Logan Aluminum wasn't about to wait for the healthcare system to fix itself.
Faced with skyrocketing insurance premiums, the Russellville, Ky.-based sheet metal manufacturer decided to replace its PPO this year with a new "consumer driven" health plan offered by Aetna--one that makes the company's 1,000 employees more accountable for their own healthcare spending. In doing so, Logan hopes to reverse a cost trend that has been eating into company profits and slicing into employee paychecks at an alarming rate.
"Our health insurance costs jumped 23.7% in 2001, followed by an 8.5% increase in 2002," says Howard Leach, Logan's director of human resources. "That was a red flag that we needed to try something different."
Logan is among a small but fast-growing number of employers exploring consumer-driven health plans as an answer to soaring benefit costs and managed care's growing inability to control medical spending. According to benefits consulting firm Towers Perrin, 44% of large employers are now considering the plans as an alternative to their traditional HMO and PPO offerings, up from just 13% last year.
But whether that interest will translate into widespread adoption remains to be seen. The provider community, and even consumer groups, are divided over the plans.
The jury also is still out on whether the consumer-driven approach will ultimately succeed in containing the nation's healthcare costs. Enrollment in the plans remains low, and critics say the new "freedoms" they afford involve tough choices about how to stretch healthcare dollars and could ultimately leave many workers paying much higher medical bills.
"These plans have brought their own share of challenges," says Scott Keyes, senior consultant for Watson Wyatt Worldwide in Minneapolis. "They are part of the solution, but they aren't the solution by any means."
The consumer-driven model represents the latest stage in the evolution of health insurance, which first retreated from fee-for-service plans in the 1980s but is now steadily relinquishing the managed-care cost controls that were so popular in the 1990s.
Some experts believe managed care has failed to contain costs because workers have had little reason to shop for the best buys as long as their companies continue to pick up the bulk of the tab no matter what the cost. The idea behind consumer-driven plans is to give workers greater responsibility for how they spend their healthcare dollars so they will have a stronger incentive to seek the most cost-effective care and reduce their use of unnecessary services.
"The goal is to get consumers to buy healthcare as if they were spending their own money," Keyes says. "I went shopping for a new car the other day, and when I saw a really fancy model, my mind said yes but my pocketbook said no. We make these kinds of decisions every day. So why not with healthcare?"
Consumer-driven plans come in many varieties. With some, an employer sets up a personal spending account, or PSA, for each employee and makes a yearly deposit of, say, $500 into each account. Employees can use the money for whatever medical purposes they choose, and any unspent funds are rolled over and available the following year.
Employers generally couple these accounts with a high-deductible insurance policy that covers expenses above a certain level, for example, $1,500. Workers use the $500 from their employer, and then are responsible for paying another $1,000 in medical costs before the coverage kicks in. From then on, the policy typically covers 80% of medical costs, leaving workers to pay the other 20%.
These plans are a revamped version of medical savings accounts, which generated a lot of buzz in the late 1990s but never gained any real traction. In 1996, Congress passed legislation allowing 750,000 MSAs to be opened in a pilot project, but only about 100,000 people signed on. Experts say that's largely because MSAs--which also pair a personal spending account with catastrophic coverage--have several more restrictions, are confusing to manage and are limited to businesses with no more than 50 employees.
The Internal Revenue Service gave the latest breed of consumer-driven plans a boost in June 2002 when it ruled that PSAs are tax-exempt and that unspent balances can be carried over into the next year without the "use or it lose it" limitations of flexible spending accounts.
"Flex" plans, which have exploded in use since the IRS approved them in 1986, allow employees to set aside part of their paychecks on a pretax basis to pay for medical expenses that aren't typically covered under traditional insurance, such as vision care. But unlike with PSAs, any unused contributions are forfeited at the end of each year--a circumstance that experts say often leads to unnecessary healthcare spending as workers race to use the funds before they lose them.
