Consumer-Directed Health Plans: Small but Growing Enrollment Fueled by Rising Cost of Health Care Coverage
Published: 2006-04-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Insurance carriers, employers, and individuals are showing increasing interest in consumer-directed health plans (CDHP). CDHPs typically combine a high-deductible health plan with a health reimbursement arrangement (HRA) or health savings account (HSA). HRAs and HSAs are tax-advantaged accounts used to pay enrollees' health care expenses, and unused balances may accrue for future use, potentially giving enrollees an incentive to purchase health care more prudently. The plans also provide decision-support tools to help enrollees become more actively involved in making health care purchasing decisions. Because CDHPs are relatively new, there is interest in the extent of enrollment and in other aspects of the plans. GAO was asked to review the prevalence of CDHPs, how the associated accounts are funded and used, and the factors that may contribute to the growth or limit the appeal of these plans. GAO examined survey data on CDHP enrollment and interviewed or obtained data from employers, insurance carriers, individuals, financial institutions, and other CDHP experts.
section_title: What GAO Found
paragraphs: Enrollment in CDHPs accounts for a small but growing share of the 177 million Americans with private health insurance coverage. From January 2005 to January 2006, the number of enrollees and dependents covered by a CDHP--either an HRA-based plan or an HSA-eligible plan--increased from about 3 million to between about 5 and 6 million. An increasing number of health insurance carriers and employers began offering CDHPs during 2005. Most employers made a contribution to their employees' health accounts, and the share of account funds spent by enrollees varied. Employers commonly contributed to their employees' HRAs from $500 to $750 for individual coverage and $1,500 to $2,000 for family coverage in 2004. Most HRA-based plan enrollees spent some or all of these HRA funds in that year. For HSAs, industry representatives noted that not all HSA-eligible plan enrollees opened and contributed to an HSA, and survey data indicate that two-thirds of employers offering these plans contributed to their employees' HSAs. Industry representatives indicated that while most HSA account holders withdrew a portion of their account funds in 2005, some account holders used other, out-of-pocket funds, rather than their HSAs, to pay for medical care. According to industry officials and experts, the primary factor responsible for the growth of CDHPs is the rising cost of health care coverage. Prompting the growth of enrollment among individuals is the desire to lower premiums and accumulate tax-advantaged savings, according to the officials. Experts noted that employers would be more likely to offer a CDHP if the plans demonstrate the ability to restrain rising costs, and employees would be more likely to enroll in a CDHP if employers offered more comprehensive CDHP benefits coupled with education about the plans. Experts and industry officials cited several factors that may limit the appeal of CDHPs. Certain federal requirements for HSAs and HSA-eligible plans may preclude changes desired by some, such as higher annual contribution limits for HSAs. Certain state insurance requirements or income tax laws in eight states do not reflect federal statutory provisions for HSAs and HSA-eligible plans. Insurers are generally unable to determine the amount to be deducted from the patient's CDHP account at the time of service or offer decision-support tools that provide enrollees with sufficiently detailed data on the cost and quality of health care. GAO received technical comments from organizations that provided data for this report, and incorporated the comments as appropriate.

section_title: Letter
paragraphs: Since 2000, premiums in the group health insurance market, which covers  the majority of Americans, have risen nearly five times faster than the  overall rate of inflation and the rate of increase in workers’ wages, leading  to debate about ways to reduce the growing cost of health care coverage.  Employers and insurance carriers are showing increasing interest in  consumer-directed health plans (CDHP), which combine a high-deductible  health plan (HDHP) with a tax-advantaged health reimbursement  arrangement (HRA) or health savings account (HSA) that enrollees can  use to pay for a portion of their health expenses. HRA accounts are  owned by the employer, and only the employer may contribute to them.  HSAs are owned by the enrollee; may be contributed to by both employer  and enrollee; and unlike HRAs, may be taken by the enrollee to a new  employer.
Proponents of CDHPs contend that CDHPs can help restrain the growth in  health care costs. They maintain that because CDHP enrollees may use  account funds rolled over from one year to pay for health care in  subsequent years, enrollees have an incentive to seek lower-cost health  care services and to limit their discretionary spending on health care by  obtaining care only when necessary. The higher deductibles associated  with the HRA-based and HSA-eligible plans typically result in lower health  insurance premiums because the enrollee bears a greater share of the  initial cost of care. Although not required to do so, insurance carriers  typically provide CDHP enrollees with decision-support tools, such as  Web-based information on costs of services and quality of providers, to  help them become more actively involved in making health care  purchasing decisions.
Critics, however, question whether CDHPs will help restrain the growth in  health care coverage costs, and whether they will do so by changing  consumer behavior or merely by attracting healthier individuals who use  fewer health care services. If CDHPs do attract a larger share of healthier  individuals, premiums for traditional plans could rise faster than they  otherwise would because of a disproportionate share of less-healthy  enrollees with higher health care expenses remaining in those plans.  Critics also worry that employers will use CDHPs to shift the cost of  health coverage to employees, either by failing to reduce employee  premium contributions or by insufficiently funding their employees’  accounts.
Because the CDHP is a relatively new concept in the design of health care  plans, there is interest in determining the extent to which insurance  carriers and employers are offering such plans, how the accounts are  funded and used, and the factors that may contribute to the growth or  limit the appeal of these plans. You requested that we explore these and  other issues related to CDHPs. We examined the following questions:  1.  How prevalent are CDHPs?  2.  How are the associated health accounts funded and used?  3.  What factors may contribute to the growth of CDHP enrollment?  4.  What factors may limit the appeal of CDHPs?
To determine the prevalence of CDHPs, we summarized existing literature  and industry surveys regarding the extent to which employers offer and  individuals enroll in CDHPs, and the extent to which insurance carriers  and financial institutions offer the plans and their associated accounts.
