Consumer Driven Health Plans: Early Findings from the Field and Future Directions

1. Consumer Driven Health Plans:Early Findings from the Field and Future Directions Stephen T. Parente, Roger Feldman, Jon B. Christianson University of Minnesota Presented to Rochester, MN Chamber of Commerce October 5th, 2004 Funded by the Robert Wood Johnson Foundation Health Care Organization and Financing Initiative For more information: www.ehealthplan.org

2. Presentation Objectives • Describe the CDHP business model. • Illustrate the mechanics of a CDHP. • Provide an Overview of our RWJ evaluation. • Address with research two primary questions: • Who enrolls? • What is the cost & use impact? • What does the future hold? • Are CDHPs a Fad? • How do HSAs fit in?

3. Patients Dissatisfaction with provider access Patient incentives are to consume Limited choices of benefits and providers Combative relationship with managed care companies Providers Loss of autonomy Erosion of physician/patient relationship Misalignment of physician reimbursement and incentives Employers Plan costs are increasing Employees are not happy Increase of employer administration burdens Issues Driving CDHP Creation

4. CDHP Business Enablers • ‘Ready to Lease’ Components of Health Insurance: • Electronic claims processing • National panel of physicians • National pharmaceutical benefits management firms • Consumer-friendly health data web portals • Disease management vendors • Internet • Transaction medium for claims processing • 2-way communication with members • ERISA-exemption • Lack of state oversight • Half the US commercial health insurance market is self-insured.

5. Early CDHPs in Operation • Definity • Concept developed in 1998, Funded in April, 2000 • Minnesota based • Clear first mover & dot-bomb survivor • Lumenos • Started in 2000 • Based in Atlanta • Harvard B-School inspired (Regina Herzlinger) • Destinty • Operating as Medical Savings Account model • In operation for 10 years in South Africa

6. Health Toolsand Resources Health Coverage $$ Annual Deductible Nurse/ Health Coaching Web- and Phone-Based Tools Preventive Care 100% Annual Deductible CDHP Component Details • Health Reimbursement Account (HRA) • Employer allocates HRA1 • Member directs HRA • Section 213(d) “scope” • Roll over at year-end • Apply toward deductible2 • Health Coverage • Preventive care covered 100% • Annual deductible • Expenses beyond the HRA • Nationwide provider access • No referrals required HRA • Health Tools and Resources • Care management program • Extensive easy-to-use information and services 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets.

7. New RWJ-Funded ResearchKey Research Questions 1. Who is choosing a CDHP? Traditionally, adverse selection is defined as the situation when healthy individuals choose a CDHP leaving the sick in a traditional plan that will soon implode its premiums because of disproportionate share of sick individuals in the insurance pool. 2. What is the CDHP impact on cost and use? CDHPs have been chosen as a response to rising premium prices in an attempt to make the consumer ‘drive the market’ be examining price variations and constraining their personal consumption, if possible.

8. Research Design • 2 Year study (11/1/2002 - 10/31/2004) • Six employers examined: • University of Minnesota, MN • Medtronic, National • Ridgeview Medical Center, MN • Hannaford Bros, New England • Welch-Allyn, Upstate NY • Raytheon, US Market • Data collected • Claims data of all utilization for all health plan choices, pre (2001) and post (2002-2003) CDHP. • Employer info on flexible spending accounts and employee income • Survey information on CDHP choices in 2002 & 2003 from U of M.

9. Measuring the Effect of a CDHP on Cost & UseStudy Setting • Health plan choices by employees: • HMO, 2000-2002 • PPO, 2000-2002 • CDHP, 2001-2002 • Variation in cost sharing by contract • Take-up of CDHP approximately 15%. • General caveat: Each of the six employers’ experience can be quite different due to: • Alternatives offered • Plan design • Communications with employees • Sponsor’s objectives for the plan

10. Presentation of Results • Results are limited to two groups of employees who worked for their firm continuously for three years (2000-2002) where: • Employee chose the CDHP in 2001 and 2002. • Employee chose another health plan in 2001 and 2002. • This limitation removed 40% to 50% of all employees from the analysis. • Why make this limitation? We want to see both adoption and maturing impact of CDHP while controlling for prior spending. • 2000: Pre-CDHP experience controls for prior spending • 2001: CDHP adoption year • 2002: CDHP ‘maturation’ year

11. Baseline Demographics

12. What was the ADJUSTED impact on provider and patient payment? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full PMPM expenditures. Also note: 1) Patient expenditures from the Personal Care Account (PCA) are included in the employer payment category. 2) Consumer payment reflects deductibles, copayments, and coinsurance expenses.

13. What was the ADJUSTED impact on provider & patient payment by different services? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full PMPM expenditures.

14. Was ADJUSTED service use different for CDHPs? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full admissions and prescription drug experience.

15. Distribution of CDHP Population by HRA Usage Levels Continuously enrolled population

16. Early Conclusions • The most important factor affecting choice is income. • The consumer drive health plan was not disproportionately chosen by the young and the healthy (for the U of MN population). • For the non-U of MN pop, in adjusted dollars, the patterns remains, despite the likely event that the CDHP experienced favorable expenditure selection. • Year 3 of CDHP experience will reveal if they can stem high cost growth trajectory from years 1 & 2.