Start-up companies such as Definity Health and Destiny Health were the first to offer such PSA-based plans about three years ago, but they have since been joined by some large insurers, including Aetna and Humana. So far, some 420,000 enrollees have signed on.
Another type of consumer-driven plan, offered largely by start-ups such as Vivius and MyHealthBank, allows employees to select benefits a la carte from an online menu of coverage arrangements, and to balance deductibles, premiums and copayments to suit their personal needs. These plans now cover about 40,000 people.
Several other companies, including a large number of Blues plans, also offer insurance policies with consumer-driven elements to them, including tiered drug formularies and hospital networks. These plans allow employers to design their own networks and benefit packages. Employees' benefit selections determine the premium for their individual plan, and they bear the financial risk for these choices above some fixed contribution from the employer.
Regardless of their design, however, all consumer-driven plans share a common goal: to rein in healthcare costs by turning workers, who are now insulated from the real costs of medical care, into smarter shoppers.
Consumers don't have a true understanding of how much medical services really cost, largely because the percentage they've had to pay out-of-pocket has steadily declined since the 1960s, especially since managed care started to take off about 20 years ago, experts say (See chart, p. 32).
Although that trend has bottomed out in the past few years--with employers now starting to shift more of the costs onto their workers--many people still think of healthcare expenses only in terms of their copayments, says Kenneth Linde, president and chief executive officer of Bethesda, Md.-based Destiny Health, whose parent company spearheaded the consumer-driven model in South Africa a decade ago and now covers 1.4 million people there.
"When you buy a TV, you run back and forth from Target to Circuit City comparing prices. Yet when you go to the doctor, you have no idea how much it really costs," says Linde, a veteran of the managed-care industry. "We've taught people that healthcare costs $10, but it doesn't. That's only the copayment on a service that really costs $75 or $100."
Others point out that consumer-driven plans allow employees to select their own doctors, see specialists without referrals and visit any healthcare facility for treatment--freedoms not generally afforded by more-restrictive managed-care plans. Greater choice will be attractive to consumers, who are fast becoming more active in their healthcare decisionmaking, thanks in part to the barrage of direct-to-consumer advertising by the drug industry and providers, says Robin Downey, Aetna's director of product development.
"A whole new world has opened up to consumers in terms of information," she says.
Providers, however, remain divided on consumer-driven plans.
On one hand, physicians largely support the new plans, which they say strengthen the doctor-patient relationship by giving individuals more freedom to choose and remain with their favorite providers.
According to the American Medical Association, consumer-driven plans encourage greater communication between doctors and patients about the necessity of various procedures, and reduce administrative hassles by eliminating the middleman (i.e., the HMO) from the medical decisionmaking process. The plans also allow employees to stick with their chosen doctors even when they change jobs or if their employers switch health plans.
Yet perhaps most important, according to the Chicago-based AMA, is that consumer-driven plans stand to improve overall healthcare quality by injecting more competition into the system.
"The system as structured now restricts choice by dictating which physicians and other healthcare providers are available to employees," Richard Corlin, the AMA's immediate past president, said during the Consumer-Driven Healthcare Con-gress held in Chicago last July. "And when employees have a limited choice of health plans, there's no pressure on those plans to be responsive. ... There's no need to be competitive."
Hospitals, however, fear consumer-driven plans could backfire by discouraging individuals from seeking preventive care. Employees who want to build up their PSAs may put off seeing a doctor until their conditions worsen and require costly emergency or inpatient treatment, says James Bentley, senior vice president of strategic policy planning for the American Hospital Association, Chicago.
To address this, some plans have made special provisions for preventive services, such as mammograms, colorectal cancer screenings, immunizations and Pap smears. Some companies cover these services with a traditional copayment arrangement and others have designed wellness programs that reward members who practice healthy behaviors.