To determine how the associated accounts are funded and used, we  interviewed representatives of five of the largest CDHP insurers, six of the  largest financial institutions that administer HSAs, CDHP experts, and  industry officials. We obtained HRA funding and use data from three of the  insurers we contacted, obtained HSA account funding and use data from  one of the financial institutions we contacted, and obtained tax data on  HSA contributions and deductions from the Internal Revenue Service  (IRS). IRS data may not be nationally representative of HSA account  holders because the data do not capture individuals who opened HSAs and  made no individual contributions, even if their employers contributed, or  those who did not claim an HSA deduction. We did not independently  verify the account data we received from insurers and financial  institutions; however, we performed certain quality checks, such as  determining consistency between data elements provided and discussing  data reliability and limitations with the private entities providing the data,  and determined that the data were sufficiently reliable for our purposes.  We also discussed the use of HSAs during eight focus groups with 75 HSA- eligible plan and traditional plan enrollees at three large employers in the  public, energy utility, and insurance sectors.
To determine the factors that may contribute to the growth or limit the  appeal of CDHPs, we conducted interviews with    officials at the Department of the Treasury and IRS;  industry officials representing health insurance carriers, America’s Health  Insurance Plans (AHIP), Blue Cross Blue Shield Association, HSA Insider,  and a nationwide health insurance broker;  representatives of employers offering CDHPs;  representatives of financial institutions administering HSAs;    provider association officials, such as the American Hospital Association  and the American Medical Association; and    CDHP experts, including the American Academy of Actuaries, benefit  consultants, and health policy analysts.
We also obtained information from five large employers in the retail,  health care, financial services, technology, and beverage industries that  offer HRA-based plans and obtained information from the focus groups of  HSA-eligible plan enrollees. We evaluated the decision-support tools on  provider quality and prices for medical services that five large multistate  CDHP insurers made available to their enrollees. We reviewed federal  statutory requirements and guidance related to CDHPs. To validate  information provided by a health insurance trade association on the  effects of state requirements on the appeal of HSA-eligible plans, we  reviewed selected state insurance and tax laws related to CDHPs. We  summarized existing literature and surveys by benefit consultants on  factors influencing the growth of CDHPs and factors that could limit their  appeal. We conducted our work from November 2004 through April 2006  in accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The majority of Americans receive their health coverage through the  private health insurance market. Over the past several years, insurance  carriers selling coverage in this market have added CDHPs to their  portfolio of insurance products. The most common types of CDHPs are  HRA-based and HSA-eligible plans used in conjunction with the associated  health account.
subsections: section_title: The Private Health Insurance Market
paragraphs: Private health insurance plans are offered in two primary markets—the  individual and the group markets. The individual market includes health  plans sold by insurance carriers to individuals who do not receive  coverage through an employer or other group. About 17 million individuals  and their dependents received health coverage through the individual  market in 2004. The group market includes health plans offered by  employers to employees, either by purchasing the coverage from an  insurance carrier or by funding their own health plans, and health plans  offered by other groups, such as professional associations. About   159 million individuals and their dependents received health coverage  through the group market in 2004. Most employers subsidize a share of  the cost of their employees’ health coverage purchased in the group  market, whereas individuals purchasing coverage in the individual market  typically must pay the full cost.
Private health plans are subject to various state and federal requirements,  depending on the market in which they are offered and the manner in  which they are funded. Health plans purchased from health insurance  carriers, either by an individual in the individual market or by an employer  in the group market, are subject to state insurance requirements. In  contrast, health plans that are self-funded by employers in the group  market are generally not subject to state insurance requirements, but  rather to federal requirements that apply to employer-sponsored benefits.  Larger employers are more likely to self-fund their health plans, whereas  small employers are more likely to purchase coverage from insurance  carriers.
section_title: Consumer-Directed Health Plans
paragraphs: Although insurance carriers and employers offer several variants of  CDHPs in the private health insurance market, these plans generally  include three basic components—a health plan with a high deductible; an  associated tax-advantaged account to pay for medical expenses under the  deductible; and decision-support tools to help enrollees evaluate health  care treatment options, providers, and costs. In addition to including  these three basic components, the health care billing process is different  for CDHPs than for traditional health plans. The two most prominent  CDHP models are HRA-based plans and HSA-eligible plans, used in  conjunction with their associated savings accounts.
subsections: section_title: HRAs and HRA-Based Plans
paragraphs: An HRA is an employer-established arrangement designed to reimburse  employees for qualified medical expenses that occur prior to meeting the  deductible. When enrollees in an HRA-based plan receive medical care,  the costs are paid from a tax-advantaged HRA account. Once the HRA  funds are exhausted, enrollees are typically responsible for paying for a  certain amount—known as a bridge amount—out of pocket before  reaching their deductible. Although employers are not required to couple  an HRA with a high-deductible health plan, in practice the two are  typically combined. HRA-based plans are only offered by employers to  employees in the group market, and only employers may contribute to the  HRA accounts. Account balances can accrue from year to year, and the  accounts are typically not portable—that is, employees do not own the  accounts and cannot retain unspent funds when they change jobs. HRAs  are administered by the employer or an insurance carrier. IRS affirmed in  2002 that employer contributions to HRAs are to be excluded from gross  income for tax purposes.
