Encouraging a Responsible
Approach to ConsumerDriven Health Care
October 2004
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Encouraging a Responsible Approach to Consumer-Driven
Health Care
This white paper is the culmination of a colloquium sponsored by McDermott Will & Emery LLP on May 2122, 2004 in Key Biscayne, Florida. It reflects the opinions and recommendations of the members of
McDermott’s Advisory Board on Consumer-Driven Health Care (CDHC).
CDHC products are beginning to make significant inroads into the health benefits marketplace. These
products, initially designed by small, innovative vendors (such as Benemax, Definity, Destiny Health,
Lumenos, Healthmarket and Vivius), have become mainstream products offered by major national health
insurers (such as Aetna, United Healthcare, and many Blues plans). These products represent one of the
fastest growing segments of the employer-sponsored health market.
In the fall of 2003, approximately 20 percent of large employers surveyed were found to have implemented
a CDHC product for one year or more. Among those offering a CDHC option, enrollment varied from 1 to
33 percent.1 A companion study of nine major insurers offering CDHC products projected that enrollment
in CDHC plans would triple in 2004 over 2003.2 Another recent study suggests that, by 2006, 80 percent
of large employers are likely to offer a high deductible CDHC plan with a savings account as an option.3
Proponents herald CDHC as the principal health care cost containment strategy for the 21st century. This is
because CDHC plans give consumers the financial incentive to make prudent, cost-effective health care
purchasing decisions, giving them greater responsibility for improving their own health. As such,
proponents claim that CDHC holds the promise of differentiating health care providers on the basis of cost
and quality, reducing systemic costs and health insurance premiums, and improving the quality of care and
health outcomes.
Critics of CDHC see, instead, an attempt by employers and CDHC vendors to shift health care costs from
employers to consumers, and question whether consumers have access to the information they need to
make prudent purchasing decisions. Critics also question whether many consumers have the capability,
interest and motivation necessary to make complicated health purchasing decisions on their own.
The future of CDHC may indeed be bright. Reduced cost, improved quality and increased access derived from
consumer-driven market forces may prove to be the elusive “holy grail” of the American health care system.
McDermott Will & Emery’s position is that an innovative idea that offers potential to enhance care and quality
while reducing costs should be encouraged and given an opportunity to demonstrate its viability. We are
concerned, however, that if CDHC plan design is subverted to the interests of non-consumer stakeholders (such
as employers, insurers, or CDHC related vendors), then the CDHC industry could provoke the type of backlash
experienced by the managed care industry. Just as consumers revolted against managed care utilization controls
administered by companies perceived as having conflicting financial interests, so could consumers revolt against
CDHC if CDHC plans do not fulfill their consumer and systemic goals. This could happen if CDHC plans do
not deliver to consumers timely and adequate information on provider cost and quality, and on consumer out-ofpocket costs; “over” incent consumers so that they avoid medically necessary care; are designed only to “cherry
pick” the young and the healthy; do not adequately address the special needs of the chronically ill, acutely ill, and
lower-wage employees; or are otherwise “gamed” by stakeholders to the detriment of consumers.
Given what is at stake with CDHC, McDermott Will & Emery recognized that the time was ripe to assemble an
advisory board and sponsor a colloquium to focus on the future of the CDHC industry. The members of the
McDermott Advisory Board on Consumer-Driven Health Care are identified on page 6. The advisory board
1
Watson Wyatt Worldwide, Adopting Consumer Directed Health Plans (September-October 2003), available at
http://www.watsonwyatt.com/research/deliverpdf.asp?catalog=w-755&id=x.pdf.
2
Id.
3
Mercer Human Resource Consulting, US Employers See a Role for New Health Savings Accounts in their Benefit
Programs (April 26, 2004), available at http://www.mercerhr.com/pressrelease/details.jhtml?idContent=1135645.
includes prominent thought leaders from various segments of the health care industry with a diversity of
perspectives on CDHC issues. The advisory board includes the director of benefits and vice president of human
resources and benefits of Medtronic and Textron, respectively; vice presidents of Aetna, Inc. and Destiny Health
and the executive vice president and CEO of HealthMarket; the president and director of the Center for Studying
Health System Change and the Center for Consumer Driven Health Care, Galen Institute, respectively; a vice
president of Shands Health Care System; the president and CEO of Harvard Vanguard Medical Associates; the
immediate past president of the Massachusetts Medical Society; a principal from Milliman USA; an executive
vice president and a senior vice president of Trizetto and MBI, respectively; a senior investment banking partner
and principal from Shattuck, Hammond and Cain Brothers, respectively; and members of McDermott Will &
Emery’s CDHC Practice Group. McDermott’s CDHC Practice Group is comprised of leading lawyers in
McDermott’s Health and Employee Benefits Departments whose practices involve legal and regulatory aspects
of CDHC and CDHC product design. (Additional information about McDermott and its CDHC Practice Group
is included in Appendix I).
The purpose of the colloquium was to provide thought leadership and recommendations on what we believe to
be the most important question confronting the CDHC industry today: What should the industry do to encourage
the development of responsible and sustainable CDHC programs, so that those programs are likely to produce
their intended effects of reducing employer/system costs while improving the health status of consumers? The
objective of the colloquium was for the advisory board to make consensus recommendations for priority industry
action steps and standards that could be implemented within a 1-2 year timeframe to help assure the responsible
development of effective CDHC plans.
Recognizing that we could not hope to cover the full range of issues presented by CDHC in the short span
of a 1½ day colloquium, we undertook to frame a wide range of topics and issues presented by CDHC and
we went through a process with members of the advisory board to frame a limited number of important
CDHC topics for discussion selected from a wide range of topics and issues proposed and considered. The
broad issues selected by the full advisory board were:
ƒ What impact will CDHC plans have on consumers?
ƒ What impact will CDHC plans have on health insurers?
ƒ What impact will CDHC plans have on employers and self-funded plans?
A series of subtopics within each broad subject area was then identified to focus the colloquium on issues that
were believed to be susceptible to nearer-term, relatively concrete recommendations. Reams of potential issues
were put to the side in this process.
Accordingly, the colloquium was not intended to and did not result in a comprehensive probe of all CDHC
subject matter worthy of assessment. Nor did the advisory board seek to make an exhaustive set of proposals on
the particular topics discussed. Rather, the recommendations of the advisory board in this white paper reflect the
progress we were able to make in the time allotted on our pre-selected issues of near-term importance.
A summary of the advisory board’s recommendations follows this introduction. Those recommendations are
discussed in greater detail in the body of this white paper. Depending on the response of the health industry to
these recommendations, we will decide whether to reconvene the advisory board to tackle additional CDHC
topics of interest.
McDermott is grateful to the advisory board members who each gave freely of their valuable time and
expertise—and considerable intelligence and energy—to this endeavor. But for their generosity, this white
paper would not have been possible. We hope that, in at least some small way, this effort nudges the
CDHC industry farther in the right direction—toward responsible and sustainable CDHC plans that reduce
health care costs and improve quality of care.
Respectfully Submitted,
McDermott Will & Emery LLP
-2-
Summary of Recommendations
The following is a summary of our CDHC advisory board’s recommendations:
Effective Cost Sharing. CDHC plans should be structured to require the highest cost sharing for services
where the member’s decisions can make a difference. Examples include elective services, choices among
different treatments (for the same diagnosis) with differing costs and outcomes, and choice of providers
with different efficiencies and outcomes. CDHC incentives can be responsibly applied to most physician
and elective outpatient services. High cost inpatient services, particularly nonelective inpatient services,
most nonelective surgery, and certain expensive diagnostic procedures, should be seen as a secondary
rather than a primary target of CDHC incentives.
Full Replacement. Full replacement by one insurer should be encouraged where feasible, thus allowing
premium contribution and benefit designs to reflect actuarial characteristics of the benefit plans within a
single risk pool. This would facilitate cross-subsidization of population segments with higher health care
costs, where appropriate, and permit greater premium pricing flexibility.
Price Transparency/Choice of Provider. CDHC plans should align incentives for choice of provider
where possible, using price, or proxies for price, and quality measures as differentiating value factors. Both
third-party control of price negotiation and insignificant distinctions in pricing among in-network providers
may limit price differentiation as critical in choice of provider. (The advisory board reached no consensus
on whether third-party negotiation leads to more or less competitive pricing than would be available from
direct-to-consumer pricing.)
Price of Treatments. CDHC plans should align incentives for choice of treatment using price or proxies
for price. Choice of services and treatments can be sharply distinguished by price, and such pricing
differentiation can influence members to make more responsible decisions.
Healthy Lifestyle Incentives. CDHC plans should consider including incentives for members to engage in
healthy behaviors. Building financial incentives around wellness and combining them with incentives for
cost-effective decisions regarding health services delivery can provide a full-spectrum CDHC approach.
Spending Accounts. CDHC plans should consider tax-advantaged spending accounts as an optional rather
than essential feature in designing incentives.
Means of Communication. CDHC plans should use a variety of web, paper and one-on-one (in person,
individual and/or group sessions and telephone access) approaches to deliver decision support information
in a user-friendly and easy-to-understand format suitable to members with differing capabilities and needs.
Available Information. CDHC plans should make pricing information available to members and providers
at or before point-of-care. This information should link the member’s deductible, copay, coinsurance, and
spending account status to network pricing of services. This can be handled most efficiently through real-time
access to information electronically such as through secure web portals or telephone.