Still, hospitals worry the new plans could leave providers saddled with more bad debt, which already is straining many health systems' budgets. Providers, for instance, would be forced to cover the cost of treating patients who choose an insurance policy with a very high deductible or minimum benefits only to discover that they cannot meet the out-of-pocket requirements, Bentley says.
So far, most employers have approached consumer-driven plans cautiously, either by introducing them to employees as a pilot program or by offering them as an option along with more-traditional insurance offerings. But ongoing healthcare cost increases--driven largely by new medical technologies, increased drug spending, rising hospital expenses and growing demand from an aging population--are stoking employers' penchant for the plans, experts say.
Job-based insurance premiums jumped an average of 13% in 2002 and are set to rise another 15% this year, the fourth straight year of double-digit increases and the highest year-over-year percentage increase since 1989, according to Towers Perrin. Not surprisingly, employers have responded by cutting benefits or shifting a greater share of the costs to their employees in the form of higher premiums, deductibles and copayments.
Early boosters of consumer-driven healthcare are optimistic the approach will slow this trend.
Louisville, Ky.-based Humana, for instance, says it saved $2.1 million in its first year after adopting a consumer-driven plan for its own employees in June 2001. Under its plan, called SmartSuite, the insurer's 10,000 Louisville employees and their dependents choose from a variety of flexible deductible and copayment structures based on their healthcare and budget needs. Options included traditional HMO and PPO offerings, as well as more-customized plans with PSAs.
The result: For the 12 months ended June 2002, Humana's medical claims costs rose just 4.9% instead of a projected 19.2%, which would have been in line with the trend for the region, says company spokesman Dick Brown.
"A lot of it was behavior modification," Brown says, adding that Humana has expanded SmartSuite to cover its 9,000 other em-ployees and their dependents nationwide. "Employees would ask more questions like, `Is it worth me using (the heartburn medication) Prevacid, which has a $50 copay, instead of Prilosec, which has a $25 copay?' Or if someone had a scratchy throat, they might have decided to wait a couple of days instead of going straight to the doctor for a prescription."
Destiny Health also has seen early signs of success in Illinois, where the company first rolled out its product in 2000. While insurance premiums are rising an average 20% to 30% statewide, Destiny's roughly 500 client companies, which now cover some 20,000 people, are seeing an average increase of only 12%, Linde says. When you factor in the account money that's rolled over into the following year--55% of employees carry something over--the increase is really more like 7%, he says.
Some consultants say that consumer-driven plans, if not designed correctly, could actually boost healthcare costs in the long run by overcompensating healthy workers. Traditionally, employers have spent most of their healthcare dollars on a small group of sick people and very little on the majority of people, many of whom don't incur any medical expenses in a year. Yet, under PSA plans, employers are required to continue making annual payments into every employee's account, even if that money is never spent, says Michael Taylor, a principal with Towers Perrin in Boston.
"Theoretically, if you have a large percentage of people who normally wouldn't spend even $1 on healthcare, and all of a sudden you're giving each of them $1,000, your costs are going to go up," Taylor says.
And according to New York-based consulting firm Segal Co., once employees meet a plan's deductible, their propensity to spend increases tremendously. Using client utilization data, Segal projected that an employer contributing $1,000 to each employee's PSA and providing insurance coverage for claims of more than $2,500 would spend $2,723 per employee annually. By contrast, a PPO would cost $2,651 per year for each employee, and an HMO would cost $2,194, Segal estimates.
Opponents also argue that consumer-driven plans, while good for young and healthy workers, could penalize employees who have chronic health problems or sudden illnesses that require extensive medical attention. Indeed, workers with few healthcare needs could quickly accumulate thousands of dollars in their PSAs, while sick employees would face considerably higher out-of-pocket costs than they had under an HMO or PPO, says Ron Pollack, executive director of Families USA, a Washington-based consumer advocacy group.
"Consumer-driven plans are a misnomer because they're not something that consumers have asked for. They're a way for employers to shift more of their costs onto consumers," Pollack says. "There's no doubt that the young, healthy part of the population will find these plans appealing, but they will ultimately be detrimental to those who need healthcare the most."