section_title: HSAs and HSA-Eligible Plans
paragraphs: An HSA is also a tax-advantaged account established for paying qualified  medical expenses, but it is the employee rather than the employer who  owns the account. Individuals are eligible to open and fund an HSA when  they have a high-deductible HSA-eligible plan and no other health  coverage, with limited exceptions. In order to be considered an HSA- eligible plan, a health plan must meet certain criteria, including a minimum  deductible amount—$1,050 for single coverage and $2,100 for family  coverage in 2006—and a maximum limit on out-of-pocket spending— $5,250 for single coverage and $10,500 for family coverage in 2006.  Preventive care services may be exempted from the deductible  requirement; however, coverage of most other services, including  prescription drugs, is subject to the deductible. Health insurance carriers  offer HSA-eligible plans to employers in the group market and to  individuals in the individual market. HSA-eligible plan enrollees are not  required to open or contribute to an associated HSA. A financial  institution, such as a bank or insurance company, typically administers the  HSA. An employer may partner with a financial institution to offer an HSA  alongside the HSA-eligible plan offered to employees, or it may defer to  employees to open the account. Both employers and individuals may  contribute to HSAs, and individuals may claim a deduction on their federal  income taxes for the HSA contribution regardless of whether they itemize  deductions or claim the standard deduction. Account balances can accrue  without limit, and the accounts are fully portable. Contributions,  withdrawals, and interest earned on the accounts are not federally taxed if  used for health care; however, enrollees may use accrued balances for  purposes other than medical care subject to a tax penalty and, for  retirement income, subject to income tax. Tax advantages for HSAs were  authorized in December 2003 by the Medicare Prescription Drug,  Improvement, and Modernization Act of 2003. Table 1 compares key  features of the two CDHP plan types.
Decision-support tools, including information on the price and quality of  health care services and providers, can help CDHP enrollees become more  actively involved in making health care purchasing decisions. These tools  may be provided by health insurance carriers to all health insurance plan  enrollees, but are likely to be more important to CDHP enrollees, who  have a greater financial incentive to make informed trade-offs between the  quality and costs of health care providers and services. Experts suggest  that in order to make informed provider choices, enrollees need data to  assess the quality of different providers. These data may include the  volume of procedures performed, the outcomes of those procedures, and  indicators demonstrating whether providers followed certain  recommended treatment guidelines. In order to assess the price  competitiveness of different providers, experts also suggest that enrollees  need reliable and specific information about the cost of services. CDHP  insurance carriers may also provide online access to health accounts for  enrollees to manage their health care spending.
section_title: Health Care Claims Processing
paragraphs: CDHP insurance carriers process and reimburse health care claims  differently than traditional insurance carriers. Unlike enrollees in  traditional health plans, enrollees in CDHPs are typically not required to  make a copayment or pay a coinsurance amount to providers at the time  they receive care. Instead, providers send the complete claims to the  insurance carriers, which process the claims and inform the providers of  the correct amounts to charge the enrollees. The providers then bill the  enrollees, who pay from their HRA account or HSA by check, by debit  card, or by authorizing the insurance carriers to allow the providers to  directly debit their account funds. If enrollees have exhausted all of the  HRA or HSA funds in their accounts, but have not yet met the deductible,  the enrollees must pay the full amounts owed the providers using out-of- pocket funds. Once the deductible has been met, however, the insurance  carriers cover all or most of the costs of covered services.
section_title: CDHPs Constitute a Small but Growing Share of the Private Health Insurance Market
paragraphs: According to publicly available survey data, the number of enrollees and  dependents covered by HRA-based or HSA-eligible plans is small but  growing. In January 2006, total CDHP enrollment was almost evenly split  between HRA-based and HSA-eligible plans. An increasing number of  health insurance carriers are offering CDHPs, and a small but growing  share of employers are offering them to their employees. Large employers  were more likely to offer HRA-based plans, whereas small employers  tended to offer HSA-eligible plans.
subsections: section_title: Available Surveys Suggest That a Small but Growing Share of Privately Insured Enrollees and Dependents Were Covered by a CDHP
paragraphs: Although no national database of CDHP enrollment exists, we estimate  that the number of enrollees and dependents covered by these plans  increased from about 3 million in January 2005 to between about 5 and   6 million in January 2006, based on publicly available survey data. About  3 million of the 5 to 6 million enrollees and dependents were covered by  HRA-based plans, and from 2 to 3 million by HSA-eligible plans. These  estimates represent a small share of the approximately 177 million  enrollees and dependents with private health insurance coverage.
The number of enrollees and dependents appears to be growing faster for  HSA-eligible than for HRA-based plans. According to a series of surveys  conducted by a health care information company, the number of enrollees  and dependents in HRA-based plans grew from about 2.5 million in  January 2005 to 2.9 million in January 2006, and the number of enrollees  and dependents in HSA-eligible plans during this period increased from  about 600,000 to about 2 million. A second series of insurance carrier  surveys provide a higher estimate for HSA-eligible plans. These surveys— conducted by a health insurance trade association—estimate that the  number of enrollees and dependents covered by an HSA-eligible plan  increased from about 438,000 in September 2004 to about 1 million in  March 2005 and to about 3 million in January 2006. In 2004 and 2005, more  than half of these enrollees and dependents were covered by an HSA- eligible plan purchased in the individual insurance market, rather than  obtained from an employer. None of these surveys indicate whether HSA- eligible plan enrollees opened HSAs.
section_title: An Increasing Number of Health Insurance Carriers Are Offering CDHPs
paragraphs: The number of health insurance carriers offering CDHPs in the individual  and group insurance markets is increasing. A survey of health insurance  trade association members reported that 99 offered HSA-eligible plans in  March 2005, up from 29 in September 2004. In addition, the plans are  being offered widely in the United States. Another health insurance trade  association survey reported that members offered HSA-eligible plans in  the individual market in 40 states, in the small-group market in 44 states,  and in the large-group market in 46 states in 2005. Further, a survey of  group health insurance carriers in 2005 reported that 93 percent of survey  respondents expected to offer an HRA-based or HSA-eligible plan within  the next year.