Investment in Quality Indicators. Additional investment by government, third-party payors, and respected
third-party organizations (medical societies) in developing quality indicators should be encouraged in order to
build consensus on quality standards and improve the quality metrics available to consumers.
Availability of Quality Data. Providers should be encouraged (via incentives) to submit clinical quality
data to CDHC plans and to reputable third parties using Health Insurance Portability and Accountability
Act (HIPAA) and state privacy law-compliant approaches for analysis and presentation to the public.
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Understandable Quality Metrics. CDHC plans should provide quality information on providers in a userfriendly and easy-to-understand format, including information fully disclosing the methodologies and
metrics used in arriving at such quality information, so as to enable the reasonably diligent consumers to
critically assess the data presented.
Portable Health Record. Employers and payors should encourage the development and implementation
of a portable, standardized electronic personal health record in order to improve the member’s ability to use
different physicians and different health systems in a timely manner.
Electronic Medical Record (EMR). Employers and payors should encourage the development of
electronic medical records, by using EMRs as indicators of quality in hospital and physician comparisons.
Payors should also consider encouraging providers to adopt health information technology and to use
EMRs.
Trusted Agent. CDHC members should have access to a trusted agent, in the form of a live person, to
help the consumer more fully understand the choices available both during the enrollment process and at
point of service selection. The trusted agent also might serve as a personal health coach. The trusted agent
should disclose any direct or indirect financial conflicts of interest before assisting the consumer.
Lower-Wage Earners.
ƒ Employers should consider steps to reduce the likelihood that lower-wage employees will be offered and
will select plan designs with unaffordable out-of-pocket maximums.
ƒ CDHC offerings should include consumer decision support tools tailored to the circumstances of lower-
wage members, such as paper backup for internet-based information, live presentations at enrollment of
realistic spending scenarios for lower-wage employees, and personal health coaches to assist in making
health service and health lifestyle decisions.
ƒ CDHC offerings also should be monitored to track the choices and utilization of lower-wage employees,
and corrective action should be taken if utilization patterns suggest that lower-wage earners are
underutilizing preventive or medically necessary health services.
The Chronically Ill.
ƒ CDHC plans should consider several options for assuring that the special needs of the chronically ill are
met. For example, one approach is to provide first-dollar coverage of maintenance drugs outside the
CDHC spending account and deductible structure.
ƒ CDHC plans should provide special information services addressing the needs of individuals with chronic
illness, using web portal, telephone, paper, and in-person approaches, as appropriate. It is important that
pharmaceutical and treatment reminders be a part of the CDHC approach to chronically ill members.
ƒ CDHC plans should include disease management programs or the use of a personal health coach to
encourage the chronically ill to take the proper steps to control their illness.
ƒ CDHC plans should monitor the use of appropriate chronic disease related services by members,
including proper use of pharmaceuticals, and take corrective action if indicators of appropriate utilization
fall below norms for conventional health plans.
Health Risk Assessment. CDHC plans should consider including a health risk assessment tool and
provide effective consumer information concerning preventive services.
-4-
Preventive Services. CDHC plans should undertake ongoing evaluation of the use of prevention services by
members and, in cases where use is below norms for conventional plans, initiatives should be implemented to
increase appropriate use. Those initiatives might include separate prevention spending accounts, a carve out
of prevention services from CDHC deductibles (first-dollar coverage), the use of personal health coaches or
more compelling prevention information tools.
Catastrophic Coverage. Employers should continue to include a catastrophic policy to back up a CDHC
approach.
Out-of-Pocket Limits. CDHC plans should continue to include reasonable limits (caps) on out-of-pocket
expenditures, and consideration should be given to establishing such limits based on the member’s annual
earnings. CDHC plans should carefully consider the potential impact of its deductibles and out-of-pocket
maximums on utilization, particularly for lower-wage earners. It is important that out-of-pocket limits be
transparent to give consumers a full understanding of their choices.
Consumer Resource Information. CDHC plans should develop systems to inform providers, electronically
or by phone, at the point of service, what the patient’s financial obligations will be, and what plan resources
are available to pay for them.
Adverse Selection.
ƒ Companies offering CDHC plans should consider a full replacement product to avoid problems that arise
from adverse selection and segmented risk pools.
ƒ CDHC plans should consider including, during a transition period, special incentives that will appeal to
older members and to sicker members to counterbalance higher out-of-pocket costs under the CDHC
plan. These incentives may be built around disease management or special high value provider offerings
that are attractive to this population.
Utilization Monitoring.
ƒ As noted above, companies offering CDHC plans should consider a full replacement product to avoid
problems that arise from adverse selection and segmented risk pools.
ƒ CDHC plans should also monitor utilization to ensure that incentives designed to motivate responsible
consumer-driven behavior are functioning as intended and are not being undermined by products such as
gap policies and the like that might impact the consumer’s financial risk.
Consumer Decision Support. CDHC plans should consider including live consumer decision support in
the form of a nurse hotline or personal health coach to provide assistance to members in determining their
need for health services, including preventive and wellness services that may be in the member’s best
interest, regardless of medical necessity.
Innovation. CDHC plans should be encouraged to experiment with combinations of consumer-driven and
managed-care techniques, and to continue to develop new and innovative approaches to address health care
expenditures that are not currently within out-of-pocket limits.
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Consumer-Driven Health Care Colloquium Advisory Board
Independent Members
Douglas L. Chaet
Vice President
Managed Care and Network Development
Shands Healthcare
Gainesville, Florida
Roger D. Chizek
Director of Benefits
Medtronic
Minneapolis, Minnesota
Robert G. Cosway
Principal
Milliman USA
San Diego, California
Paul B. Ginsberg, Ph.D.
President
Center for Studying Health System Change
Washington, D.C.
William J. Goss
Senior Vice President
Investment Banking, Cain Brothers
New York, New York
Ryan L. Levin
Vice President of Product Development and
Risk Management
Destiny Health
Oak Brook, Illinois
George E. Metzger
Vice President, Human Resources and Benefits
Textron, Inc.
Providence, Rhode Island
Gregory R. Morris
Executive Vice President, Chief Executive Officer
HealthMarket
South Norwalk, Connecticut
Victoria J. Nipple
Executive Vice President
MBI
Waltham, Massachusetts
Kenneth R. Paulus
President, Chief Executive Officer
Harvard Vanguard Medical Associates
Newton, Massachusetts
Charles H. Klippel
Vice President and Deputy General Counsel
Aetna Life & Casualty Company
Hartford, Connecticut
Greg Scandlen
Director
Center for Consumer Driven Health Care,
Galen Institute
Walkersville, Maryland
Mitchell L. Kornblit
Principal
Shattuck Hammond Partners
New York, New York
Daniel J. Spirek
Senior Vice President, Solutions Architecture,
TriZetto Group
Greenwood Village, Colorado
Thomas E. Sullivan, M.D.
Immediate Past President
Massachusetts Medical Society
Waltham, Massachusetts
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McDermott Will & Emery Advisory Board Members
Michael L. Blau
Co-Chair, Partner
Boston, Massachusetts
Tel: 617.535.4010
E-mail: [email protected]
Virginia H. Holden
Co-Chair, Partner
Chicago, Illinois
Tel: 312.984.7585
E-mail: [email protected]
Keith D. Bilezerian
Partner
Boston, Massachusetts
Tel: 617.535.4002
E-mail: [email protected]
Gary Scott Davis
Partner
Miami, Florida
Tel: 305.347.6520
E-mail: [email protected]
Charles K. Kerby
Partner
Washington, D.C.
Tel: 202.756.8160
E-mail: [email protected]
Susan M. Nash
Partner
Chicago, Illinois
Tel: 312.984.7660
E-mail: [email protected]
For more information, please contact your regular McDermott Will & Emery lawyer, or any of the lawyers
listed above.
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Table of Contents
Responsibly Align Member Incentives to Meet CDHC Goals
9
Highest Cost Sharing Where Consumer Has Real Choice
10
Choice of Benefit Design
11
Choice of Networks, Providers and Treatments
11
Choice of Lifestyles
14
Spending Accounts: Tax Advantaged, Now More Flexible, but Possibly Transitional
14
Responsibly Provide Appropriate Consumer Decision Support Tools
16
Provide Access to Information When Needed and in an Understandable Format
17
Pricing Information Should Be Transparent and Reflect What the Member Pays
Out-Of-Pocket
18
Quality Data Should Be Accessible Under CDHC, Including Data on Process,
Outcomes and Patient Experience
19
Personal Health Record and Electronic Medical Record
21
Trusted Agent Role
22
Responsibly Adjust (or Carve Out) for Special Populations
23
Lower-Wage Employees
23
Chronically Ill
25
Preventive Care
26
Wellness Programs
28
Responsibly Avoid or Mitigate Adverse CDHC Consequences
29
Retain an Insurance (Catastrophic) Component to the Health Plan that Places Reasonable
Limits on Out-of-Pocket Medical Expenditures
29
Mitigate Provider Bad Debt
30
Avoid Segmented Insurance Pools When Offering CDHC
31
Reduce Likelihood That Members Will Avoid Needed Treatments to Save Money
32
Develop Barriers to “Gaming” by Stakeholders
33
Continue to Manage Utilization and Pricing Outside the Consumer-Driven Arena
34
Appendix I
35
Responsibly Align Member Incentives to Meet CDHC Goals
At the heart of CDHC are financial incentives that influence consumer health care decisions. While managed
care incentives have traditionally targeted physicians and hospitals under CDHC, the consumer is the
incentives target.