As a result, Pollack says, the new plans could drive up the price of traditional insurance options by forcing older and sicker workers into HMOs and PPOs, which then would have to raise rates even higher to adjust for their riskier membership base. And providers could end up paying even more in uncompensated care as more people are priced out of the market, adds the AHA's Bentley.
Wait and see
Adoption of these new plans remains modest. Although more companies are studying the plans, only 7% of employers are expected to offer a consumer-driven option by year-end (See chart, p. 31). And experts estimate that a total of just 1.5 million employees--or a tiny sliver of the 175 million Americans with job-based insurance--are currently enrolled in such plans.
Consultants say companies generally are taking a wait-and-see approach to the plans, much like they did in the 1980s when managed care was new and indemnity plans were the norm. Many employers are in "learning mode" as they try to discern how best to structure the new plans to achieve maximum cost savings and employee satisfaction, Keyes says.
"Some employers are saying the plans need to be more aggressive, while other employers are saying they should be more generous" with benefits, Keyes says. "When you're stuck in that kind of quandary, you're unlikely to pull the trigger."
Other experts say companies have been cautious about implementing consumer-driven plans for fear they won't go over well with employees. Indeed, where the PSA plans are offered as an option, employers are seeing average enrollment penetration of just 10%, Taylor says. "While some consumers may be equipped to make their own healthcare decisions, other may not have the time, tools or inclination," he says.
Consumers have been gun-shy about switching to the new plans because they fear they will lose something in the tradeoff, says Mary Jo Payne, vice president of the Orange, Calif.-based consumer advocacy group California Health Decisions. "Consumers are not used to paying more out of pocket," she says, pointing to the 17,500 General Electric Co. workers who went on strike nationwide in January after the company raised their copayments.
In a recent survey of 800 California consumers, California Health Decisions found only 46% consider consumer-driven plans either "somewhat" or "very" appealing, and another 46% consider them "not too" or "not at all" appealing. (The remaining 8% were undecided.) And while 86% of respondents approved of the plans' increased freedoms and rollover features, only 35% said they were willing to accept higher deductibles in exchange for lower premiums or to pay more to see an out-of-network doctor, according to the study released last month.
Leach of Logan Aluminum admits that employees there have had "mixed emotions" about the company's new plan, which provides individuals with a $400 PSA and an insurance policy that kicks in after $600 is paid out of pocket. Logan's previous benefit package had been very generous, covering 100% of employees' in-network costs after the copayment.
Christopher Delaney, chief marketing officer for Definity Health, Minneapolis, acknowledges that it's a "big challenge" getting consumers to enroll for the first time, but once they do they are very satisfied. Definity's re-enrollment rate among members is 95%, compared with an 85% to 88% average for traditional insurance plans, he says. "Clients are seeing higher satisfaction and higher retention with our product," Delaney says.
Ultimately, however, the future of consumer-driven plans will hinge on the availability of useful healthcare information and comparative pricing data so employees can make better-educated healthcare decisions, experts say.
In an effort to educate members and help them to more easily comparison-shop, most consumer-driven plans provide varying degrees of information on the cost and quality of medical services. Some companies, such as Portland, Ore.-based MyHealthBank and Minneapolis-based Vivius, let enrollees use a Web site to choose providers and learn more about specific healthcare issues. Others, such as Definity, provide a hot line that members can call to discuss their healthcare options with a registered nurse.
Still, much of the information available to the public is incomplete, conflicting or too complex for the average consumer to understand, some experts say. Providers remain reluctant to publish their price lists and critics argue that information on provider quality is not adequate to meet consumer needs. Although significant progress has been made recently in rating hospital quality, for example, less progress has been made on the physician front.
"There's a lot of information out there, and that's what's confusing," Taylor says. "That aspect will have to be cleaned up a bit before healthcare becomes truly consumer-driven."
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