CDHP: Getting the Customer Involved In Managing Health Care Costs

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Capgemini

Employers, payers, and providers know that the health care system is moving toward greaterconsumer involvement and that this evolution will radically change how they manageinformation and communication.

A new design in health insurance products, referred to as a consumer-directed health plan (CDHP), has entered the marketplace, and its popularity continues to grow. Trends show that in 2003, enrollment in CDHP-type products more than doubled. According to a January 2004 Inside Consumer-Directed Care, early projections for 2004 put final enrollment numbers somewhere between 1 million and 1.3 million. CDHPs are based on the consumerism trend, which focuses on empowering the consumer with more health care quality and cost information, more control in making health care decisions, and more accountability in the financial impact of health care decisions. Since the design of a CDHP involves multiple funding arrangements, health plans are turning to new technology such as debit cards to enable the administration of these funds.

Fifty years ago, medical insurance protected the insured primarily from financial devastation brought about by a catastrophic illness. Meeting the deductible for major surgery sometimes meant many years of financial hardship for the patient and his family. Timely payment to the provider was far from assured.

More recently, most consumers have come to regard medical insurance as an entitlement paid for by employers through a variety of health plan models. Securing first-dollar coverage has been, for many employees, a condition of employment. This entitlement mentality has insulated consumers from the true costs of medical care. To the insured employee, an office visit to the physician, billed to the health plan at $120, means only a $10 copay. The prescription for a life-saving name-brand drug, billed to the drug plan at $450, appears as a $15 copay. If the employee requires major surgery, he assumes his health plan (and, ultimately, his employer) will pay the majority of the charges.

Employers, beset by rising health care costs and competitive pressures, simply cannot afford to continue providing the current level of health coverage. Increasingly, health care consumers are being given – sometimes willingly, sometimes with great apprehension – more responsibility and accountability for their own health care, including more of the financial cost. At the same time, the Internet has developed as a primary platform for providing information to educate consumers about treatment options and actual costs of health care services. Helping consumers make more informed, more cost-effective decisions about their own health has become a critical business imperative for health plans and employers funding health benefits for its employees.

Definition of a CDHP

A CDHP is designed to reduce employers’ costs for providing health insurance to their employees by offloading some of the financial obligation onto the employees while providing the employees wider latitude in determining how their health care dollars are spent. This enables health plans and employers to move away from the one-size-fits-all plans and empowers people to seek care based on their individual preferences.

CDHP is a generic term for a new health care insurance product most often characterized by:

• High deductibles for consumers;
• Lower premiums for employers and consumers;
• More choice for consumers, with each choice having incremental cost-sharing impacts on the consumer;
• Often complex, customized coverage rules;
• Varying cost-sharing amounts (i.e., copays and coinsurance) that steer consumers toward cost-effective treatment options;
• Health reimbursement arrangements (HRAs) funded by the employer to provide first-dollar coverage for part of the deductible. This type of arrangement provides a funding advantage for self-funded employers who don’t have to incur the financial liability until services are incurred.
• Flexible spending accounts (FSAs) funded by the employee with pretax dollars, which can be utilized at the discretion of the employee for out-of-pocket expenses that may or may not have been covered under the medical portion of an insurance product. Services eligible for FSAs are outlined in Section 113 of IRS Code. The FSA is optional for the employer to offer alongside any medical product.
• Payer-provided information on health care quality and costs that assist the consumer in making better-informed health care decisions.

