Consumer-Directed Health Plans: Small but Growing Enrollment Fueled by Rising Cost of Health Care Coverage
Released: 2006-05-30T00:00:00

Letter

Background

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.

The Private Health Insurance Market

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.

Consumer-Directed Health Plans

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.

HRAs and HRA-Based Plans

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.

HSAs and HSA-Eligible Plans

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.

Health Care Claims Processing

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.

CDHPs Constitute a Small but Growing Share of the Private Health Insurance Market

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.

Available Surveys Suggest That a Small but Growing Share of Privately Insured Enrollees and Dependents Were Covered by a CDHP

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.

An Increasing Number of Health Insurance Carriers Are Offering CDHPs

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.

A Small but Growing Share of Employers Offer CDHPs, and the Type Offered Varies by Employer Size

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.

Most Employers Contributed to Health Accounts, and the Share of Account Funds Spent by Enrollees Varied Widely

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.

For HRA-Based Plans, Employer Contributions Varied, and Most Enrollees Spent a Portion of Account Funds

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.

Not All HSA-Eligible Plan Enrollees Opened and Contributed to an Account

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.

Desire to Restrain Rising Cost of Health Care Coverage Is Primary Factor Driving Growth of CDHPs

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.

Employers Offer CDHPs Primarily to Help Lower Cost of Health Care Coverage

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.)

Individuals Enroll in CDHPs to Lower Their Health Insurance Premiums and Accumulate Account Balances

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.

Federal and State Requirements, Inadequate Consumer Tools, and Other Factors Could Limit the Appeal of CDHPs

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.

Industry Officials Suggest Certain Federal Tax Laws and Guidance May Limit Changes to HSAs and HSA- Eligible Plans That Could Increase Their Appeal

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.

Health Insurance Trade Association Reports That Some States Maintain Insurance or Income Tax Requirements That Do Not Reflect Federal HSA Statutory Provisions

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.

Delayed Account Transactions May Hinder Appeal of CDHPs

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.

Inadequate Decision- Support Tools May Hinder Appeal of CDHPs

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.

Other Factors May Limit the Appeal of CDHPs

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.

Concluding Observations

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.

External Comments

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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Appendix I: Summary of Information Included in Decision-Support Tools Offered by CDHP Health Insurance Carriers

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.

Related GAO Products

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.