Health Plan Operations in the New World Of Health Care Financing

by Kevin R. Brown

July 16, 2004

If new consumer-directed health plan products and systems can continue to be effectivelyimplemented and supported by payer organizations, they could prove to be the sought-aftersolution to the health care cost dilemma.

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Very few market dynamics over the last 20 years have garnered the attention
of the health care payer community as has consumer- directed health care. Over
the last four to five years, much has been written – positive and negative –
about the concept designed to put health care consumers in control of the health
care buying decision, and whether or not it could work in the current health
care delivery system.

Today, in mid-2004, it is obvious that consumer-directed health care is gaining
momentum. Preliminary evidence suggests that the model has had some success
in helping to control utilization costs. Most forecasts are predicting broad
market acceptance for consumer-directed health plans (CDHP), given the recent
legislation creating health savings accounts (HSAs) – a concept expected to
expand the CDHP market to small and mid sized employer groups.

In this paper, we explore the history of consumer-directed health care, from
its creation to service the employer market to becoming a major component of
a health plan’s product strategy. We will also look at how the market will evolve
and how health plans need to strategically plan and adapt in order to maintain
a competitive position in this new environment, now and well into the future.

The Beginning

In the late 1990s, several health care innovators had varying visions about
the future of the industry, although the fundamental concepts were very much
the same. These visions were fueled by excellent economic conditions, including
one of the greatest bull markets in history, and the belief that the current
health care system was poised for innovation not seen since the development
of the HMO and other managed care initiatives.

By the year 2000, employers were faced with double-digit premium increases,
due to increasing utilization rates and rising prescription drug costs. Most
of the insured had only nominal copays as their contribution to the financial
risk in the health care decision process. The thinking behind the CDHP concept
was to make the insured more responsible for how their health care dollars were
spent. They were provided with incentives to find a balance between seeking
cost-conscious, necessary care versus the all-too-familiar, scattered utilization
approach. This new philosophy ensured that consumer-purchasing dynamics would
finally be brought to the health care industry.

To achieve this goal, consumers were armed with decisionsupport tools to better
manage their own health care needs. They were given access to health care content,
provider cost data, their own claims and encounter data, and a funded account
to subsidize health care expenditures.

It was on these grounds that HealthMarket and Lumenos® were founded, and consumer-directed
health care was born. The major CDHP players had their own unique twist on the
market. HealthMarket sought state licensure and marketed themselves as an insurance
company. Lumenos contracted exclusively with the ERISA-exempt, self-funded employer
market. Each had slight variations on product design.

By midyear 2001, Lumenos was gathering sales momentum with the signings of
Novartis and Radnor Holdings. HealthMarket was also experiencing significant
membership growth. The companies continued gaining momentum and attempted to
further promote the benefits of the new consumerdirected concept by joining
forces, along with other companies, to create the Consumer Driven Health Care

As more and more large employers started adopting full replacement options
with the consumer-directed upstarts, it became apparent that health plans needed
to start addressing this new competitive threat. Years earlier, when employers
shifted employees to PPO plans to answer backlash against managed care in terms
of provider selection, health plans started developing their own PPO products
to promote product choice. Naturally, when national employers started moving
some or all of their business to consumer-directed plans, some health plans
began responding to the competitive threat by developing their own consumer-directed
offerings and products.

Consumers’ demand for more control and choice are not the only factors fueling
this movement. Recent technological advances and government regulations on standards
have combined to move the health care industry toward a real-time enterprise
featuring the seamless exchange of digital information. This invariably will
help to lower administrative costs for health plans; better integrate the users,
providers, and payers of health care services; and will cause the health care
industry to operate more as financial institutions do in the consumer-based
transactions that health plans will be required to handle.

The Present

The current wave of consumer-directed health care began as health plans started
formulating a response to the new phenomenon. A handful of large, national players
immediately began development of their consumer-centric strategy. Aetna, WellPoint,
CIGNA, and Humana all unveiled CDHP strategies very early, attempting to establish
themselves as visionaries in terms of product development.