How a CDHP Works

An employer provides its employees a high-deductible medical product supplemented by an HRA and an optional FSA. For example:

• John Smith is single with no dependents. His employer offers him a $1,000 deductible preferred provider organization (PPO) medical product with an HRA and an optional FSA. The employer funds the HRA with $500. John elects to fund the FSA with $500 of his own pre-tax dollars because he anticipates needing extensive physical therapy for an old injury.
• The HRA funds are available to John on day one of the benefit period (i.e., Jan. 1), therefore, services for charges $1 through $500 would not require any additional out-of-pocket payment. Once the $500 provided in the HRA is exhausted, he will be liable for health care expenses from $501 through $1000. If he does not utilize all $500 of the HRA in the benefit period (i.e., Jan. 1 to Dec. 31), then the balance of HRA funds roll over to the next period. Most often, HRAs funded by employers are not portable, meaning that any remaining balance is forfeited by the individual employee if employment is voluntarily or involuntarily terminated.
• Since, in our example, John elected to utilize the optional FSA and funded it with $500, any charges from $501 through $1,000 would be reimbursed from his FSA. The funds in the FSA are not allowed to roll over and must be utilized by the individual employee, or any balance at the end of the benefit period will be forfeited.
• Once the $1,000 deductible has been satisfied, the health plan would reimburse 70 to 90 percent of the allowed charges, depending upon the employer’s PPO plan design. In addition, these types of products typically have a maximum threshold, in case of catastrophic illness or injury, in which the individual employee would have no liability in excess of the threshold and the health plan would pay 100 percent of incurred expense covered by the contract.

With the introduction of new health savings account (HSA) legislation, CDHPs are beginning to migrate to a design that includes a high-deductible PPO with an HSA and an optional FSA. Both employers and employees can fund HSAs. These tax-advantaged accounts offer portability and are also designed to bridge the deductible gap or offset the cost of services not covered.

HRAs and FSAs: Bridging the Deductible Gap

Health plans have adopted a number of strategies to help bridge the gap between what insurance will cover and what the employee must pay. Employers want to provide “first-dollar coverage” to encourage employees to utilize preventive health benefits and seek appropriate and necessary care. Therefore, employers contribute to HRAs. These accounts are an integral component of CDHP in that they engage the consumer in some degree of price comparison and discretion without creating financial hardship or discouraging appropriate care.

Benefits of HRAs

Employees have several benefits in CDHP products with HRAs. These include:

• Employees have access to the funds in the HRA at the beginning of the coverage/benefit plan year.
• Balances in HRAs at the end of the coverage/benefit plan year (unused funds) roll over to the next year, so the employee is not penalized for lower health service utilization.
• CDHP products typically have lower premiums.

Employers also benefit by offering CDHP products with HRAs:

• Due to the unproven experience of the CDHP products in the marketplace in the first few years after its introduction, health plans and third-party administrators (TPAs) required employers to “self-insure” – bear the risk of the HRA component. Since employers do not have to designate funds (incur liability on the books) for HRAs until services are actually incurred, there is a timing lag that creates a cash flow advantage to the employer, and the insurance premiums are considerably more affordable.
• The employer may never incur the full liability of the HRA if it is unused and rolled over to the next benefit plan year.
• Some employers may cap how much HRA money an employee can roll over from one year to the next. Once the available funds in an employee’s HRA reach the deductible amount, the employer makes no further contributions until or unless the account is depleted. Other employers allow total unused funds to roll over to cover unexpected large medical expenses in future years.
• Most employers do not allow HRA portability. If an employee voluntarily or involuntarily terminates employment, any HRA balance is forfeited and never incurred as a liability.

HRAs are relatively new, and the market is still learning how to regulate and administer them. The legality of capping HRAs is currently under discussion, since this arguably results in unequal benefits to different categories of employees.

Designing a CDHP Product

CDHP products are often highly customized to the needs of each member and each employer’s desired financial commitment to employee health care. The design of a CDHP can be quite complex, combining or excluding routine care, hospitalization, dental coverage, prescription reimbursement, and other services.

CDHP products utilize some of the same design features of more traditional managed care plans. For example, the copay for an office visit to an in-network physician may be $15, while the copay to an out-of-network physician may be $25. With CDHP plans, copay amounts for routine medical care remain low enough to encourage health plan members to utilize preventive services. However, if a member chooses services outside the normal treatment protocol or from a non-network provider, they can utilize their HRA funds to cover these costs.