section_title: A Small but Growing Share of Employers Offer CDHPs, and the Type Offered Varies by Employer Size
paragraphs: Although many insurance carriers have made CDHPs widely available to  employers, only a small percentage of employers offer CDHPs to their  employees. This percentage is growing, however. According to national  employer benefit surveys, about 1 percent of all employers that offered  health benefits offered a CDHP in 2004, and about 4 percent offered one in  2005. Large employers were more likely than smaller employers to offer a  CDHP. According to a 2005 benefit survey, 22 percent of employers with  20,000 or more employees offered a CDHP, compared to 2 percent of  employers with less than 500 employees. One recent employer benefit  survey indicated that the number of employers offering CDHPs would  likely increase in 2006. It found that 22 to 25 percent of employers said  they were somewhat likely, and 2 to 4 percent said they were very likely,  to begin offering a CDHP in 2006.
Almost all employers that offer CDHPs also offer one or more traditional  health plans. According to a national employer benefit survey, only   1 percent of employers offering a CDHP in 2005 did not also offer one or  more traditional plans. However, benefit consultants and insurance  carrier representatives told us there is growing interest among employers  in fully replacing their traditional plans with CDHPs. For example, one  employer we spoke with offered an HSA-eligible plan, an HRA-based plan,  and a traditional plan as options for employees in 2005, but only offered  the CDHPs in 2006. The findings of employer benefit surveys, as well as  industry officials and benefit consultants we spoke with, indicated that  large employers were more likely to offer a CDHP as one of several plan  options, whereas some small employers that offered HSA-eligible plans  offered them as their only option.
When employers offered a CDHP as one of two or more options,  enrollment in the CDHP was generally lower than in the traditional plans.  For example, data from three large multistate insurance carriers indicated  that the average 2004 enrollment rates in their HRA-based plans when  those plans were offered alongside one or more traditional plans was   17 percent. According to a national health benefits survey, among  employers with 1,000 or more workers that offered an HSA-eligible plan,   3 percent of employees were enrolled in the HSA-eligible plan in 2005.
Employer characteristics typically determine the type of CDHP offered.  According to industry representatives and benefit consultants, HRA-based  plans are typically offered by large employers that self-fund their health  coverage. Large employers are more likely to offer an HRA-based plan  because they have more flexibility in designing the plan benefits, they can  specify how the funds are to be used, and they can retain unused account  balances. Small employers are more likely to purchase rather than self- fund their health insurance plans and are less likely to offer an HRA-based  than an HSA-eligible plan.
section_title: Most Employers Contributed to Health Accounts, and the Share of Account Funds Spent by Enrollees Varied Widely
paragraphs: Most employers made a contribution to their employees’ health accounts,  and there was wide variation in the share of account funds spent by  enrollees. Employers are required to contribute to the HRA accounts  associated with HRA-based plans, and the contribution amounts varied.  Almost three-quarters of HRA-based plan enrollees with single coverage  and more than 95 percent with family coverage spent a portion of their  HRA funds in 2004, and the year-end balances varied. Industry officials  noted that not all HSA-eligible plan enrollees actually opened an  associated HSA, and estimated that about 50 percent to 60 percent did so.  According to survey data, about two-thirds of employers offering HSA- eligible plans made a contribution to employees’ HSAs, and the average  employer HSA contribution in 2005 was about $553 for single and $1,185  for family coverage. Data obtained from IRS indicate that tax filers who  claimed a deduction for an HSA claimed an average amount of $2,100 in  2004. Early experience with HSAs suggests that some individuals are using  their account funds to pay for medical care, whereas others are choosing  to pay for care with other, out-of-pocket sources, rather than withdrawing  the funds from their HSAs.
subsections: section_title: For HRA-Based Plans, Employer Contributions Varied, and Most Enrollees Spent a Portion of Account Funds
paragraphs: The amount of money employers contributed to their employees’ HRA  accounts varied across employers, both for single and for family coverage.  Based on HRA account data provided by three multistate insurance  carriers, the most common annual employer HRA contribution in 2004  ranged from about $500 to $750 for single coverage and from about $1,500  to $2,000 for family coverage. For single coverage, a small number of  employers contributed less than $500, and a very few contributed more  than $2,000. For family coverage, a small number of employers contributed  less than $1,000, and a very few contributed more than $3,500.
Bridge amounts—which employees must pay out of pocket after they  exhaust their HRA funds but before they meet their deductible—varied  widely for employees whose employers purchased plans from these three  insurance carriers. Some employees with either single or family coverage  had a bridge amount of $0. Others were responsible for paying up to $6,750  with single coverage or up to $8,150 with family coverage before reaching  their deductible. According to our analysis of a recent national employer  benefit survey, the average bridge amount in 2005 was about $1,078 for  single and $2,130 for family coverage.
In 2004, most enrollees in HRA-based plans spent a portion of their  account funds. HRA-based plan enrollees with single coverage were less  likely to spend their HRA funds than enrollees with family coverage.  Specifically, data provided by the three multistate insurance carriers  indicate that almost three-quarters of HRA-based plan enrollees with  single coverage and more than 95 percent with family coverage spent  some or all of their HRA funds in 2004 (see fig. 1). The average amount of  unspent HRA funds at the end of 2004 was $470 for single coverage and  $401 for family coverage.
section_title: Not All HSA-Eligible Plan Enrollees Opened and Contributed to an Account
paragraphs: According to industry officials, not all HSA-eligible plan enrollees opened  and contributed to the associated HSA. National data sources are limited,  but officials we spoke with estimated that the share of all HSA-eligible  plan enrollees that had opened and contributed to an HSA was about   50 percent to 60 percent. Supporting this estimate, based on publicly  available survey data and data obtained from IRS, about 55 percent of  HSA-eligible plan enrollees claimed an HSA deduction or reported an HSA  contribution in 2004. Moreover, one insurance carrier representative  reported that about 60 percent of the carrier’s HSA-eligible enrollees who  obtained coverage through an employer opened and contributed to an  HSA. Regarding employer contributions, data from a national employer  benefits survey indicate that about two-thirds of employers that offer  HSAs made a contribution to their employees’ accounts in 2005. Some  health policy analysts have expressed concern that some individuals who  enroll in an HSA-eligible plan but do not open or contribute to the account  will be unable to afford the high deductibles out of pocket.