At present, consumer-directed adoption patterns fall into three general categories:
visionaries, followers, and naysayers. The visionaries are mainly large health
plans that desire to be the first to market a CDHP offering and be viewed as
leaders. Followers are waiting for proof-of-concept in order to mitigate the
financial and business risks of implementation for the new product. The naysayers
believe that the consumer-directed phenomenon is a short-term fad – that either
the product will not reduce medical and administration costs as promised or
that something new will replace the demand for CDHP products in a few years.

According to the 2003 survey, Technology Decisions for Defined Contribution
Products, Oct. 9, 2003, 50 percent of health plans had no intention of developing
a consumer-directed product. Over the next few years, this number will drastically
diminish, perhaps to as low as 5 percent by 2006, as health plans find it necessary
to adopt the products to effectively compete and survive (see Figure 1).

Over the last several years, competition in the payer space has not only been
about new products and the lowest price; health plans have increasingly competed
on the grounds of customer service and product flexibility. This demand places
increasing pressure on the information management systems that payers use and
will require that they serve the entire enterprise, be userfriendly for both
employees and health plan members, and be able to interpret and provide data
that helps both health plan executives and members reduce costs. Technology
will become more important as CDHP products become more popular because Web
transactions are central to successful adoption of consumer-directed programs.
Joanne Galimi, research director of Gartner’s Healthcare Industry Research and
Advisory Services, recently wrote in Managed Healthcare Executive magazine,
“Web initiatives for payers continue to advance by establishing improved transaction
and service capabilities between the organizations and their business partners.
The initiation of multichannel Web functions integrated with critical business
applications will be needed to achieve Web business objectives and ROI.”

As more evidence becomes available as to how CDHP lowers utilization rates
and administrative costs, employers will continue to clamor for the product.
Customer retention rates and new business wins will plummet without a consumer-directed
product to offer. Plan designs will continue to vary as they evolve and keep
pace with consumer demands and government mandates.

With the recent passing of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, most projections anticipate the further growth of
the consumer-directed concept with the creation of HSAs. These improve upon
the Archer Medical Savings Accounts in several key areas that will make them
a more attractive solution for the general population:

  • Ability to fund the account from employer and employee contributions, both
    of which are tax deductible;
  • Elimination of the “use-it-or-lose-it” provision; employees are now allowed
    to accumulate funds;
  • Increased portability in the event of a change of employment;
  • No limits based on size of employer; and
  • Only for use with high deductible plans ($1,000 for single coverage, $2,000
    for family coverage).

Other savings vehicles, such as flexible spending accounts (FSAs) and health
reimbursement arrangements (HRAs), were available to a broader range of employer
groups and also figure into a health plan’s overall CDHP strategy, although
much of the HRA-based and FSA-based product designs will likely be completed
by or evolve to hybrids based on the new HSA model.

The Future

The HSA legislation is truly a landmark event in the future of consumer-directed
health care for both employers and payers alike. The HSA promotes accessibility
for all commercial groups, and it is only a matter of time before health plans
open some aspects of CDHP to other market populations, such as Medicare and

While individual groups have elected to use CDHP as a full replacement option
to their traditional insurance coverage, components of managed care should remain
a significant part of the health care delivery model. But CDHP will be a vital
part of a health plan’s product strategy [similar to how the HMO and POS (point
of service) products were positioned in the 1990s], accounting for 20 percent
to 25 percent of overall enrollment. The dynamics determining CDHP premium rates
will make it a very competitive alternative to managed care products. Because
rates for CDHP premiums are based on fixed contributions, they’re more predictable
than rates for other products. Laurie Ingram, health care analyst for the META
Group, told Insurance and Technology magazine that “employers see their
costs rising and they want to go to a fixed price from a budgeting perspective.”

There will also be an evolution in how health plans choose to administer CDHP
products. In the current environment, speedto- market is critical. The health
plan visionaries at the forefront of the CDHP movement secured a considerable
head start; now, everyone else is trying to get their products up and running
in an attempt to catch up. Industry observers question whether some insurers
can build the technology infrastructure quickly enough to support CDHP products.
The implications are significant. Given the health care group enrollment cycle,
with the vast majority of groups becoming active or renewing Jan. 1, missing
a date in the product development process by a month could delay the launch
an entire year.