Another CDHP design option is to combine the medical deductible with a pharmacy deductible to create a combined deductible. The incentive behind this design is to address prescription drug costs, typically the most expensive element of the medical insurance product. The CDHP combined deductible offers tiered pharmacy benefits. The goal is to provide consumer choice for any option, while aligning those choices with proportional costs so that the consumers understand and are affected financially by the impact of their decisions. CDHP prescription drug plans allow the consumer to see the difference in charges for generic formularies and brand name prescriptions. In some cases, members with chronic conditions are encouraged to buy their long-term medications from mail-order wholesalers or pay more to refill prescriptions at their local pharmacies. Again, the objective of the CDHP design is to engage consumers in the cost and quality aspects of their health care decisions.

Additional financial incentives, such as higher coverage percentages at particular providers or “centers of excellence,” encourage members to seek treatment at hospitals or other providers that the plan’s administrator has determined have better patient outcomes or discounted provider contracts.

In most cases, a member is not precluded from choosing higher-cost health care options, but choice comes at a cost that the health plan and employer historically had absorbed. With a CDHP, consumers must be involved and accountable for the cost and outcomes of their choices.

The second generation of the CDHP is beginning to introduce new product features to the market. These new features create a wave of complexity for health plans to administer. Some of the latest features include:

• Family deductible – Since the HRAs and FSAs are funded at the family level and health care expenses are budgeted at the family level, the objective is to shift the deductible accumulator to the family level. This family deductible seems to be family-consumer oriented (like the food budget, vacation budget, etc.) and is more understandable and consistent to the average consumer.
• Fully insured HRA – Instead of forcing the employer to bear the risk alone and fund the HRA to the health plan’s deductible, this option lets an employer bear the risk using traditional risk-pooling methods found with traditional health plan options such as HMOs. This trend is directed to small and middle-tier employers who prefer fully insured products.
• HRA payments to providers – Initially, HRA payments followed the FSA model and were sent to the members after services were incurred; members were then responsible to pay their providers. This model put the provider at risk of not receiving payment. To be more consistent with provider contracting language and to reduce provider liability for patient receivables, health plans are designing solutions to pay the providers directly from various member-level accounts. One solution is the debit card.
• First-dollar cost sharing – Some employers are concerned that firstdollar coverage at 100 percent will continue to insulate the employee from the true cost of health care services. Therefore, the trend is to structure the HRA funds to pay a percentage of the first dollar services to keep the employee involved in cost and utilization decisions.
• Ability to exclude benefits from HRA coverage – Some employers consider certain services as higher utilized services (e.g., pharmacy) or less imperative (e.g., vision). In order to keep the employee involved in the cost-utilization equation, employers are opting to exclude these types of services from HRA funding.
• Ability to “bucket” HRA funds for specific services that will not roll over – Some employers want to provide an incentive for employees to utilize essential or necessary services. Therefore, a portion of the HRA funds (i.e., $100 of the $500 for an individual employee) can be allocated to a service type with a rule that the specific portion will not roll over at the end of the benefit period. The most common example of this is preventive care.
• Pharmacy-only defined contribution product – Some employers are funding a defined amount for pharmacy services only. This allows the employer to provide a defined benefit amount, provides the consumer with more choice, and engages the consumer in understanding the cost impact of pharmacy services
• .Dental-only defined contribution product – Some employers are funding a defined amount for dental services only. This allows the employer to provide a defined benefit amount, provides the consumer with more choice, and engages the consumer in understanding the cost impact of dental services.
• Push communications – Direct-to-consumer communication using push technology allows health plans and employers to demonstrate the impacts of the consumer’s health care choices. This information shows employees details of their HRA, FSA, and now HSA funds, and reminds them to utilize the different decision-support tools offered by the health plan. This is a very customized feature – similar to accessing 401(k) accounts provided by financial service companies.