CDHC incentives are typically of two types: (1) out-of-pocket costs that members incur in paying for a
service and (2) the availability of spending accounts that can be accessed to pay for health care services.
For CDHC incentives to be effective, the consumer has to have access to relevant and usable information
about price and quality, so that informed judgments about value can be made.
Early results suggest that the CDHC approach can produce savings, despite the current lack of full price
transparency and the availability of only relatively rudimentary quality measures. (See Table 1, Aetna
HealthFund below.) However, currently there are no reliable multi-year studies looking at the impact on
medical expenditures and premiums under CDHC plans, whether savings are replicable and sustainable, or
how such savings might compare to savings under managed care plans. The Society of Actuaries has
formed a workgroup that is gathering data on CDHC plans to perform more rigorous actuarial analysis of
these issues.
Table 1. Aetna HealthFund Results (2003)*
Overall medical cost trend 2003-2004
Aetna HealthFund (CDHC plan)
As option
3.7% increase
As full replacement
11% decrease
Aetna comparison group
11% increase
Factors in HealthFund results
Primary care office visits
11% decrease
Specialist office visits
3% increase
ER visits
3% decrease
Outpatient cases
14% decrease
Inpatient admissions
5% decrease
Pharmacy costs
5% decrease
Prescriptions filled
13% decrease
Generic prescriptions
7% increase
Source: “Aetna HealthFund First-Year Results Validate Positive Impact of Health Care Consumerism.” Press release, Aetna, Inc.,
Hartford, Conn., June 22, 2004 (www.aetna.com/news/2004/pr_20040622.htm).
* The study included 12-month results from 19 employers with 13,500 members in HealthFund, Aetna’s CDHC product. Comparisons
were made with a matched group of Aetna’s membership who did not have the Aetna HealthFund product.
The advisory board agreed that the key to a responsible CDHC incentives approach is to focus the strongest
incentives where the member has real choice, such as physician and outpatient services that are likely to fall
within applicable deductible limits. There was also general agreement that responsible plans may reward
consumers for healthy lifestyle choices. Consumers, however, generally should not have any significant out-ofpocket exposure to the cost of care for injuries and illnesses that are beyond the reasonable control of the
consumer to avoid; this is the proper realm of insurance.
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There was less agreement regarding how best to tailor CDHC incentives for inpatient care, preventive health
services and for chronic disease services. Some on the advisory board argued for special provisions (such as
incentives for chronic care compliance) or carve outs, with first-dollar coverage of these services. Others
argued for their inclusion in the general CDHC scheme. As a preliminary matter, the advisory board noted
that there is a general lack of empirical information about what amount of out-of-pocket exposure for
individuals at various income levels is adequate to influence specific health care decisions. The advisory
board recommends further research on this question so that financial incentives can be designed to have more
precise and effective impact.
Highest Cost Sharing Where Consumer Has Real Choice
There was considerable debate among the advisory board as to how best to structure incentives, what decisions
can be influenced by empowering consumers to make a choice, and what decisions are best left to insurers or to
health care professionals.
The advisory board agreed that the areas where consumer choice can make the most difference include
elective services, choice among treatments with differing costs for the same diagnosis, and choice of
providers with different efficiencies and outcomes. There was also consensus that CDHC plans should not
put consumers at financial risk for out-of-pocket spending for accidents and injuries and other events
beyond the control of the consumer.
All CDHC approaches focus principally on first-dollar spending rather than last dollar spending, although
some more sophisticated CDHC arrangements have high attachment points or “donut holes.” (A donut hole is
an of out-of-pocket exposure after a layer of coverage. A donut hole can be structured creatively so as to
provide incentives for the prudent selection of higher-cost services.) The reason that CDHC incentives
generally focus on first-dollar spending is that almost everyone spends some money on health care in a typical
year, while very few spend in excess of $1 million. Consequently, health sector consumerism tends to most
strongly direct incentives (e.g., full cost sharing through a deductible) for the first $500 to $5000 that an
individual spends on health care, and to direct fewer incentives to the last dollar spent in a given year, whether
that is the thousandth dollar spent or the millionth dollar spent.
The questions for the advisory board provoking the most controversy generally were: (1) To what extent
should preventive services and disease management services be subject to consumer incentives? and (2)
How does CDHC address more expensive services that are likely to meet the deductible immediately, such
as high-priced surgical services and inpatient care?
One approach to CDHC is to allow the full range of services typically covered by insurance to fall within the
deductible and/or spending account. This approach runs the risk that one hospitalization or high-priced
surgery will consume the deductible and void the impact of CDHC incentives for the remainder of the
coverage period. Another approach is to sever nonelective hospital services (including outpatient surgeries)
and prescription drugs associated with chronic illness from the CDHC plan, and continue to cover those
services as insured benefits, using a tiered-copay approach. This approach isolates care that is not wholly
within the control of the consumer and thereby continues to provide CDHC incentives to the member.
RECOMMENDATIONS
Effective Cost Sharing. CDHC plans should be structured to require the highest cost sharing for services
where the member’s decisions can make a difference. Examples include elective services, choices among
different treatments (for the same diagnosis) with differing costs and outcomes, and choice of providers with
different efficiencies and outcomes. CDHC incentives can be responsibly applied to most physician and
elective outpatient services. High cost inpatient services, particularly nonelective inpatient services, most
nonelective surgery, and certain expensive diagnostic procedures, should be seen as a secondary rather than a
primary target of CDHC incentives.
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Choice of Benefit Design
Usually small employers offer employees a single health plan. Larger employers often offer multiple options,
sometimes varying benefits, varying types of plans (HMO, PPO) and involving multiple vendors. In order
to meet CDHC objectives, member incentives should be aligned to promote accountability in choosing a
benefit package where a choice of plans is offered.
Currently there is a move among larger companies towards full replacement contracts, that is, to move from
using multiple insurers to a single insurer or single third-party administrator. When a single insurer offers
CDHC benefit choices, the insurer is able, in most circumstances, to price different benefit or network
options within the context of a single insurance risk pool. The different options can be priced based largely
on their actuarial equivalency. Thus, a member choosing a higher cost plan with richer benefits would
typically have to pay the actuarial difference in premium between that plan and a “no-frills” basic plan.
The member’s incentive, in choosing an option, relates to the actual cost of the plan. Richer first-dollar
benefits require a higher premium contribution. The employee will be influenced in plan choice by the
amount of premium costs that are the employee’s responsibility.
When CDHC is offered within the context of multiple insurers or companies, there are multiple risk pools,
and competition among the plans to attract employees may result in adverse selection. Competition among
the plans will often be based on attraction of the healthy members. If CDHC plans engage in such tactics,
they may win that competition, leaving the chronically ill in more traditional, higher-cost plans. CDHC plans,
particularly those with health care account carry-over and investment features, may be particularly
attractive to young healthy employees, since such plans provide the opportunity to build a health care “nest
egg.” If this occurs, it may impair the ability of the employer or insurer to spread the health care costs of
its sicker population across a more normative risk pool, potentially causing premiums for some of the more
traditional plans to become prohibitively expensive or not actuarially sound.
RECOMMENDATIONS
Full Replacement. Full replacement by one insurer should be encouraged where feasible, thus allowing
premium contribution and benefit designs to reflect actuarial characteristics of the benefit plans within a
single risk pool. This would facilitate cross-subsidization of population segments with higher health care
costs, where appropriate, and permit greater premium pricing flexibility.
Choice of Networks, Providers and Treatments
Health care is different from most other sectors of the economy due to its dominance by third-party
payment. The third-party payment system has many complex features, some of which are difficult to place
within a CDHC framework. As a result, the incentives that flow from the basic CDHC structure (high firstdollar cost sharing), when blended with existing third-party structures, may not be sufficient to encourage
price to be used as a factor in the choice of providers and treatments.
In the pure CDHC world, these barriers to aligning incentives would go away and begin to look like a
normal “shopping” experience. However, the health care world is not the pure consumerism world, even
under the CDHC approach, and basic price incentives can be sharply limited. This is because most
provider “prices” are currently negotiated by health insurers or intermediaries, and not by consumers.
The issue of current pricing arrangements obtained through third-party negotiation with providers versus
direct-to-consumer pricing was discussed extensively during the colloquium. Some thought third-party
negotiated rates are beneficial to consumers since they reflect discounted rates available as a result of the
market power and leverage wielded by insurers. Others thought the confidentiality of such negotiated rates
results in an artificial floor on prices, and that consumers potentially could get better rates on their own or
through consumer coalitions. While the advisory board generally agreed that pricing transparency could
form the basis for a more competitive pricing approach, there was no agreement on whether or how quickly
the current system would or should move in that direction.
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Network Pricing. Insurers typically negotiate physician
and hospital service fees on a wholesale basis. Therefore,
rates faced by health plan members are discounted, and
may be half or one-third of billed charges.
While pricing approaches vary, primary care physicians
and some specialists are typically paid using a fee
schedule reflecting a rate offered to the physician by the
health plan. The physician is in the position of deciding
whether to accept it. In rarer cases, physicians are paid
on a discount-off-charges, a maximum allowable, or a
capitation basis. Finally, in the case of most hospitals
and in the case of powerful physician groups, rates are
established through negotiation. In virtually all negotiated
agreements, the parties covenant that terms will remain
confidential, including pricing of services.
