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May 12, 2003

Readers Ask

A reader recently asked, "What are consumer-driven healthcare models and medical savings accounts? How do they differ from medical flex spending accounts?"

The primary feature of consumer-driven healthcare (CDH) plans is the employer-funded, employee-directed healthcare (or medical) savings account. CDH plans combine these accounts with high deductible insurance plans, and allow employees to choose the providers of their coverage.

At the core of such plans is the philosophy that covered employees will use their coverage more sparingly if they see the true costs of the services they receive.

Like flexible spending accounts (also called flexible savings accounts), the CDH template puts pre-tax dollars into an account utilized for healthcare services. Employees are provided with first-dollar coverage, under which no deductible or coinsurance is applicable to covered expenses.

Unlike flexible spending accounts, however, CDH models are employer-financed. In addition, any funds remaining in the employee's account at the end of the year roll over to the following year.

Some CDH plans include a so-called bridge amount that the employee pays if the healthcare savings account is exhausted. Bridge amounts usually fall between several hundred and one thousand dollars.

CDH plans also include coverage in the event of hospitalization: once the bridge amount (if any) is paid out, remaining charges will be covered by a high deductible health insurance.

CDH plans may fall under one of the following four models (adapted from Managed Care Forum):

A Decision Support system, which provides information, tracks and analyzes expenses, and stores personal health information for access: usually a Medical Savings Account with an umbrella insurance policy.
A Health Plan Catalogue, in which an employer offers a range of programs provided by a healthcare consumer information company.
A Time of Need program, which provides services as needed to uninsured or underinsured employees.
A Personalized Healthcare System, which requires an employer to set contribution strategy, providers to set reimbursement rates, and employees to choose an exclusive panel of providers based on need.

Though the number of individuals covered by consumer-driven healthcare plans is relatively small, they can be expected to multiply. In June 2002 the IRS affirmed the non-taxable status of the healthcare savings account, the lynchpin of CDH plans. Their ruling allowed for rollover from one year to the next, affirmed that these accounts can be made available to employees even after retiring or leaving the organization, and stated that the balance will remain tax-free as long as it is spent on healthcare. Since that time, insurers have been quick to adopt and market such plans.

On the plus side, CDH plans can be significantly less expensive for employers to maintain than HMO or PPO plans. They relieve employers from the often-difficult decision between employee health plans. Of course, any plan that reduces the cost of healthcare coverage is welcome at a time when employers have just seen the largest jump in benefits costs in 10 years.

In addition, such plans give more control to patients frustrated with the current state of healthcare. As Internet access becomes more prevalent, patients are increasingly better informed about their plans and their health. CDH plans may satisfy some of their desire for control by allowing them to choose providers, doctors, and care at will. A sophisticated workforce with a strongly expressed interest in controlling their coverage is the ideal testing ground for CDH models.

Detractors of CDH plans say they are an excuse to shift the cost and responsibility involved in healthcare benefits to employees. Some consumer advocates characterize the plans as cynical attempts to reduce employee use of healthcare by increasing their anxiety over the costs involved.

According to a recent Towers Perrin survey, your employees may share these sentiments. Though 63% acknowledge that health care costs have an impact on employer profits, only 46% believe that it's fair to shift some of the cost to employees.

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ISSN Number 1549-0467