Some industry experts feel that many health insurers cannot develop the necessary
IT infrastructure quickly enough to support the elements of CDHPs, including
tools on health care research and HSA account management. Internal resources
are scarce or stretched thin. Often, there are conflicting priorities within
an organization or just a lack of capable staff to ensure that a project of
this magnitude comes in on time and on budget. As a result, many health plans
are looking at outsourcing the administration of the CDHP product, or buying
systems to interface to their core claims processing engines. This strategy
gives them access to a larger pool of resources and expertise than a firm might
have by trying to perform this function entirely inhouse, or by contracting
with a niche third-party vendor. And, most importantly, this provides a rapid
launch capability to payers to meet competitive and marketing objectives.

Increasingly, as CDHP gains further market acceptance, the long-term preference
will be for health plans to have the consumer- directed functionality as a component
of their core system. There are two main reasons:

  1. Maintaining disparate systems is costly. Procurement of the CDHP software,
    plus development of interfaces, testing, and integrated reporting, all add
    significant incremental costs and put pressure on the health plan’s already-thin
    margins. Having CDHP-ready functionality in the core system lowers the total
    cost of ownership of enabling the product.
  2. Product and administrative flexibility is enhanced. Having CDHP as part
    of the core system enables plans to more easily change benefit plan configurations
    and tailor designs to each group. By having a system managed through only
    one vendor, it also makes deployment models more flexible. For example, contracting
    should be easier in an application-hosting arrangement, without the presence
    of a third-party product.

It is imperative that payer organizations put themselves in the best strategic
position to support the consumer-directed health care movement. The first stage
of the movement has occurred, and all of the anecdotal evidence suggests that
enrollment growth in the products will exceed expectations.

With the approval of legislation allowing HSAs, the consumer- directed health
care movement now enters a second stage involving a more sophisticated approach
to management of pretax dollars to cover health care expenses. HSAs are portable,
may contain contributions from employer or employee, and balances can be rolled
over from one year to the next. As a result, health plans will face added competition
from financial services companies, which have more experience with the management
of financial accounts and small transactions. Health plans must address these
product requirements in the retention and acquisition of new business and in
their technology infrastructure. A first step has to be examining, planning,
and addressing the system that must serve the enterprise and all product lines
and be flexible enough to accommodate newer financial transactions.

In 2005 or 2006, the consumer-directed health care movement will enter a third
stage, which will focus on providing effective mechanisms for the insured to
use their accumulated funds to best address their health care needs. Randall
Abbott, a senior consultant with the Watson Wyatt benefits consulting firm,
recently wrote in Employee Benefit Plan Review magazine that “plan options
may include member-selected levels of copayment, coinsurance, provider tier,
and drug reimbursement.”

In addition, provider pricing surrounding episode management and comprehensive
care management for specific acute problems or disease states may become quite
popular. Making those payment options available to insured lives with significant
fund balances could be a powerful mechanism by which consumers influence the
health care market.

How well health plans implement these new products and the systems that will
drive them will go a long way toward determining their success. If they’re incapable
of supplying members with the necessary tools and information to enable consumers
to comparison shop, manage funds, and track and control utilization of services,
then CDHPs will be considered primarily as a way to shift health care costs
from employers to consumers. If they seamlessly provide access to information,
put decision-support tools in the hands of consumers, and use technology to
help reduce administrative costs in the health care system, then CDHPs could
prove to be the sought-after solution to the health care cost dilemma.

The tough questions that health plan executives must answer are:

  • Are they willing to risk that consumer-directed health care is not the next
    biggest wave to hit health care?
  • Do they have the internal capability to launch a program in three to six
    months and hit the next enrollment cycle running?
  • Can the internal system they have now accommodate consumerdirected multiple
    fund processing and the new HSA and financial management functionality required
    in the future?
  • Do they have the actuarial and market data to accurately rate a CDHP product?

These questions are critical to the success of any health care payer that plans
to embrace consumer-directed health care and successfully secure significant
market share.



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