CDHP Administrative Complexity

The highly customized coverage options available through CDHPs and the various accounts, coupled with the widely varying rules regarding which account to draw from first, complicate billing transactions for health plans and providers. A member’s financial responsibility for any health care service depends upon many variables, such as the service date, account balances at the time of service, and the unique coverage rules of the member’s plan. This increases the urgency for real-time eligibility and real-time financial information available at the point of service. Otherwise, health care providers will experience increased liability in their accounts receivable.

Health plans have introduced provider portals, electronic connectivity, eligibility clearinghouses, and smart cards as information transport vehicles to begin to streamline the information flow for complex CDHP plans. For example, smart cards contain an embedded computer chip that, when presented at the registration desk, can be swiped through a smart card reader that synchronizes with the health plan to deliver current account balances, eligibility details, coverage rules, and other patient data. Bringing all this information together at the point of service simplifies billing and enables the provider to debit the card immediately for the applicable patient liability amount to assure timely payment to the service provider. If provider portals and smart card technology are implemented effectively, CDHP products should not result in increased risk to the provider and should achieve the objective of engaging the health care consumer.

Decision Support

Empowering consumers to become more involved in choosing care options means giving them information and resources to make better decisions that are more cost-conscious. Many health plans sponsor Web sites that give consumers access to their health plan coverage details, account balances, claims status and history, and a wealth of information that includes:

• Comparisons of the efficacy and cost of name brand and generic drugs;
• Descriptions of a wide variety of diseases and treatment options;
• Comparisons of outcomes of treatment options;
• Comparisons of cost and quality of area hospitals and other service providers;
• Physician directories and references; and
• Coverage rules.

Another key component of decision support with CDHP products occurs during the plan design and selection process. Since consumers have not previously had as many options with such different short-term and long-term cost impacts, they are not generally equipped to determine their optimal coverage and account-funding requirements. For a healthy person with little risk of large unexpected claims, a high-deductible insurance plan with an accompanying HRA is probably enough. However, for a family with children who frequent the doctor or dentist, contributing to an FSA account for estimated health care needs in excess of the value of their HRA might be advantageous. For an older employee with chronic conditions, the high deductible coupled with their employer’s HRA contribution and the maximum FSA contribution might be the best protection against expected health claims. Each consumer’s situation is unique and provides different funding challenges.

The ideal solution to assist consumers is a dynamic financial modeling tool that allows a consumer to answer questions regarding his personal situation for the upcoming benefit plan period. Some health plans and e-health vendors acting as TPAs for CDHP offer dynamic decision guide tools, and others provide static examples on their Web sites to help guide consumers. Static guides obviously provide less value if the consumer does not meet one of the set list of examples, but they can be rapidly implemented as a first step.

In addition, calculating the amounts in financial modeling and in designating funds for FSA funding arrangements requires access to cost comparisons across multiple providers. This type of information is just emerging in the industry and is often not readily available nor does it reflect the network discount arrangements between payers and providers. Over time, this best guess at what to expect to pay for services will not be enough, and consumers will demand access to information to help make more cost-effective decisions.

Debit Cards and Enabling Technology

CDHPs are changing payer revenue cycle processes and the financial relationship between payers, providers, and plan members. To make these products attractive to all stakeholders requires a robust and integrated information network. Enabling technology that brings comprehensive information about members’ medical condition, eligibility requirements, account balances, and billing rules to the point of service is fast becoming a necessity. Potentially complicated billing questions need to be resolved as service is rendered, not months later. Interconnected, Web-based information networks provide the necessary collaboration among providers, pharmacies, employers, payers, and financial institutions. Various card strategies are emerging as efficient and consumer-friendly mechanisms for transporting highly secure, critical personal health information.

Debit cards help to make CDHP attractive to providers by reducing their financial risk. They simplify the potentially complicated financial transactions by which health care providers get paid for their services. Payer-provider contracts are agreed to on the assumption that the employer or health plan will bring in a high volume of customers and will make the provider whole for services rendered within a reasonable amount of time – in exchange for discounted rates. The depth of the discount is based in large part on the payer’s track record for full, prompt payments to the provider. Providers and payers both benefit when financial transactions are fast and easy. Debit cards enable providers to properly debit the appropriate member accounts at the time services are rendered. These types of debit cards are similar to “stored value” cards.