Nationally representative data sources on employer and enrollee  contributions to HSAs are limited. Data from one national employer  benefit survey indicate that in 2005 the average employer HSA  contribution was $553 for single and $1,185 for family coverage. Data  from IRS show that among tax filers who claimed a deduction for an HSA  contribution in 2004, the average amount was about $2,100. The average  deduction amount generally increased with income level.
CDHP experts and industry officials stated that some account holders are  primarily using HSAs as a tax-advantaged savings vehicle. Representatives  from three of the six financial institutions we contacted characterized HSA  account holders as falling into one of two groups—spenders or savers.  Spenders use their account funds to pay for medical expenses, whereas  savers, who, according to financial institution representatives, tend to be  more highly compensated individuals, pay for care from other, out-of- pocket sources, rather than withdraw funds from their HSA, in effect using  their HSAs as tax-advantaged savings. One financial institution provided  data showing that during the first three quarters of 2005, about 72 percent  of its account holders withdrew funds from their HSAs, including about   20 percent who exhausted their accounts. The average amount rolled over  by this financial institution’s HSA account holders at the end of 2004 was  $950. We could not determine whether HSA-eligible plan enrollees  accumulated balances because they did not need to use their accounts— because they paid for care from other, out-of-pocket sources or did not  need health care during the year—or because they reduced their health  care spending as a result of financial incentives associated with the HSA.
section_title: Desire to Restrain Rising Cost of Health Care Coverage Is Primary Factor Driving Growth of CDHPs
paragraphs: The primary factor responsible for the growth of CDHPs is the rising cost  of health care coverage. CDHP experts and employers we interviewed  reported that employers offered the plans to lower their cost of health care  coverage and their employees’ premiums, as well as for other perceived  benefits. Individuals enrolled in CDHPs through an employer or the  individual market primarily to lower their health insurance premiums,  accumulate tax-advantaged savings, and gain greater control over their  health care purchasing decisions, according to CDHP experts and  participants in our focus groups. CDHP experts also reported that  individuals were more likely to enroll in a CDHP offered by an employer  when the employer offered a generous contribution to the CDHP premium  and associated savings account, offered more comprehensive benefits, and  effectively educated its employees about the plans.
subsections: section_title: Employers Offer CDHPs Primarily to Help Lower Cost of Health Care Coverage
paragraphs: Industry officials and other experts we spoke with told us that the primary  reason employers offer CDHPs is to help lower their cost of health care  coverage. These officials reported that some employers believe one way  to restrain the growth in the cost of health care coverage is to promote  cost-consciousness on the part of their employees by making them aware  of the true cost of health care services. According to these officials, by  offering the ability to roll over unspent account balances and take account  balances from one employer to another, some believe that CDHPs provide  incentives for enrollees to select the best treatment option at the lowest  available price. Employers also want to offer their employees a tax benefit  that can create the opportunity to save for future medical expenses,  including saving for medical costs in retirement. Industry officials and  experts also noted that employers offer CDHPs in response to  dissatisfaction among employees with tight utilization controls under  managed care plans, such as health maintenance organizations (HMO). In  addition, according to these officials, employers would be more likely to  offer a CDHP in the future if health care premiums continue rising  significantly or if CDHPs demonstrate the ability to reduce the rising cost  of health care coverage.
Publicly available employer surveys cite factors that encouraged  employers to offer CDHPs to their employees. In four surveys we  reviewed, employers responded that they offered CDHPs to reduce the  cost of health care coverage and provide employees with greater plan  flexibility and a tax benefit. Our interviews with five employers that offer  CDHPs showed that the key reasons for offering a CDHP were to reduce  company spending on health care coverage, to promote cost- consciousness among employees, to lower the cost of health insurance  coverage to employees, and to attract and retain employees. (See table 2.)
section_title: Individuals Enroll in CDHPs to Lower Their Health Insurance Premiums and Accumulate Account Balances
paragraphs: A broker that sells CDHPs on behalf of insurance carriers nationwide  reported that in the individual health insurance market, individuals  seeking to lower their premiums, accrue tax-free savings for health care  expenses, and gain greater control over their health care decision making  are increasingly purchasing HSA-eligible plans. An official representing the  broker noted that some individuals—particularly low users of health care  services—view HSA-eligible plans as an affordable way to protect against  a catastrophic health care expense, while providing greater control and  savings account features. Participants in our focus group who were  enrolled in employer-sponsored CDHPs also cited the desire to lower their  monthly outlay for premiums, build up savings to pay for retirement or  other nonmedical care expenses, and exercise greater control over health  care decisions as the reasons for selecting an HSA.