BARRIERS TO USING PRICE AS A
FACTOR IN PROVIDER CHOICE
ƒ Network pricing tends to reduce primary care
physician pricing to a single fee schedule.
ƒ High cost services are typically negotiated and
considered confidential.
ƒ High cost services often exceed the deductible
and out-of-pocket maximum.
Choice of Physician (Within Network). From the perspective of CDHC, there are several issues related to
aligning incentives for choice of physicians. First, under typical HMO arrangements, price to the consumer as
a factor in choice of physician generally is limited to the difference between in-network and out-of-network
rates. Some HMOs will not pay at all for out-of-network services, leaving the member to pay out-of-pocket
for the provider’s retail charges. Other HMOs will pay an out-of-network allowable and leave the member
to pay out-of-pocket the difference between the allowable and the provider’s retail charge. In PPO
arrangements, members pay a higher co-pay for out-of-network nonpreferred providers. Under these varying
managed care arrangements, the differing value proposition presented by various physicians with different
skill, experience, and results has largely been rendered moot, at least for in-network providers who are all paid
at similar levels.
Many CDHC plans adopt existing managed care network arrangements and accept the limitations they
place on price as an incentive. They assume it is in the member’s best interest for a powerful third party to
use market power to secure a discount price, than to trust the typical consumer market mechanism of large
groups of individuals shopping based on price to yield a lower price. This acceptance of existing
arrangements is due, in part, to the current large difference between physician charges and insurer fee
schedules. Insurer fee schedules generally are well below physician charges. A transition away from fee
schedules might result in higher effective prices to consumers, at least in the short run, without any value
justification for those higher prices.
A NOVEL APPROACH TO NETWORK PRICING
One different approach, developed by Vivius, has been to construct a physician network using open bids.
Under the Vivius approach, which is now operational in several markets, physicians make open bids on the
price of their services and members choose individual physicians of different specialties (based in part on
price) to create their own individual network. Physicians can change their prices, but must provide notice
to the member when changes are planned. The member does not actually see service prices, but rather
the actuarial equivalent of price in the form of a monthly capitation amount for each provider. Instead of
paying the physician fees directly, the member pays the monthly capitation fee (as part of a premium).
Actual service fees involve copays and deductibles at varying levels, which are also chosen by the member
in forming its network. The member’s premiums are priced based on the total of physician capitation
amounts and the size of copays and deductibles chosen.
Early results suggest that many physicians are willing to make bids that are at least equivalent to the rates
they offer managed care plans. (Vivius offers physicians less administrative burdens as an inducement for
them to do this.)*
*Source: www.vivius.com
- 12 -
Choice of Hospital and Surgeon. A second pricing issue results from the high price of certain services in
relation to out-of-pocket limits. Many of the more expensive services (e.g., most surgeries and inpatient
care) will immediately exhaust the member’s deductible and/or spending account. The result is that there is
no effective price discrimination for those services because the out-of-pocket maximum effectively caps
prices to the consumer at a point well below any rate differentiation.
As a result, some CDHC companies have decided to carve out expensive surgical and inpatient services,
letting them remain within the realm of insurance and managed care. Others have taken a different
approach, allowing the deductible to work across all services, and accepting that members who are
hospitalized will have their costs capped and may anyway enter the realm of managed care controls for
those high cost services. The advisory board did not agree on the best approach here. Some argued for a
straight deductible across all services, while others urged carve outs, tiered copays, donut holes, or the use
of low attachment points for expensive services.
Tiered Pricing. In some markets, networks have been tiered, in some cases by price, and in others by indicators
of cost effectiveness and quality. Where hospital inpatient services are tiered, the general approach is to use
differential copays to distinguish the tiers rather than to expect the network price for services to provide an
incentive (given that the member’s out-of-pocket limit is likely below the network pricing on any tier).
Confidentiality of hospital-negotiated rates is also a barrier to members accessing network pricing information.
Consequently, for hospital pricing, copays can serve as proxy for price, and can provide an incentive for choice
of hospitals among different tiers.
Aetna has developed tiered physician networks in several markets based upon quality and cost-effectiveness
measures.4 While Aetna HealthFund (Aetna’s CDHC product) has not yet been offered in combination with
the tiered networks, Aetna sees no long term barrier to such a combination. To help members evaluate price,
Aetna provides HealthFund members a standard physician fee schedule, based on average physician rates, and
provides the caveat that some physician rates may vary from the standard schedule. Should the tiered network
become a part of HealthFund, then the listed prices could also be tiered.
Prescription Drugs. Prescription drugs have been tiered for several years by many payors, with a copay
structure that distinguishes generic, preferred brands and non-preferred brands. Some CDHC plans have
taken the approach that prescription drugs are subject to a deductible/spending account CDHC mechanism.
(This is the required approach under the new health savings account (HSA) guidelines, but is not required
for health reimbursement arrangements (HRAs).) Until the deductible is met, prescription drugs are priced
for the member based upon the insurer’s negotiated rates and not upon retail charges. When the deductible
is met, the member can revert to a tiered copay structure or move into a coinsurance arrangement.
Other CDHC plans, such as Destiny Health, have carved out chronic prescription drugs (in contrast with nonchronic drugs, which are covered through the savings account) and cover them fully with tiered copays.
RECOMMENDATIONS
Price Transparency/Choice of Provider. CDHC plans should align incentives for choice of provider
where possible, using price, or proxies for price, and quality measures as differentiating value factors. Both
third-party control of price negotiation and insignificant distinctions in pricing among in-network providers
may limit price differentiation as critical in choice of provider. (The advisory board reached no consensus
on whether third-party negotiation leads to more or less competitive pricing than would be available from
direct-to-consumer pricing.)
Price of Treatments. CDHC plans should align incentives for choice of treatment using price or proxies for
price. Choice of services and treatments can be sharply distinguished by price, and such pricing differentiation
can influence members to make more responsible decisions.
4
Press Release, Aetna HealthFund First-Year Results Validate Positive Impact of Health Care Consumerism (June 22,
2004) (available at http://www.aetna.com/news/2004/pr_20040622.htm).
- 13 -
Choice of Lifestyles
One of the benefits of the CDHC approach, when combined with a spending account, is that the spending
account can be used to purchase wellness programs such as smoking cessation programs or weight
management programs.
A corollary issue is whether CDHC incentives should encourage healthy lifestyle choices. Some employers, for
example, set higher premium contributions for smokers than non-smokers, while others do not.
A variant of the premium differential approach is for the CDHC plan to require a different premium
contribution by the member based on lifestyle factors such as smoking and obesity. However, if the
smoker or the obese person enters a smoking cessation or weight management program (annually), the
additional premium contribution can be eliminated. Under this approach, members would not have to
actually cease smoking or lose weight, but wellness program participation would have to be documented.
Another approach, used by Destiny Health and others, offers what the company calls vitality points based
upon the member’s health risk profile. Members, who do not smoke, are not obese, exercise regularly and
exhibit other good health behaviors are placed into the highest of four vitality levels, and can receive
differentiated special rewards such as airline travel mileage credits, discounted hotel accommodations, and
special health club rates. The value of the rewards is based upon the member’s position in the vitality tiers.
The ultimate extension of these wellness approaches is to apply them to everyone -- to require premium
contributions of all members unless they participate in a wellness program. This approach is now being
piloted by BlueCross BlueShield (BCBS) of Rhode Island, and requires members to select wellness
programs from an approved list, tailored based upon the member’s risk profile. If the pilot plays out as
expected, it will be offered in all BCBS Rhode Island contracts beginning in 2005.5
RECOMMENDATIONS
Healthy Lifestyle Incentives. CDHC plans should consider including incentives for members to engage in
healthy behaviors. Building financial incentives around wellness, and combining them with incentives for
cost-effective decisions regarding health services delivery, can provide a full spectrum CDHC approach.
Spending Accounts: Tax Advantaged, Now More Flexible, but Possibly
Transitional
The health care spending account is one of the more innovative ideas that CDHC plans have brought to the
table, and Congress has been sold on the idea. There are now several alternative ways under federal law to
offer tax-advantaged spending (or reimbursement) accounts. The chart on this page describes the principal
features of the various types of spending accounts, some of which offer considerable flexibility for
designing CDHC products.
5
HealthLeaders Research, New England Health Plan Analysis, Winter 2004, Vol. 3, No. 1, pg. 5.
- 14 -
Table 2. Comparison of Spending Account Features
HAS
HRA
Health FSA
General limitations
No employer involvement
required, but must be used
with high deductible plan
Employer must establish
and determine contribution
amount
Employer must establish
and determine contribution
limits
Deductible
requirement for high
deductible plan
(minimum)
$1000 individual
N/A
N/A
Spending account
contribution limit
Lesser of deductible under
high deductible plan or
$2,600 (single) or $5,150
(family) (2004)
No limitation employer
determined and paid
No limitation employer
determined employee can
contribute up to limit
Preventive services
Can be covered before
deductible met
Employer determined
Employer determined
Prescription drugs
Not allowed until deductible
met
Employer determined
Employer determined
Office visit copays
Not allowed until deductible
met
Employer determined
Employer determined
OOP maximum for
High-deductible plan
$5,000 individual
N/A
N/A
Who can contribute
Employer and employee
Employer only
Employer and employee
Employee tax savings
Account is funded by pretax
dollars
N/A
Account is funded by pretax
dollars
Employer tax savings
FICA savings on employee
contribution; deduction on
employer
Deduction on employer
contribution
FICA savings on employee
contribution; deduction on
employer contribution
Funds carried over
Yes
Permitted
No: spend it or lose it
Portable
Yes; Individual owns funds
and not employer
No, but can have continued
access to funds even after
leaving employment
No
$2,000 family
$10,000 family
Source: Section 223: Health Savings Accounts—Interaction with Other Health Arrangements, Revenue Rule 2004-45, Department of
the Treasury, Office of Public Affairs, May 11, 2004 (www.ustreas.gov/press/releases/reports/rev_rul200445.pdf).
