategy requires a lot of education in what is not the most exciting subject area.

Another reason is the outflow of premiums to the banking industry. Health Insurance is sold by brokers working on commissions. When the health insurance premium is reduced by moving to the HDHP, the broker loses income. Brokers are usually not interested in providing extensive education on banking issues for which they receive no income.

The debate about HSAs is usually framed as a dissertation about what they aren't able to do. Some examples of this reasoning are that HSAs don't solve the problems of the uninsured, that there won't be any money in your account if you have to pay claims, etc. etc.

One could make similar arguments regarding Individual Retirement Accounts, that they are for the rich, don't solve the problem of low incomes in retirement etc., etc.

The fact is that HSAs do have value for some indiviuals. This value can usually be determined by looking at the respective premiums and cash flows involved. For some persons, this analysis will lead to the conclusion that an HDHP and an HSA make sense for them, for others this will not be the result.

Trying to make things as simple as possible, can it really be bad to send less money to the insurance company and put the savings into your personal account? Many folks, once educated as to the details, find this an attractive alternative.