17. BIG Critical Caveat:Benefit Design will Drive Expenditure Results ‘Draconian’ benefit design for family contract: • $1,0000 PCA, $4,000 Deductible, 20% co-insurance after deductible Current industry standard design for family contract: • $2,000 PCA, $4,000 Deductible, 10% to 15% co-insurance after deductible Generous benefit design for family contract: • $2,000 PCA, $3,000 Deductible, 0% co-insurance after deductible

18. Policy OpportunitiesWhat is the Upside to CDHPs? • Innovative means to bring consumer choice into the medical marketplace as well as consumer awareness of the trade-offs of liberal medical insurance coverage policies. • Creates infrastructure for personal, portable health care coverage. • Hybrid variants could be crafted to serve low income, part time workers and possibly the uninsured through tax credits and vouchers.

19. Policy ConundrumsWhat is the Downside to CDHPs? • What if CDHPs accelerate the consumer’s burden of health care spending ‘too’ quickly? • Not much incentives for managed care’s proven assets (e.g., disease management) to play a role.

20. What Employers Might These Plans Be Best For? • Moderately educated population. • Already have cost-sharing experience. • 3-Tier drug pricing no longer having an effect. • Employer willing to use co-insurance. • Employer willing to experiment for two years to get benefit design ‘right-size’ for the population. • Employers hungry for wide, national network of provider choices. • Employers who have thought out long-run HSA/HRA trade-offs market evolves.

21. Introduced in the 2003 Medicare Reform Law What it enables: Any U.S. citizen can create a ‘qualified’ HSA account. Must have ‘catastrophic health insurance’ with minimum deductible of $2,000. Max is $10,000 for a family contract. Individuals or employers can make annual pre-tax contribution to an HSA, separate from the insurance policy, of 100% of the deductible (max of $5,150). CDHP’s Legislative Cousins:Health Savings Accounts

22. Health Toolsand Resources Health Coverage $$ Annual Deductible Nurse/ Health Coaching Web- and Phone-Based Tools Preventive Care 100% Annual Deductible CDHP Component Details • Health Reimbursement Account (HRA) • Employer allocates HRA1 • Member directs HRA • Section 213(d) “scope” • Roll over at year-end • Apply toward deductible2 • Health Coverage • Preventive care covered 100% • Annual deductible • Expenses beyond the HRA • Nationwide provider access • No referrals required HRA • Health Tools and Resources • Care management program • Extensive easy-to-use information and services 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets.

23. Health Coverage $$ Annual Deductible Preventive Care 100% Annual Deductible …The HSA Model • Health Care Account (HSA) • Consumer/Employer allocates HSA • Consumer directs HSA • Owned by consumer and portable • Roll over at year-end • Many deposited pre-tax • Consumer can withdrawal with penalty • Can apply toward deductible HSA • Health Coverage • Purchased by ‘Qualified’ Plans • Annual deductible • Expenses beyond the HSA • No managed care provisions • Nationwide provider access • No referrals required

24. Old Way for Family Coverage: Buy family policy insurance from individual market Policy cost: $8,460 Plan has $500 deductible Deductible applied per person Deductible capped at $1,000 Cost if healthy: $8,460 Cost if 1 person sick: $8,960 Cost if 2+ people sick: $9,460 The New HSA Way: Buy ‘qualified’ catastrophic plan Qualified plans costs: $3,936 Plan has $2,500 deductible Deductible applied per person Deductible capped at $5,000 Cost of healthy: $3,936 Cost if 1 person sick: $6,436 Cost if 2+ people sick: $8,936 Why Would Anyone Want such a Wacky Thing?Compare & Contrast

25. What Are We Now Doing for the U.S. Department of Health & Human Services and U.S. Treasury Department • Combine our data with federal survey data to cost out HSA plan for different segments of the population through micro-simulation. • Focus on low-income because we could price a voucher/tax credit. • We know how much low-income people would spend because they are present in our data. • We know how preventive care in HSA would work with actual data for this population too.

26. Crystal Ball Time • Are CDHPs a Fad? • Not likely. At worse they a transition point away from traditional indemnity insurance because they are more attractive substitute for that form of coverage. • Will HSAs take off? • Individual market: Yes • Employer market: HRAs will likely function as a transition to HSAs. If employers/employees reject HRAs for cost, selection, or satisfaction issues, it will be a slow ramp up. • Are HSAs viable health reform? • Depends on the election. • Depends on the quality of the political arguments made regarding the trade-offs to society of such an expansion in ‘entitlements’. • Yes, if there is the will for political compromise such as was demonstrated for the Education Act and Medicare Modernization Act. • No, if there is gridlock prior to 2008.

27. Reserve Slides

28. Health Plan Features Most Preferred

29. Results: Premium Sensitivity • Employees are sensitive to out-of-pocket premiums, and surprisingly, employees with chronic conditions are more premium-sensitive • If the CDHP raised its premium by 1% it would lose 4.6 % of healthy single enrollees and 5.4% of healthy families • 1% premium boost would cause 6.9% of singles and 10.7% of families with chronic condition to leave the CDHP • The results depend on 100% of the premium hike being passed along to the employee (i.e, defined contribution), as is the case for the UM

30. Results: Health Status and Other Employee Characteristics • Employees and families with chronic conditions prefer the PPO, but otherwise, there is no evidence of adverse selection • Having a chronic condition is associated with a 3.2% increase in the probability of choosing PreferredOne vs. HealthPartners • Note that PreferredOne had the highest premiums ($189.51 for single coverage and $448.40 for family coverage per pay period), suggesting that the plan is experiencing adverse selection • Higher income employees chose the CDHP or Choice Plus, suggesting these plans may evolve as favorites of the ‘well-to-do’ • Older employees chose PreferredOne or Choice Plus