Revenue Ruling 2002-41, July 15, 2002, Internal Revenue Service, Department of the Treasury (www.irs.gov/pub/irsutl/revrul2002-41.pdf).
Bob Lyke and Chris L. Peterson, “Flexible Spending Accounts and Medical Savings Accounts: A Comparison,” Congressional
Research Service, July 21, 2003 (www.law.umaryland.edu/marshall/ElectronicResources/crsreports/crsdocuments/96-500EPW.pdf).
- 15 -
Spending accounts accord employees the ability to build up savings for future health care expenses and can be a
key driver to healthy lifestyle choices. That said, the spending account concept was downplayed by several
advisory board members. These members expressed the view that spending accounts were important only as a
transitional tax incentive to help members get used to the idea of higher deductibles.
With HRAs and HSAs, the use it or lose it requirements of earlier spending accounts (such as flexible
spending accounts (FSAs)) have been eliminated, giving the member some incentive to manage the spending
account through to retirement. One view of these newer spending accounts that can be carried over from one
year to the next is that they are a useful tool and do not create perverse incentives. In this view, the spending
account increases the member’s health services spending power, but does not change the mechanism of price
as an incentive since reasonable consumers should not purchase services imprudently. The health plan
member can manage the spending account, like money is managed in a checking account—making health
service purchases for current needs and saving some funds for future use.6
However, the spending account, by its presence and novelty, raises the profile of health care spending, at
least during a transition period. Some believe that the mere presence of a health spending account may lead
to higher spending in health care, compared to a deductible-only approach, particularly if the spending
account has use it or lose it rules. In any event, the presence of the spending account has the potential to
increase the amount of thought given to purchasing decisions. As a result, expenditures that might not have
been considered in the absence of a spending account may now be contemplated as a consequence of its
mere presence.
For example, the presence of a spending account might provide an additional incentive for a member who wants
to stop smoking to use funds in that account to pay for a smoking cessation program. Without the spending
account, a smoking cessation program may not have been considered, and spending on smoking related illnesses
would have been unaffected.
RECOMMENDATIONS
Spending Accounts. CDHC plans should consider tax-advantaged spending accounts as an optional rather
than essential feature in designing incentives.
Responsibly Provide Appropriate Consumer Decision
Support Tools
Under CDHC, the health care consumer moves from a passive role to an active role in making decisions
within the health care system. New and improved consumer decision support tools for selecting among health
plan options, and for assessing the cost and quality of providers, are critical to a responsible and successful
approach to CDHC. Most firms marketing CDHC plans realize this fact, and considerable investment is being
made to develop and offer more effective tools.
More transparency in provider pricing and in measuring and reporting on quality is necessary for CDHC plans to
develop effective consumer decision support tools. The barriers to such transparency include the confidentiality
of prices negotiated by health insurers, peer review privilege, patient privacy, lack of consensus on quality
measures, lack of electronic medical records as a foundation for research into evidence-based medicine, and the
reluctance of providers to share information about quality. Some advisory board members believe that these
6
Trautwein, Janet, “Strategies for Reforming the Private Health Insurance Market” (slide presentation), National
Association of Health Underwriters, February 2004. (www.benico.com/Presentations/HSA-HRA-FSA_NAHU.mht!HSAHRA-FSAPowerpoint NAHU presentation)_files/frame.htm).
- 16 -
barriers will be overcome by consumer-driven market forces. In the colloquium discussions, laser eye surgery
was given as an example of an area where lack of insurance coverage has led to better pricing and quality
information being made publicly available by providers. It was noted that the physicians offering the surgery
have taken the lead in getting out price and quality information in order to differentiate themselves from their
competitors.
Much of the development work in the area of consumer decision support has focused on better web tools.
Ultimately, electronic delivery of information through web and other electronic tools is likely to be the
most efficient delivery mechanism. But responsible CDHC plans should use multiple means of informing
consumers, at least in the short run, since the web is not used by everyone and is not likely to be in the near
term. Some of the more promising developments on the health information front include government
support of standards for a portable personal health record and the evolving role of trusted agents to assist
consumers in interpreting information and making decisions. However, more fundamental progress will
require better access to information on price and quality.
Provide Access to Information When Needed and in an Understandable Format
There are two basic categories of decision making that occur in the new CDHC environment. One category
involves decisions made at the time of enrollment about choice of plan, benefits and possibly provider
network. The other category involves decisions made on a daily basis in response to ongoing health care
needs, such as choice of providers, sites of care and treatments.7 The everyday decisions must take into
consideration one’s medical need for the service, the urgency of that need, the convenience of the provider’s
location and service hours, the cost of the service, and the quality of care delivered by the provider.
CDHC plans are putting considerable investment into decision support tools on the web to address these
information needs. However, web tools represent only one of several means of communication, and many
consumers cannot use the internet for health care information. There always will be consumers who are
incapacitated, incompetent, not web-enabled, or web averse, and who may need or prefer to access
information through means other than the internet. Therefore, responsible CDHC plans should develop a
variety of information sources, such as the web, paper, phone and face-to-face. The relative cost and
benefit of maintaining each of these communication channels, however, needs to be prudently assessed.
USER-FRIENDLY TECHNIQUES FOR WEB PRESENTATION OF CONSUMER CHOICES
ƒ Break complex choices into a series of simple (either/or) choices.
ƒ Present options in an ordered fashion (e.g., based on cost).
ƒ Offer expert advice by identifying the “best value” options.
ƒ Use scenarios to depict the consequences of different choices.
ƒ Offer targeted interactive question-response to lead to a decision.
Source: “Decision Making in Consumer-Directed Health Plans,” by Judith H. Hibbard, Joyce Dubow, and Ellen Peters,
AARP Public Policy Institute, May 2003, pg. 11-20.
7
Hibbard, Judith H., Joyce Dubow, and Ellen Peters, “Decision Making in Consumer-Directed Health Plans,” AARP
Public Policy Institute, May 2003, pp. 5, 18.
- 17 -
Currently, web tools typically include decision support information about health plan options, spending
account balances, provider costs, rudimentary provider quality measures and estimates of treatment costs.
The same information should be made available through other media as well.
The internet is a cost-effective tool, and employers should encourage members to use it for decision support
information to the extent reasonably possible. Paper-based and telephone services can be used, in part, to
support members in moving to the web, by providing information about web access and assisting
individuals using the web for the first time to manage the set-up process.
RECOMMENDATIONS
Means of Communication. CDHC plans should use a variety of web, paper and one-on-one (in person,
individual and/or group sessions and telephone access) approaches to deliver decision support information
in a user-friendly and easy-to-understand format suitable to members with differing capabilities and needs.
Pricing Information Should Be Transparent and Reflect What the Member Pays
Out-Of-Pocket
Effective CDHC plans must furnish plan and provider price information to their members, since one goal of
CDHC is to make members more financially accountable and price sensitive.
Pricing Decisions During Enrollment. During enrollment, the CDHC member may be required to choose from
several health plan or benefit options. These options may involve different levels of employee premium
contribution in exchange for richer or leaner benefits, larger or smaller networks, or different approaches to
utilization management (HMO versus PPO).
Higher member premiums typically are linked to lower out-of-pocket spending requirements. Out-ofpocket spending will also be member-specific. It will depend on the member’s level of service use (e.g., is
the member chronically ill) and whether the use occurs in or out of network or in lower or higher cost tiers
within a network.
While the premium contributions under different plan options may be simple to present, the total likely out-ofpocket costs for service use under different options is not as easily depicted. One way to assist members in
calculating probable out-of-pocket costs is for the plan to present several scenarios, built around common
profiles of service use. The service use scenarios might give specific examples of low, medium and high use.
The member can then determine which scenario(s) most likely represent the member’s expected level of use
and out-of-pocket costs.
Everyday Price-Sensitive Decisions Based on Need for Services. To make accountable, price-sensitive
decisions on health service use, members need access to information about the cost of services.
A listed price of the type now being required by some states, such as those posted in the physician’s waiting
room (with up-front payment requirements) is unlikely to be very helpful. While such price lists might tell an
uninsured person all that he or she needs to know, for a CDHC plan member, such prices must undergo two
transformations for the information to be meaningful. First the charge must be transformed into the insurer’s
allowable amount. Second, the allowable amount must be placed into the context of the status of the plan
member’s deductibles, copays, coinsurance, spending account and out of pocket maximum.
For this financial information to be useful, the member must have access to it at or before the point of care.
Otherwise, the financial information cannot influence decision making upfront; it can only lead to back-end
regret about the bill. The provider also needs information about deductibles, copays and coinsurance at
point of care so that the provider can collect the appropriate out-of-pocket costs upfront and not be incur
increased after-the-fact collection burden and risk. The practical implication is that, except in emergencies,
- 18 -
pricing and out-of-pocket information should be available both to the member and to the provider at or
before point of care.