Industry officials and CDHP experts reported that the key factors in  determining whether employees enroll in a CDHP when offered are the  level of employer contributions, both toward the CDHP premiums and  toward the associated savings accounts, and the communication and  education efforts undertaken by employers. The officials noted that the  appeal of CDHPs was increased where the employer offered a larger  contribution to the CDHP premium and associated savings account and  more comprehensive benefits. A survey of employers indicated that  employees were more receptive to CDHPs when the employees believed  that the employer was not switching to a CDHP solely to shift rising costs  onto them, but also to encourage them to take more control of their long- term health care needs. One employer in the survey achieved high levels  of employee engagement and satisfaction with its CDHP offering by using  its employees as advocates to explain the new benefit design and the  rationale for the benefit change to both employees and their spouses, and  comparing its plan to CDHPs offered by other companies. The company  also offered its employees financial incentives, wellness programs, and  training for online decision-support tools that allowed employees to  compare the cost and quality of different treatment and provider options.
section_title: Federal and State Requirements, Inadequate Consumer Tools, and Other Factors Could Limit the Appeal of CDHPs
paragraphs: Industry officials and CDHP experts we interviewed cited several factors  that could limit the appeal of CDHPs, including a lack of flexibility in the  federal statutory provisions and guidance establishing HSAs and HSA- eligible plans and insurance or income tax requirements in eight states  that do not reflect federal statutory provisions for HSAs. Officials of  provider associations and experts suggested additional factors, including  the inability of the patient or provider to know at the time service is  delivered the amount to be deducted from the patient’s CDHP account,  and the inadequacy of decision-support tools provided by insurance  carriers to help enrollees assess the cost and quality of providers and  treatment options. Industry officials and CDHP experts cited other factors  that could affect wider adoption of these plans, such as insurance carriers  pricing CDHPs too high and a “wait and see” attitude by some employers.
subsections: section_title: Industry Officials Suggest Certain Federal Tax Laws and Guidance May Limit Changes to HSAs and HSA- Eligible Plans That Could Increase Their Appeal
paragraphs: A health insurance trade association and health policy analysts that  advocate HSAs reported that certain federal tax laws and regulations may  limit changes to the accounts or plans that could increase their appeal to  employers or individuals. For example, these groups cited IRS guidance  stipulating that HSA-eligible plans may not provide coverage for most  prescription medication before the annual deductible is met as potentially  limiting the appeal of these plans. In contrast, traditional plans typically  allow enrollees to receive coverage for prescription drugs before the  deductible is met—a benefit that is very common among employers. In  addition, annual contributions to an HSA for 2006 are capped at $2,700 for  single and $5,450 for family coverage. An industry official noted that  higher contribution limits could reduce the gap between the allowable  HSA contribution and the annual plan deductible, thereby encouraging  more individuals to enroll in these plans. However, increasing the  contribution amounts would result in additional revenue loss to the  federal Treasury because of the tax-exempt status of the accounts.
IRS guidance precludes certain changes to CDHPs that health policy  analysts and experts believe could increase the appeal of CDHPs to certain  high-risk groups that typically incur higher medical expenses. For  example, some experts have suggested allowing financial incentives for  employees with chronic illnesses or for employees who participate in  wellness programs. With certain limited exceptions, IRS guidance  penalizes employers that vary the amount of the account contributions  they make to comparable classes of employees, based on factors such as  employee participation in a disease management program, by imposing a  tax equal to 35 percent of the amount of the employer contributions.
An industry official also noted that IRS guidance can limit the flexibility of  HSAs for individuals who enroll in an HSA-eligible plan later in the  calendar year. If an HSA-eligible plan is purchased after the first of the  year, IRS guidance states that the allowable contribution must be prorated  based on the number of months left in the year, even though the enrollee is  subject to the full annual deductible. This could create a potential shortfall  between the prorated contribution amount—available to offset the annual  deductible—and the annual deductible.
section_title: Health Insurance Trade Association Reports That Some States Maintain Insurance or Income Tax Requirements That Do Not Reflect Federal HSA Statutory Provisions
paragraphs: According to a health insurance trade association, three states currently  impose requirements that limit the extent to which HDHPs may be  coupled with HSAs. HMO requirements in three states prevent them from  offering HDHPs coupled with HSAs. These three states—Illinois, Missouri,  and New York—all specify maximum combinations of deductibles and  copayments, allowable charges, or out-of-pocket costs that HMOs may  charge to enrollees, thereby preventing them from offering HDHPs  consistent with federal statutory provisions. New York also imposes  another requirement on all individual health insurance plans, requiring  them to provide coverage of certain standardized benefits, which include  major medical, comprehensive, or comparable benefits. Under the  Internal Revenue Code and applicable guidance, HDHPs coupled with  HSAs may not provide coverage for primary care or other services  intended to treat an existing illness, injury, or condition before the annual  deductible is met.
The association also indicated that five states currently offer lower  incentives to HSAs because they do not allow state personal income tax  deductions for HSA contributions. These states are Alabama, California,  New Jersey, Pennsylvania, and Wisconsin. According to the association,  the remaining states have incorporated federal tax treatment of HSA  contributions into their own laws by referring to the relevant federal  provision, have revised their own tax laws to parallel federal law, or do not  impose a personal income tax.
section_title: Delayed Account Transactions May Hinder Appeal of CDHPs
paragraphs: CDHP experts and provider association officials reported that the appeal  of CDHPs may be limited by the inability of the patient and provider to  know at the time of service the amount to be deducted from the CDHP  account. Enrollees typically do not pay for services from their HRAs or  HSAs when they receive care from a provider because the amount to be  withdrawn from their account is not yet known. Instead, an enrollee  authorizes the insurance carrier to debit his or her account after the claims  adjudication process is complete. Alternatively, the enrollee may elect to  write a check to the provider to settle the outstanding charge after the  claim is adjudicated by the CDHP insurance carrier. CDHP experts and  provider association officials noted that the current system is confusing  for providers and patients. The association official cited an example  whereby a provider submits a claim to the insurance carrier after the  CDHP patient has been treated. The claim is adjudicated by the insurance  carrier, which sends the provider an explanation of benefits detailing what  the insurance carrier will pay and what the patient must pay out of his or  her HSA. Based on this explanation—sometimes received up to 6 weeks  after the service was delivered—the provider bills the patient directly and  is left wondering when payment will be received. During this period, the  patient, who may incur other health care expenses, is left uncertain of the  amount that will be withdrawn from the HSA, and therefore cannot  determine the remaining balance.
