Building A Better Consumer-Driven Health PlanRecent surveys suggest that as many as 25%of all U.S. employers may be considering the new“consumer-directed” health plans.

Organizers of the plans hope to control health care costs bygiving employees a financial interest in their use of health careresources.

Some skeptics have argued that the plans will simply shift costsonto the backs of employees, and that they might lead to adverseselection, but there are many strategies employers can use to avoidthose problems.

The HRA Ruling

Organizers of the new plans are using many names to describethem. In addition to “consumer-directed,” the most popular include“consumer-driven,” “consumer-centric” and“defined-contribution.”

The diversity of the names reflects the diversity of theproducts. A typical consumer-directed plan might combinehigh-deductible major medical insurance with some kind of personalhealth care spending account. The personal account will coverroutine expenses, and the insurance will cover catastrophicexpenses. Some employees will have to pay a large deductible, knownas a “bridge,” before the insurance kicks in.

But the Internal Revenue Service gave organizers and employers agreat deal of flexibility in June 2002, when it ruled thatemployees could keep unused assets in Section 105 healthreimbursement arrangements at the end of the year without treatingthe fund assets as taxable income.

Under the current Section 105 ruling, employers can segment HRAsinto many different types of accounts, including health carespending accounts, prevention accounts, maintenance accounts,savings accounts and retirement medical accounts.

Employers can also use HRAs alongside flexible spending accountsor Section 125 plans. Combining HRAs with FSAs and Section 125plans can help employees cover out-of-pocket costs on a pre-taxbasis.

An employer can even fund benefits such as COBRA health benefitscontinuation coverage through HRAs.

Some employers have been using HRAs for a decade as a substitutefor traditional group health coverage, but the June 2002 IRS rulinggave many more employers an incentive to consider shifting toHRAs.

Accounting For Success

Traditional managed care systems contain costs by increasingout-of-pocket costs for employees who fail to use cost-savingfeatures. In a traditional plan, for example, employees pay morefor the use of out-of-network services.

Consumer-driven plans can improve on that approach by creatingincentives for employees to make the right choices about their ownhealth care utilization.

Components of the new plans can include preferred-providernetworks, prescription drug formularies and other familiar methodsfor controlling costs. But the plans can also use a variety ofstrategies for designing employer-funded and employee-fundedaccounts that reward employees who make judicious use of healthcare services.

Health Care Spending Accounts: These employer-fundedaccounts are equivalent to “checking accounts” for health care.They give employees control over the first $1,000 to $2,000 ofhealth care expenditures. All or a portion of unused year-endbalances can roll over to subsequent years on a tax-free basis,providing an incentive for employees to control their day-to-dayhealth care spending.

Employers usually back health care spending accounts withhigh-deductible insurance coverage, and they often help employeesget good value by using preferred-provider networks.

Prevention And Maintenance Accounts: Employers can fundthese accounts on a “use it or lose it” basis, to encourageemployees to get routine physical exams, Pap smear tests, PSA testsand other important preventive care.

In a traditional defined-benefit plan, the plan describes theprevention services it covers. One plan, for example, might cover aPap smear but not an annual mammogram. When a consumer-driven plancovers prevention services through a prevention account, membershave more flexibility.

Health Care Savings Accounts: These accounts arestructured as employee-owned accounts, funded through employeeshealth care spending accounts. As an incentive to promote thejudicious use of health care, employers and health plans canstructure health care spending accounts to distribute “dividends”from year-end balances into employees health care savingsaccounts.

The dividend is a portion of the health care spending accountbalance eligible for year-to-year rollover. Unlike health carespending accounts, which are not portable and roll back toemployers if employees are terminated, these savings accounts giveownership of a portion of funds to employees for their long-termhealth care needs. The savings accounts provide employees withportable assets.

The use of health care spending accounts and savings accountssimultaneously creates a true “asset-based” model for health care.This model promotes a “Use wisely today, and save for tomorrow”message, as funds saved through wise use will be available after anemployee leaves the employer.

Simultaneous use of spending and savings accounts also enablesthe design of innovative health plans that can segment eligibilityfor plan services and IRS-covered services.

An employer could use a health spending account to cover officevisits and prescription drugs, and a separate health savingsaccount to cover services such as Lasik eye surgery.

Retirement Medical Accounts: Retirement medicalaccounts, the true 401(k)s of health care, are a natural extensionto Section 105 HRAs.

RMAs can only be used for health care services. An importantfeature of RMAs is the ability to use vesting schedules, which tiesemployee retention to retirement health benefit funding.

RMAs, for example, can be funded by vesting a portion of thefunds accruing in employer-funded spending accounts. An increase inthe vested amount is directly related to the length ofemployment.

RMAs are portable. Whether the rollover funds are accrued fromhealth care spending accounts or from dividend funds in the healthcare savings accounts, these funds are accessible to individualsbeyond employment and available for retirement health benefits.They may also provide coverage for supplemental health insurance,such as long-term health care insurance.

These funds must be managed and controlled by individualemployees, similar to the way 401(k) plan accounts are managed.

Making It Work

To create transparency and reinforce the power of financialincentives, plans should provide access to detailed informationabout all the accounts at all times.

Employers can also incorporate monetary or non-monetaryincentives, such as point-based systems that reward chronically illplan members for following disease-management protocols.

Employers also have choices about how they structure employeesout-of-pocket costs. A plan could, for example, ask employees tomeet a deductible before drawing on the health care spendingaccount, then make insurance coverage immediately after an employeehas exhausted the health care spending account. Or, the plan couldgive employees immediate access to the health care spendingaccount, then ask an employee who has exhausted the account to takeresponsibility for the bridge before drawing on the insurance.

Employers can also choose between structuring the out-of-pocketpayments as fixed-dollar amounts or as a percentage of theemployees salaries.

Dr. Amit K. Gupta, a physician with experience in practicemanagement, managed care and insurance operations, is the founderand president of CareGain Inc., Monroe Township, N.J. CareGainhelps health insurers and employers design and administerconsumer-directed health plans.

Reproduced from National Underwriter Edition, April 7, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.