Many CDHC companies have web portals that offer network physician fee schedules. In some cases,
bundled pricing for services (e.g., global fees for a complete procedure or episode of care) is available as
well. If fees vary from the posted schedule, due to special pricing for some providers, then the member
should be warned that variations from the fee list are possible and of the circumstances when those
exceptions apply. Pricing information should also be available to the member in a paper format, or through
customer service by phone.
However, many consumer decisions are made during the course of a physician visit or in a hospital clinic.
In such situations, the member should be able to access needed information on price from the health plan
through the provider at point of care. Some insurers already provide this capability, through online access
to network pricing and the status of the member’s deductible, spending account, coinsurance and out-ofpocket maximums. Others provide this information by phone.
RECOMMENDATIONS
Available Information. CDHC plans should make pricing information available to members and providers at
or before point-of-care. This information should link the member’s deductible, copay, coinsurance, and spending
account status to network pricing of services. This can be handled most efficiently through real-time access to
information electronically such as through secure web portals or telephone.
Quality Data Should Be Accessible Under CDHC, Including Data on Process,
Outcomes and Patient Experience
The metrics for measuring health care quality are in an early stage of development. The gross measures that
are currently most readily available, such as licensing, board certification and malpractice claims, allow the
consumer to make only very basic distinctions, but represent a step forward.
More recently, process measures, such as those under development by the Leapfrog Group for hospitals,
have become available on the web. But, meaningful clinical and outcome measures represent the biggest
remaining challenge due to data quality and availability issues, a dearth of credible longitudinal studies, and
lack of consensus on such measures among the leadership of the provider community.
The development of better data on quality should be a top priority for CDHC plans. Approaches to quality
include measuring the patient experience, capturing claims data or Health Plan Employer Data and Information
Set (HEDIS) data on critical processes and outcomes, measuring reputation for quality by surveying
practitioners, and measuring outcomes, including morbidity and mortality in higher risk settings. Future
initiatives should tie quality measures more closely to clinical data derived from electronic medical records and
to outcomes data captured on an ongoing basis as part of a complete, portable personal health record.
Quality Measures from Insurance Claims Files. Health insurers and hospitals currently maintain large
databases of health care claims and discharge information from which some useful quality information may
be derived. Health insurance data sets, however, are administrative data sets built around third-party
reimbursement. The purpose of claims data is relatively distinct from quality measurement. Nevertheless,
claims data and hospital discharge data capture important information, and through proper processing can
be transformed into useful quality indicators.
Measures that can be retrieved from claims data and hospital discharge data include mortality, diagnosis,
condition severity, complications and secondary infections. Mortality, infection rate, and complication rate
can then be risk-adjusted and used to make comparisons among hospitals or among physicians for specific
procedures. These data, however, do not easily lend themselves to “apples-to-apples” comparisons, even when
experts can agree on appropriate risk adjusters.
- 19 -
For example, in-hospital mortality data, even when severity adjusted, will vary based on differences in
discharge procedures. Hospitals that discharge to a nursing wing of the hospital after a moderately short
hospital stay will likely end up having lower mortality rates. This is because patients that would otherwise
have been registered as dying in the hospital, instead die in the nursing wing and are not counted in the
hospital’s mortality data.8
Leapfrog Initiative: Associates of Quality. In an effort being pursued by the Leapfrog Group, hospital
quality is inferred from certain processes found by research to be associated with better quality. Procedure
volume is presumed to be directly related to quality—higher volume indicates higher quality. The presence of
board-certified intensivists in intensive care units indicates higher quality. The introduction of computerized
order entry systems for drug prescriptions indicates an improvement in quality. And, while not yet explicitly
part of Leapfrog, the logical extension of computerized order entry systems is to consider electronic medical
records as an indication of improved quality.9
Barriers to Quality. There are several barriers to developing and accessing better quality data. There are
patient privacy concerns, peer review privilege protections, and also a general provider resistance to
sharing data on quality. Part of the resistance of providers is the fear of the medical malpractice system,
which can severely penalize any public reporting of medical errors. As a result, attempts to release
information about performance or outcomes of particular physicians are often resisted by practitioners.
A second barrier is the medical record itself. The paper medical record (the predominant means of
maintaining records today) is haphazardly completed, does not contain standard data elements and can be
used for quality assessment only with great difficulty and expense. It is not tailored to a diagnosis, and
consists mainly of handwritten or dictated physician notes. Just as Leapfrog uses order entry systems as an
indicator for and instigator of quality, electronic medical records would serve the same role. By
standardizing many inputs to the medical record using evidence based guidelines, and with automatic data
cleaning operations (to remove incongruent data), the medical record itself would be a force for quality
improvement and an indicator of quality improvement. Almost as a by-product, clinical data from the
record could be abstracted to develop and assess clinical protocols, track outcomes and provide the
foundation for an evidence-based approach to quality care.
New Quality Initiatives. There are a number of recognized national efforts ongoing to measure quality
and improve the reporting of quality data. The Leapfrog effort has been mentioned, and several health
plans have established web sites using health insurance data to evaluate hospital and physician quality. For
example HealthGrades (originally developed by UnitedHealthcare) is a website offering hospital quality
comparisons.10
Probably the most prominent effort underway right now is being spearheaded by the Center for Medicare and
Medicaid Services (CMS). CMS is developing quality measures and initiatives for hospitals, physicians,
nursing homes and home health services.11
The hospital quality initiatives spearheaded by CMS include voluntary reporting by hospitals of 10 quality
indicators relating to treatment of acute myocardial infarction and pneumonia.12 With the passage of the
Medicare Prescription Drug and Modernization Act of 2003, CMS has added a payment incentive to
encourage hospitals to submit data with respect to each of the 10 indicators. Those hospitals not submitting
the data will have their 2005 fee update decreased by 0.4 percent.13 CMS also is developing a patient
8
Interview, Bill Cecil, Director, Health Policy Research, BCBS of Tennessee, September, 2003.
“Purchasing principles”, The Leapfrog Group, 2004 (www.leapfroggroup.org/purchase1.htm).
10
“Hospital Report Cards,” HealthGrades, Inc.
(www.healthgrades.com/public/index.cfm?fuseaction=mod&modtype=Content&modact=Hrc_Methodology&MeTy=
MortComp).
11
“Quality Initiatives,” Centers for Medicare and Medicaid Services, June, 2004. (www.cms.hhs.gov/quality).
12
“Hospital Quality Initiative Overview,” CMS, March 2004, page 2 (www.cms.hhs.gov/quality/hospital).
13
“Hospital Quality Initiative Overview,” CMS, March 2004, page 2 (www.cms.hhs.gov/quality/hospital).
9
- 20 -
experience survey and is piloting that survey in three states and is exploring ways to effectively present the
survey results to consumers.
In measuring physician quality, CMS is pursuing several avenues, one being to provide consumers with
decision support data on physician quality. Two initiatives that are of special interest are the Doctor’s Office
Quality (DOQ) project and the Doctor’s Office Quality Information Technology (DOQ-IT) project.14 The
DOQ project is attempting to develop clinical performance measures, a practice system assessment survey,
and a patient experience survey. The DOQ-IT project is attempting to upgrade physician’s office technology
by making physicians aware of the technologies available and providing assistance to help them adopt new
health information technologies.15
The advisory board concluded there was not sufficient progress on quality measures to recommend any
single source of quality indicators, whether government or private, over others. Most panelists agreed that
encouraging competing vendors, including the government, to develop multiple approaches to measuring
quality would lead to better consensus approaches over time.
Nevertheless, there was general agreement that there should be some early movement toward common data
standards and formats, so that different insurers and review organizations will not require strikingly
different data maintenance and retrieval efforts by providers.
RECOMMENDATIONS
Investment in Quality Indicators. Additional investment by government, third-party payors, and respected
third-party organizations (medical societies) in developing quality indicators should be encouraged in order to
build consensus on quality standards and improve the quality metrics available to consumers.
Availability of Quality Data. Providers should be encouraged (via incentives) to submit clinical quality
data to CDHC plans and to reputable third parties (using HIPAA and state privacy law compliant
approaches) for analysis and presentation to the public.
Understandable Quality Metrics. CDHC plans should provide quality information on providers in a userfriendly and easy-to-understand format, including information fully disclosing the methodologies and
metrics used in arriving at such quality information, so as to enable the reasonably diligent consumers to
critically assess the data presented.
Personal Health Record and Electronic Medical Record
The personal health record is a complete summary of a person’s health data. It can be either paper or electronic,
and recently a national standard for such a record has been proposed. The electronic version of the personal
health record would use open (non-proprietary) standards to allow it to interface with multiple software
applications for the purpose of accessing and printing the personal health record.
The purpose of the personal health record is to empower the patient to move his or her medical record among
physicians and health care systems with ease. The absence of a portable health record is a barrier to the
patient’s selection of a provider of choice, since the preferred provider may not otherwise be able to access the
patient’s pertinent health information in a timely manner. As such, the advisory board viewed development of
a portable health record as a priority CDHC goal to enable consumer choice among providers.
14
“Physician Focused Quality Initiative,” Centers for Medicare and Medicaid Services, July 2004
(www.cms.hhs.gov/quality).
15
“Medicare announces initiatives to improve care and provide new services through health information technology,”
Centers for Medicare and Medicaid Services, July 21, 2004 (www.cms.hhs.gov/media/press/).
- 21 -
The electronic medical record (EMR) offers similar benefits to the health care system as computerized
order entry systems championed by the Leapfrog initiative. That is, it is likely to reduce medical errors and
to be associated with quality.