A few vendors have, or are developing, technologies that can  electronically determine the amount to be deducted from the patient’s  CDHP account at the point of service and execute this transaction shortly  thereafter. For example, a major CDHP insurance carrier recently  introduced an integrated, real-time claims adjudication process that it  anticipates will simplify administrative tasks and help physicians obtain  payment for services from the patient more quickly. The insurance carrier  reported that instead of duplicative manual keying of claims and benefit  information, the new system submits the claim and returns the adjudicated  claim before the patient leaves the doctor’s office. Similarly, a company  that handles commercial credit card transactions recently partnered with a  major nationwide health insurance carrier to launch a real-time debit card  for HSAs. According to the insurance carrier, the debit card can be used at  the physician’s office or hospital, or to pay bills online. The card is swiped  by the patient at the point of service, allowing funds to be withdrawn from  the HSA automatically and a payment for the insurance carrier’s portion of  the medical claim to be made directly to the provider simultaneously.  Financial institutions we interviewed have expressed a desire to switch to  these new technologies as they become available.
section_title: Inadequate Decision- Support Tools May Hinder Appeal of CDHPs
paragraphs: According to CDHP experts and employers, the tools provided by  insurance carriers to assist consumers in assessing the price and quality of  health care providers and services do not provide sufficient information to  allow enrollees to fully assess the cost and quality trade-offs of health care  purchasing decisions. The decision-support tools we reviewed from five  of the largest CDHP insurance carriers included hospital- and physician- specific quality data and provider cost information that was limited. For  example, five of the insurance carriers provided three or more measures of  hospital quality, such as outcomes data, procedure volumes, and patient  safety ratings; however, none provided similar process or outcome  measures to assess individual physician quality. Three insurance carriers  provided information on medical board certifications, and each carrier  provided other information about physicians, such as medical education  and hospital affiliation. Three of the insurance carriers provided average  hospital payment rates and average physician payment rates within a  specified geographic area for selected services, but none provided the  actual payment rates that would be charged to enrollees that the carrier  had negotiated with specific hospitals or physicians. All insurance  carriers provided information that allowed enrollees to track their account  balances, and all provided some information on health education.  Appendix I summarizes the information included on each CDHP insurance  carrier’s Web site.
Other recent assessments of CDHP decision-support tools found similar  limitations. For example, one study concluded that most CDHP decision- support tools did not provide sufficiently detailed measures of cost and  quality to allow enrollees to identify higher value treatment options.  Another survey found that almost 90 percent of the insurance carriers  surveyed did not adjust their cost information and 67 percent did not  adjust their quality information to reflect severity of illness.
CDHP experts and representatives of health care providers cited several  reasons that existing decision-support tools contain limited quality and  cost data. A provider association reported that the biggest challenge is  providing the cost and quality data in a way that consumers can  understand and interpret. The association also stated that there are  potential legal barriers to greater price transparency, such as antitrust  laws and health plan contracts, which may preclude the sharing of  negotiated pricing. Additionally, there are many complexities involved in  making providers’ prices more transparent, as well as a lack of consensus  on what would make ideal quality measures. Furthermore, experts note  that providers may resist making quality information more transparent,  allowing consumers to shop for medical services based on price and  quality, and the data needed to build the cost and quality tools for patients  are dispersed among several publicly funded health programs, as well as  private insurers and self-funded employers.
Representatives of insurance carriers whose tools we reviewed told us  that they are currently limited in their ability to provide some of the  information experts identified as important. Multiple representatives  expressed concern over the lack of consensus across the industry on what  constitutes ideal quality measures and methodologies for developing  quality data. A representative noted that his company does not offer  patient satisfaction ratings for hospitals or physicians because of concerns  over the difficulty in achieving a meaningful rating that is based on a high  enough volume of respondents. Another representative told us that  physician-specific cost and quality data would be difficult to collect and  report until the physician community agreed that the value of providing  these kinds of information to consumers outweighed any potentially  negative personal ramifications. These representatives stated that they  were planning to offer actual negotiated physician costs in selected  markets in the coming years and that one insurance carrier has plans to  offer hospital process indicator data.
section_title: Other Factors May Limit the Appeal of CDHPs
paragraphs: Other factors were cited by some CDHP experts and industry officials as  potentially affecting the wider adoption of CDHP plans. An industry  official said that CDHPs have been priced too high by insurance carriers,  and as a result, the difference in premiums between CDHPs and traditional  low-deductible preferred provider organization (PPO) plans has not been  enough to attract more attention from employers interested in reducing  the cost of health care coverage. For example, a national broker of health  insurance in the individual market reported that in 2005 its nationwide  average single-coverage monthly premium for HSA-eligible plans with  deductibles between $2,000 and $2,999 was $166, compared to $213 for  non-HSA plans with deductibles under $500. Surveys by benefit  consultants indicate that some employers have been hesitant to offer or  promote CDHPs or HSAs, instead taking a “wait and see” attitude. One  survey reported that almost one-third of employers not considering a  CDHP think the concept is too new and want to gauge other employers’  experiences with CDHPs before deciding to offer one themselves.