Stored value debit cards can access funds assigned to cover a consumer’s health savings account, employer-contributed HRA, employee-contributed FSA, or a member’s personal account. The debit card gives the provider access to the accounts, authorizes the transaction, and updates the account balances that can be accessed by the card for future transactions. Debit cards also eliminate the cycle of member-submitted claims, reimbursement, and provider payment. Often, the final step in this cycle is delayed as members delay payment to their providers, even though the funds have been sent to them. Receiving payments directly from the appropriate member accounts without waiting for claims to be submitted, processed, and mailed in at the consumer’s discretion is a very attractive feature of debit cards. Consumers also like debit cards because they simplify bill paying and provide a focused account for tracking health-related expenses.

Smart cards are another emerging tool to streamline the transactions between providers and health plans. The difference is that, because the card holds a computer chip, there can be two-way transactions and instant synchronization of information such that updated information is stored back onto the card. As a result, the card always reflects the current status of the member’s health and financial information. With a simple smart card reader and a standard Internet connection, information can pass between payers and providers or pharmacies on a secured basis, taking into account complex coverage and financial rules. Another attractive feature of the smart card is that it meets strict HIPAA security protocol. The cost of the cards themselves can be depreciated over three years, similar to other computing assets.

With enabling technologies in place, CDHPs can encourage greater personal accountability for health care decisions and payment while protecting providers from increased patient-receivable risk. If these enabling technologies are deficient or absent, providers are at greater risk for lost or late payments and members will not have the information they need to be discriminating consumers of health care services. A well-implemented and broadly integrated IT infrastructure enables a CDHP to be a winning proposition for all who provide, receive, or pay for health care services.

The Engaged Health Care Consumer: Adopting Healthier Lifestyles

Employers and other payers have long known that health care costs would decrease dramatically if consumers would adopt healthier lifestyles and comply with their treatment protocols. How can payers change the behavior of a culture in which people would rather take an expensive diet drug than walk a mile a day? Should a prescription plan pay the full cost of lipid reducing drugs if a better – and much cheaper – remedy is for the patient to limit triglycerides in his diet? How can a payer encourage a diabetic to properly monitor her blood sugar to reduce the risk of life-threatening complications that are expensive to treat? As part of the move to CDHPs, payers are experimenting with a number of strategies that encourage more healthful, cost-conscious behavior. Member portals are common tools used to provide a myriad of data on cost, quality, treatment protocols, care alternatives, and so on. In addition, plans have introduced programs to reward healthy decisions and continue to look for ways to provide consumer-oriented information on their health care options. For example:

• Partnerships between health plans and employers to assign health advisers to work with members with high cost diseases where known interventions make a difference in outcome and treatment cost. Medical professionals interact with physicians and members to develop customized care plans and follow up regularly to assure patient compliance.
• Employer reimbursement for pharmacists to counsel diabetes patients, and free diabetic supplies and copays to members who comply with monitoring and treatment protocols.
• Increased employer HRA contribution for employees consistently participating in an approved cardiovascular exercise program.

In the long term, the financial impact to health plans in shifting responsibility for the first $1,000 of benefit period health care services is small compared to the potential cost savings of healthier consumer behavior. As CDHPs mature, expect to see more innovation in product design and technology, like smart cards, to engage consumers with incentives that address a wider range of diseases and provide deeper intervention into personal health care decisions. Employers, payers, and providers know that the system is moving toward greater consumer involvement and that this evolution will radically change how they manage information and communication. Early collaborative initiatives have focused on eliminating some of the administrative complexity in verifying eligibility, pre-certification approvals, and claims submission. The next generation will need to recognize that consumers need better information in order to become better consumers of health care services.