Ups and Downs of the "New" Consumer Directed Healthplans


by Clelland Green - Date: 2007-01-21 - Word Count: 1161 Share This!

After nearly 20 years of low copays for office visits, prescriptions, hospitalizations and the like, individuals and employers are starting to go back to the future to try to control their health insurance costs. Before managed care, referrals, copays and the like, everyone who had insurance had a simple plan that people called Major Medical Insurance. You had a deductible before coverage started and then you paid a percentage of the bills up to a specified limit, which was called your coinsurance. It was simple and it worked, but medical costs were growing quickly and as soon as HMO's were less expensive than major medical plans, they took off.

Its now old news that managed care has lost its charm and that costs have been spiraling out of control for the last several years. While benefit managers are likely to raise copays and increase the employee's contribution to participate in the plan to control costs, many are considering the new Consumer Directed Healthcare plans as their latest strategy. These "new" CDH plans come with an HSA (health savings account) or an HRA (health reimbursement account). HSA's can be used by an individual or an employer where HRA's can only be offered by an employer. Without getting into the details on the rules for these programs in this article, HSA's are a tax advantaged savings program where you or employer can contribute money on a tax deductible basis, it grows on a tax-deferred basis and you can use the money today for any qualified medical expenses. HRA's provide a specific benefit to employees, the employer can specify what they want to cover, the unused part of the benefit can be added to next year's benefit, and the benefit level can never be converted into real money.

The goal of these plans is to make consumers aware of the cost of care and to provide them with an incentive to use their health care dollars wisely. "Nobody spends somebody else's money as carefully as he spends his own" is a quote from Milton Friedman which is commonly heard within the consumer directed healthcare industry. Now that the word is out about these plans, not everyone is excited about them. Many employees don't like the idea of having to "budget" their families' health care. Their concerns are many. They fear they won't be able to visit their long-time health-care providers. They're concerned their children won't receive adequate care. Most of these fears can be addressed by giving employees more information about the plans. Yet at the same time it remains an extremely sensitive issue, one that HR must treat with great delicacy.

The controversy surrounding consumer directed plans exists largely because employees feel uneasy about the transition from the managed care plan they have used for years. As an HR executive, you'll be called upon to assuage those fears and honestly explain what defined-contribution plans are all about. You'll need to know their pros and cons.

To start, here are the positive aspects of such plans. First, they will help make your employees better health-care consumers. Right now, most co-pay plan participants don't truly understand the cost of care. Many believe a visit to the doctor's office only costs $10 - the amount of the average co-pay - and the prescription drugs are $5 a pop for generic and $10 for brand name. Further, some patients end up having duplicate tests done at two different doctors' offices without even being aware of it - and of the expense involved.

Consumer directed plans bring true health-care costs to light, and make employees realize that the way they use their benefits can impact their increasing costs. In essence, theses plans transform health-care services into the "line items" and make workers more aware of what they're spending. They can make them take a more proactive role in trying to keep costs down, and provide them with the incentive of a "carry forward," which will motivate them to focus more on price and quality.

Employees will be encouraged by the fact that if they use a CDH plan wisely, they can end up with a potential retirement nest egg. While HRA's can not result in an actual cash payment to employees, the "savings" in these plans can be vested and used during retirement for health care expenses. With HSA's, the savings grows tax-free until age 65 and at that point they can use the plan for any purpose paying their normal income taxes. They can also continue to withdraw funds tax-free for qualified expenses. When employees see they profit from judicious use of the plan, they will become more enthusiastic about it.

Another benefit to these plans is they increase employee awareness about such issues as patient education, maintaining a healthy lifestyle, disease management and other health-care tools and services. By becoming a smarter health-care consumer, the employee will actually have more knowledge and understanding about how the health-care system works.

At the same time, there are some disadvantages to this benefit design, and these shortcomings form the basis of the controversy surrounding it. For one, if preventive care costs are not covered on a first-dollar basis under a major medical plan, some consumers will forego important health-care services in order to "save" money they can put toward retirement. This is risky and could conceivably lead to lower infant immunization rates, fewer mammograms and lower rates of proper gynecological care, including yearly exams. Presently there is little evidence to support the position that this will or will not occur.

In addition, if employers offer a defined-contribution plan as an option alongside more traditional plans, they'll likely find that the individuals who select the new offering are younger, healthier and more affluent. These are the same employees who currently cost the traditional health plan less than $1,000 per year in claims expenses. The result could be much greater costs for the employer if the plans are not sharing in the same risk pool.

Finally, when introducing a defined-contribution plan to employees, you must be prepared to invest a significant amount of time, energy and resources into patient education about the plan. If you thought explaining HMOs was challenging, then be prepared to feel a little overwhelmed by the volume of questions you'll get about this.

In the end, defined-contribution plan benefits are likely the wave of the future, and it's time that we all get used to their existence. Each year, just in time for Christmas, HR must deliver the dreaded news of how much the health-care premiums will be going up. Many families find it a struggle to be taking on so much of the cost.

Consumer Directed Healthplans can help employees treat health care as another part of their budget. Just as they might not splurge on a trip to the mall, they will be less inclined to purchase the most expensive drug to treat their condition. They may also see a real economic benefit in improving their own health. The result being a real win-win for the employer and the employee.


Related Tags: health savings account, consumer directed healthplan, defined contribution plan, health insurance costs

Clelland Green created Benepath, Inc. in 2004 as a consulting firm to insurers and managed care organizations on Consumer Directed Health Products, including Health Savings Accounts and High Deductible Health Plans. Benepath recently expanded to provide these products and other health insurance plans to businesses and individuals online at http://www.benepath.com.

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