Under CDHC, the EMR, as an indicator of quality, can become a consumer decision factor. It also improves
the ability to develop clinical quality measures and outcomes through electronic extraction of pertinent data,
and thus is a predicate technology for getting to meaningful comparisons of the relative quality of physicians
and institutions.
RECOMMENDATIONS
Portable Health Record. Employers and payors should encourage the development and implementation
of a portable, standardized electronic personal health record in order to improve the member’s ability to use
different physicians and different health systems in a timely manner.
Electronic Medical Record. Employers and payors should encourage the development of electronic
medical records, by using EMR as an indicator of quality in hospital and physician comparisons. Payors
should also consider encouraging providers to adopt health information technology and to use EMRs.
Trusted Agent Role
Some consumers may need the assistance of a trusted agent to help make well-informed health care
decisions in a CDHC plan. Health care decision can be complex, and some consumers may not have, or
may prefer not to invest, the time, attention and energy required to educate themselves to make informed
health care decisions. In a CDHC world, consumers may benefit from having a trusted agent available to
help them navigate the health care system. Ideally, the trusted agent would be financially neutral (that is,
not be directly or indirectly financially rewarded by health care decisions made by the consumer), an expert
regarding the decisions at issue, and accessible by phone and web.
Candidates for this “trusted agent” role include the employer, the insurer’s customer service (to offer
suggestions regarding choice of plan and provide information about spending account levels and cost
sharing requirements), 24-hour nurse call-in services (to help decide if a physician or emergency room visit
is needed), physicians (at the point of care who offer advice within the context of a broad and deep clinical
knowledge of the member), and independent third-party patient advocates and vendors. Other than
independent third parties, each of the other candidates for the “trusted agent role” may have conflicts of
interest that compromise their ability to offer unbiased help. The employer and insurer are compromised
by a general concern about patient utilization and the cost to them of that care, while the provider can be
compromised by the desire to offer more services for the provider’s financial benefit.
During our panel discussions, it was noted how casual physicians are about health care costs when insurance is
covering the full amount. However, the panel agreed that physicians are more likely to shift perspective and
actively consider costs (in a trusted agent role) when the patient, rather than the insurer, is at financial risk. Also,
when providers and insurers offer decision support in a coordinated fashion, their differing financial incentives
can cancel each other out, making it more likely that their care recommendations will be in the consumer’s best
interest and giving them greater stature as a co-joint trusted agent.
The advisory board further concurred that candidates for trusted agents should at a minimum disclose their
conflicts of interest to the consumer.
Some CDHC plans are beginning to develop a new kind of trusted agent, the personal health coach, who
helps members navigate the health care and insurance system, from an administrative as well as clinical
perspective. The personal health coach can be affiliated with the health plan or can be an independent third
party who contracts directly with the member (although there is currently not a clear revenue model for an
independent third party). The personal health coach can also provide disease management services for
- 22 -
those members with chronic conditions, and can substitute for a nurse call line, to assist members with
decisions around episodes of acute illness or injury.
RECOMMENDATIONS
Trusted Agent. CDHC members should have access to a trusted agent, in the form of a live person, to
help the consumer more fully understand the choices available both during the enrollment process and at
point of service selection. The trusted agent also might serve as a personal health coach. The trusted agent
should disclose any direct or indirect financial conflicts of interest before assisting the consumer.
Responsibly Adjust for (or Carve Out) Special Populations
CDHC plans employ financial incentives to motivate consumers to make prudent health care purchasing
decisions. Under CDHC plans, members end up paying a large portion and possibly all of their medical
expenditures out-of-pocket, other than for inpatient services and other expensive items and services. For
members whose expenses are low or income is high, it is relatively easy for them to manage their health
spending. For others, who may have lower income or a serious, but manageable, medical condition, health
care spending decisions may seem more daunting.
A “one size fits all” approach to CDHC incentives, then, will pose more financial and health risk to some groups
than others. Consequently, CDHC products should be designed to take into account the special circumstances of
financially and medically vulnerable populations, in a manner consistent with CDHC goals.
Lower-Wage Employees
Lower-wage employees represent a special CDHC category for several reasons. Most important, they are
likely to have lower family income and fewer assets. They are also likely to be younger, have lower
educational attainment and be less likely to access information via the web (although younger generally
trumps older on the web front).16 They may be members of a minority group, and are more likely to be
recent immigrants and have less facility with English.
Lower-wage employees are least likely to be insured, and typically cannot afford to choose a health plan
with rich first-dollar benefits. While CDHC plans with spending accounts do cover first-dollar benefits,
CDHC plans offered by small employers or employers with lower-wage workers may involve only a high
deductible catastrophic policy without a spending account feature.
As a result, the real choices for many lower-wage employees may be limited to CDHC benefits or no
coverage at all. Lower-wage employees are more likely to be in smaller firms that are less likely to offer
health insurance. Those smaller employers that currently do offer insurance may be considering dropping
health benefits in the present pricing climate.
16
“A Nation Online: How Americans Are Expanding Their Use Of The Internet,” Economics and Statistics
Administration and National Telecommunications and Information Administration, U.S. Department of Commerce,
Bureau of Labor Statistics February 2002 (www.ntia.doc.gov/ntiahome/dn/).
- 23 -
Table 3. Uninsured Rate, 2002, United States, by Worker Characteristics
% uninsured
Age
18-34
25.1%
35-54
14.1%
55-64
11.5%
Workers annual income
<$20k
32.2%
$20k-39,999
15.9%
>$40k
6.4%
Business size
Self-employed
26.3%
<25
31.2%
25-99
20.7%
100-499
14.6%
500-999
11.7%
1000+
12.6%
public sector
7.3%
Source: Catherine Hoffman, and Mary Wang, Health Insurance Coverage in America, 2002 Data Update, Kaiser Commission
on Medicaid and the Uninsured, December 2003, Table 7, Page 28, based on Current Population Survey, March 2003
Supplement (www.kff.org/uninsured/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=2934).
Lower-wage employees, then, are the type of employee most likely to need special consideration in CDHC
plan design to assure that they are not discouraged by out-of-pocket limits from obtaining needed health
care services.
In this regard, consider cost-sharing requirements and spending accounts, which provide most of the
incentives that drive CDHC plans. A given level of cost sharing represents a larger share of the lowerwage employee’s disposable income. For example, a $2000 deductible represents about 10 percent of the
net annual earnings of a lower-wage ($20,000/year) employee. The same deductible represents only about
5 percent or less of the earnings of a mid-level ($40,000-$60,000) wage earner. CDHC incentives, then,
exert stronger pressure for lower-wage employees to cut spending on health care services.
During enrollment, lower-wage employees are likely to choose CDHC plans with lower contribution
requirements, with the result that they are exposed to higher out-of-pocket limits. With fewer assets to
draw on to pay for services, they may avoid medically necessary services to save on the cost of care, and so
may join the uninsured in receiving under-care.
There are a number of approaches, some more employer friendly than others, to mitigate the tendency of
lower-wage employees to opt for plans that are low cost on the premium side, but high-cost, and possibly
unaffordable, on the benefits side.
Benefit Restructuring. One approach is to limit the choices of lower-wage employees to plan options
with out-of-pocket costs that are affordable, regardless of the circumstances. This can be accomplished by
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tying out-of-pocket maximums to a percentage of annual wages. The problem with this approach is that it
may lead to lower-wage workers opting out of insurance coverage, if the lower out-of-pocket limit
translates into a higher, unaffordable premium contribution.
A second approach is to age-adjust premium cost sharing based on medical expenditure risk for younger
employees. This would lower premium costs for younger employees who are more likely to fall in the
lower-wage category, effectively giving them more buying power when choosing a CDHC option.
Premium Supplements. Another approach is for the employer to provide a supplemental premium
contribution for lower-wage employees to encourage the employee to choose a plan with higher premium
contributions but lower out-of-pocket medical expenses. This approach is not likely to be favored by
financially stretched employers, given the added cost. However, some larger employers do provide such a
supplement, and a few states (e.g., Maine) do so as well under tightly defined circumstances.
Informational Approaches. An important approach at enrollment is to provide employees a reality check,
by presenting cost scenarios in person to explain the out-of-pocket consequences of the various plan
options. In this way, lower-wage employees can be discouraged from choosing unaffordable options (due
to premium or potential out-of-pocket costs).
Finally, the day-to-day decision support component of CDHC is extremely important, particularly for
lower-wage earners. Heavy reliance on providing information via the internet may bypass some lowerwage employees. A personal health coach, available by phone for questions about use of benefits, health
promotion activities, and disease management assistance, is one source for providing assistance to lowerwage employees who are not internet-savvy. The cost of such personal health coach services, however,
would need to be factored into the cost of the CDHC plan.
RECOMMENDATIONS
Lower-Wage Earners
ƒ Employers should consider steps to reduce the likelihood that lower-wage employees will be offered and
will select plan designs with unaffordable out-of-pocket maximums.
ƒ CDHC offerings should include consumer decision support tools tailored to the circumstances of lower-
wage members, such as paper backup for internet-based information, live presentations at enrollment of
realistic spending scenarios for lower-wage employees, and personal health coaches to assist in making
health service and health lifestyle decisions.
ƒ CDHC offerings also should be monitored to track the choices and utilization of lower-wage employees,
and corrective action should be taken if utilization patterns suggest that lower-wage earners are
underutilizing preventive or medically necessary health services.