Recent studies also raise questions about whether CDHPs can appeal to  certain segments of the population—such as the aged or the sick—who  may not have the inclination to select a CDHP or the desire to actively  participate in making complex health care decisions. These studies  caution that high users of medical services are more likely to prefer to  remain in traditional plans, and that some employers are concerned that  regardless of the amount of education they provide, spending accounts are  too complex for certain segments of their workforce. Three-quarters of  individuals polled by the Kaiser Family Foundation cited the fear of high  medical bills when asked about HDHPs. Focus group participants who  are enrolled in PPO plans cited lower and predictable out-of-pocket costs,  satisfaction with their current plan, and an unwillingness to manage their  own health care as the reasons for not enrolling in an HSA-eligible plan.  The focus group participants also noted that HSA-eligible plans were  confusing and complicated. For example, participants complained that the  HSA booklets were too confusing and convoluted and that the HSA- eligible plan was more complicated and required more of the enrollee’s  time for reviewing paperwork.
Employers we interviewed cited challenges they faced as they  implemented their CDHPs. These included the administrative complexity  of billing and claims processing, limited or insufficient information on the  quality and cost of provider and treatment options, and employees’  unfamiliarity with and apprehension about CDHPs. (See table 3.)
Similarly, employers responding to a benefit consultant survey said that  the key challenges they faced in implementing their CDHPs were  providing education and promoting understanding of the CDHP product,  pricing the CDHP product properly relative to other health plan options,  contending with the potential for the CDHP product to attract primarily  healthier employees, and selecting the right health insurance carrier and  financial institution to administer the plan and accounts.
section_title: Concluding Observations
paragraphs: In recent years, federal and state governments have taken steps to  authorize and encourage the development of CDHPs, and insurance  carriers and employers have begun including the plans as an option within  their broader portfolios of health insurance offerings. While enrollment in  the plans is growing, CDHPs currently cover a relatively small share of the  privately insured population. In addition, a significant share of individuals  who enrolled in an HSA-eligible plan did not open and contribute to an  associated HSA to set aside funds to pay for health care expenses under  the higher deductibles. Nevertheless, the factors that have stimulated the  initial development and acceptance of these plans, such as the rising cost  of health care coverage and the desire to stimulate more cost- consciousness among plan enrollees, are not likely to abate in the near  term.
Further enrollment growth in CDHPs will depend on several factors. The  likelihood that employers will increasingly offer CDHPs may be influenced  by how, or if, the plans demonstrate cost savings. On the one hand, the  plans may restrain costs by encouraging employees to become more  informed, cost-conscious purchasers of health care. This may depend in  part on the ability of health insurance carriers to improve and expand  upon the cost and quality information they make available to enrollees. On  the other hand, apparent CDHP cost savings may result primarily from a  cost shift from healthy to less healthy employees if healthier employees  disproportionately migrate to these plans, thus causing traditional plan  premiums to rise faster. The likelihood that individuals will increasingly  select a CDHP where given a choice may be influenced by the generosity  of the CDHP benefit package relative to other health plans offered by  employers and the experiences of early plan enrollees. Interest among  employees is likely to be greater if they perceive that the higher  deductibles are largely offset by employer contributions to employees’  accounts and lower monthly premiums, and if early enrollees report  positive experiences using the plans.
section_title: External Comments
paragraphs: We provided to IRS, AHIP, and several other private-sector organizations  excerpts of a draft of this report pertaining to the data each had provided  us. We received technical comments from IRS and AHIP, which we  incorporated as appropriate. Other organizations that responded said they  approved of our presentation of the data they had provided to us.
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If you or your staff have questions about this report, please contact me at  (202) 512-7119 or at dickenj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs can be found on the last page  of this report. Randy DiRosa, Assistant Director; N. Rotimi Adebonojo;  Pamela N. Roberto; George Bogart; and Roseanne Price made major  contributions to this report.
section_title: Appendix I: Summary of Information Included in Decision-Support Tools Offered by CDHP Health Insurance Carriers
paragraphs: Appendix I: Summary of Information Included  in Decision-Support Tools Offered by CDHP  Health Insurance Carriers A disease management program is a voluntary program offered by insurance carrier for those with  certain high-risk conditions, such as diabetes, asthma, and congestive heart failure. Patients  generally have access to a case manager who coordinates physician care and educational materials  to help them learn how to effectively manage their disease and improve their quality of life.
This insurance carrier does not have a formal disease management program, but it offers  personalized information from a health coach on major medical conditions, such as diabetes, asthma,  and heart disease.
A health risk assessment generally includes a questionnaire about health-related behaviors and risk  factors that generates a report that provides guidelines on ways to reduce the risk of disease.
Process indicators measure whether providers follow certain guidelines for care and include  indicators such as the share of patients for whom recommended treatment guidelines were followed.
Outcomes data are collected by hospitals and physicians to track patient outcomes following a  treatment or procedure, such as mortality rates, complication rates, and average length of hospital  stay.
Patient safety ratings include data on compliance with safety practices, such as meeting certain staff- to-patient ratios.
The information provided is limited. Insurance carrier provides the actual, hospital-specific, out-of- pocket costs (based on the plan’s coinsurance) for certain procedures.  In cases where the out-of- pocket cost exceeds the enrollee’s maximum out-of-pocket spending limit, which is very often the  case, that spending limit is shown rather than the full cost.
Average payment rates were available for a limited list of services.
section_title: Related GAO Products
paragraphs: Federal Employees Health Benefits Program: First-Year Experience with  High-Deductible Health Plans and Health Savings Accounts. GAO-06-271.  Washington, D.C.: January 31, 2006.
Federal Employees Health Benefits Program: Early Experience with a  Consumer-Directed Health Plan. GAO-06-143. Washington, D.C.:  November 21, 2005.