Building A Better Consumer-Driven Health Plan

Building A Better Consumer-Driven Health Plan Recent 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 by giving employees a financial interest in their use of health care resources.

Some skeptics have argued that the plans will simply shift costs onto the backs of employees, and that they might lead to adverse selection, but there are many strategies employers can use to avoid those problems.

The HRA Ruling

Organizers of the new plans are using many names to describe them. 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 the products. A typical consumer-directed plan might combine high-deductible major medical insurance with some kind of personal health care spending account. The personal account will cover routine expenses, and the insurance will cover catastrophic expenses. Some employees will have to pay a large deductible, known as a “bridge,” before the insurance kicks in.

But the Internal Revenue Service gave organizers and employers a great deal of flexibility in June 2002, when it ruled that employees could keep unused assets in Section 105 health reimbursement arrangements at the end of the year without treating the fund assets as taxable income.

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

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

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

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

Accounting For Success

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

Consumer-driven plans can improve on that approach by creating incentives for employees to make the right choices about their own health care utilization.

Components of the new plans can include preferred-provider networks, prescription drug formularies and other familiar methods for controlling costs. But the plans can also use a variety of strategies for designing employer-funded and employee-funded accounts that reward employees who make judicious use of health care services.

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

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

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

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

Health Care Savings Accounts: These accounts are structured as employee-owned accounts, funded through employees health care spending accounts. As an incentive to promote the judicious use of health care, employers and health plans can structure health care spending accounts to distribute “dividends” from year-end balances into employees health care savings accounts.

The dividend is a portion of the health care spending account balance eligible for year-to-year rollover. Unlike health care spending accounts, which are not portable and roll back to employers if employees are terminated, these savings accounts give ownership of a portion of funds to employees for their long-term health care needs. The savings accounts provide employees with portable assets.

The use of health care spending accounts and savings accounts simultaneously 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 an employee leaves the employer.

Simultaneous use of spending and savings accounts also enables the design of innovative health plans that can segment eligibility for plan services and IRS-covered services.

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

Retirement Medical Accounts: Retirement medical accounts, the true 401(k)s of health care, are a natural extension to Section 105 HRAs.

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

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

RMAs are portable. Whether the rollover funds are accrued from health care spending accounts or from dividend funds in the health care savings accounts, these funds are accessible to individuals beyond 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 individual employees, similar to the way 401(k) plan accounts are managed.

Making It Work

To create transparency and reinforce the power of financial incentives, plans should provide access to detailed information about all the accounts at all times.

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

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

Employers can also choose between structuring the out-of-pocket payments as fixed-dollar amounts or as a percentage of the employees salaries.

Dr. Amit K. Gupta, a physician with experience in practice management, managed care and insurance operations, is the founder and president of CareGain Inc., Monroe Township, N.J. CareGain helps health insurers and employers design and administer consumer-directed health plans.

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