Chronically Ill
The chronically ill should be separately considered because their health care choices have the biggest
impact on overall plan costs, and on their own out-of-pocket costs. Also, it is the chronically ill who
benefit most from disease management programs. There is evidence that disease management programs
are cost-effective for the chronically ill. Those programs have been shown to improve outcomes and may
lower health care costs for this population, in terms of reduced use of emergency room and inpatient
services.17
17
Villagra, Victor G. and Tamim Ahmed, “Effectiveness Of A Disease Management Program For Patients With
Diabetes,” Health Affairs, Vol 23, Issue 4, 255-266, 2004.
- 25 -
That said, there is some evidence that the chronically ill can fare well, health-wise, under responsibly
designed CDHC plans. For example, an Aetna HealthFund study found diabetics to be maintaining or
increasing their diabetic-related care despite having to pay the full cost of drugs up to the deductible, either
out-of-pocket or via the spending account.18
One approach, used by Destiny Health, to care for the chronically ill in a CDHC plan is to distinguish
between patient-controllable and uncontrollable medical expenses. Destiny carves out the prescription
drugs specifically required by the chronically ill and covers them as a first-dollar benefit.19 (This approach
can be funded by dollars in an HRA account, but may not be allowed under the new Medicare legislation
establishing HSAs).
Another approach is to limit out-of-pocket expenses to affordable amounts, as discussed above with respect to
lower-wage earners. This provides the chronically ill with protection from unusual levels of expenditures.
Many CDHC companies also offer specific disease management tools. For example, in addition to an array
of web-based information tools, Lumenos offers a personal health coach, who, for the chronically ill,
performs compliance monitoring through weekly telephone/web-based contacts.20
RECOMMENDATIONS
The Chronically Ill
ƒ CDHC plans should consider several options for assuring that the special needs of the chronically ill are
met. For example, one approach is to provide first-dollar coverage of maintenance drugs outside the
CDHC spending account and deductible structure.
ƒ CDHC plans should provide special information services addressing the needs of individuals with
chronic illness, using web portal, telephone, paper, and in-person approaches, as appropriate. It is
important that pharmaceutical and treatment reminders be a part of the CDHC approach to chronically ill
members.
ƒ CDHC plans should include disease management programs or the use of a personal health coach to
encourage the chronically ill to take the proper steps to control their illness.
ƒ CDHC plans should monitor the use of appropriate chronic disease related services by members,
including proper use of pharmaceuticals, and take corrective action if indicators of appropriate utilization
fall below norms for conventional health plans.
Preventive Care
One of the important issues in CDHC is how to deal with preventive services. Should preventive services
receive first-dollar coverage or be subject to deductibles and coverage by a spending account. Some
experts worry that CDHC may represent a step back from the benefits of managed care, where first-dollar
coverage of preventive services encouraged the use of those services. The advisory board disagreed on
how best to approach preventive services, but agreed that appropriate use of effective preventive care
services is important for a responsible CDHC model and should be encouraged.
Value of Prevention Services. Currently, there is debate in the health care community regarding the value of
prevention services. In recent years, the value (cost/benefit) of an annual check-up for all adults has been
18
“Aetna HealthFund First-Year Results Validate Positive Impact of Health Care Consumerism.” Aetna, Inc., Hartford,
Conn., June 22, 2004 (www.aetna.com/news/2004/pr_20040622.htm).
19
HealthLeaders Research, New England Health Plan Analysis, Summer 2003, Vol. 2, No. 3, pg. 8.
20
Parkinson, Michael D. and Doug Kronenberg, “Consumer-Driven Health Care: Improving Outcomes and Reducing
Costs,” Lumenews, Oct. 13, 2003, Vol. 3, No. 2.
- 26 -
questioned. However, the value of many preventive services, such as childhood vaccines, well baby visits,
well child visits, mammograms, Pap smears, and prostate screenings, have been empirically established for
applicable segments of the population.
Dedicated Spending Accounts. The concern that preventive care might be discouraged under CDHC
plans has been translated into federal legislation. Preventive care services receive special attention under
the recent HSA legislation and in earlier IRS rulings on spending accounts. Separate spending accounts for
prevention services can be established and those accounts can be set up on a “use it or lose it” basis. At the
same time, a regular health spending account for the member can be carried forward to the next year and
funds can accumulate over time.
Deductible Exemption. The recent Medicare legislation also allows prevention services to be excluded
from HSA deductible requirements. For example, Medtronic, which has about 13 percent of its work force
in CDHC plans, carves out prevention services from the deductible and covers those services on a firstdollar basis if obtained in-network.21 Aetna’s HealthFund also carves out prevention services from its
deductible requirement.
Special Incentives. Some companies argue for subjecting prevention services to CDHC plan deductibles,
and then offering rewards (such as vacation discounts) to encourage the use of prevention services. Destiny
Health uses this approach, and Destiny has found it to yield preventive service use that is comparable to
well-managed HMO plans.
Information as Incentive. An important feature of CDHC is consumer decision tools, and this feature can
play a prominent role with prevention services. Information made available to members might include a
personal health assessment tool with recommendations regarding prevention services. An additional step,
similar to the disease management approach, is to provide timely notification of the need for evidence
justified screenings, such as for mammograms or PAP smears.
Early research into the use of preventive services under CDHC plans suggests that the use of such services
is at least equivalent to the use of such services under conventional plans. Most plans attribute the results
to the increased engagement of members in their health, despite higher out-of-pocket costs, and, in some
instances, to first-dollar coverage of preventive services in the CDHC plan.
21
Medtronic, Inc., Slide Presentation “Consumer Driven Healthcare” (May, 2004).
- 27 -
Table 4. Use of Prevention Services
Approach to Prevention
Service use
Aetna
Carve out prevention services
Increase in use of 23% compared to 8% increase in general
Aetna population; Gynecological exams increased 4%, as did
general Aetna population; Child prevention exams increased
by similar amounts as in general Aetna population
UnitedHC
Funded by deductibles and
spending accounts
Higher utilization of preventive services; Higher registration
rate on myuhc.com, which provides health information tools
Definity Health
Funded by deductibles and
spending accounts
Mammograms are on par with HEDIS Benchmarks
Destiny Health
Funded by deductibles and
spending accounts
Prevention results on par with HEDIS benchmarks
Special rewards for healthy
lifestyles
Lumenos
Extra money in spending account
for taking health assessment and
signing on with health coach
Participation in exercise and other wellness activities reported
up by 25% of members in survey
Sources: Web sites of health plans listed above, press releases and advisory board member interviews.
RECOMMENDATIONS
Health Risk Assessment. CDHC plans should consider including a health risk assessment tool and provide
effective consumer information concerning preventive services.
Preventive Services. CDHC plans should undertake ongoing evaluation of the use of prevention services by
members, and in cases where use is below norms for conventional plans, initiatives should be implemented to
increase appropriate use. Those initiatives might include separate prevention spending accounts, a carve out
of prevention services from CDHC deductibles (first-dollar coverage), the use of personal health coaches, or
more compelling prevention information tools.
Wellness Programs
Wellness programs are distinguished from prevention services in that such programs promote active
everyday engagement in the process of remaining healthy. Such programs may include risk assessment and
the use of preventive services, but the larger thrust is toward healthy lifestyle choices, focusing on
appropriate levels of exercise, healthy eating habits, moderate use of alcohol, avoidance of illegal drugs and
tobacco cessation.
Historically, most conventional insurance and managed care plans have not funded wellness programs.
The biggest barrier to funding has been the lack of proven cost effectiveness. The return on investment in
wellness often takes 3 or more years (say for smoking cessation programs) and average member turnover in
health plans is only 2-3 years.22
However, under CDHC plans, there are various ways to encourage wellness without incurring additional
employer cost. One approach is to allow the CDHC spending account (should there be one) to be used for
wellness services.
22
Interview, Tim McAfee, M.D., Center for Health Promotion, November 2003.
- 28 -
Another approach is to offer rewards for participation in wellness programs, either by rewarding accomplishments
(succeeding in stopping smoking) or by rewarding participation. Several CDHC companies have developed
reward systems that promote healthy lifestyles and participation in wellness programs. For example, Destiny
Health has an incentive program called Vitality with four levels of rewards based upon life style choices.
BCBS of Rhode Island introduced a new program (Healthmate Personal Choices) in January, 2004 that
requires members to contribute 15 percent (the contribution amount can vary) toward their health insurance
premium unless they participate in one or more approved wellness program.23
CDHC programs, through their decision support tools, can also provide information about approved wellness
and wellness programs. The cost effectiveness of individualized wellness information is not documented across
the spectrum of communications media, but the cost of providing information via the web is relatively minimal.
RECOMMENDATIONS
Wellness Incentives. CDHC plans should consider including incentives for participation in wellness activities.
A variety of approaches are available, including providing information on wellness programs, providing
incentives to use wellness services or to make healthy lifestyle choices, and allowing spending accounts to be
used for wellness services.
Responsibly Avoid or Mitigate Adverse CDHC
Consequences
There are a number of positive results that are expected to flow from CDHC. Principal among them are lower
cost and better quality care. Also possible are unintended, adverse consequences, such as encouraging
underutilization, undermining risk pools through adverse selection, and flawed decision support tools and
information leading to suboptimal decisions. Some of these consequences can be avoided or mitigated through
plan design.
For example, a fundamental rationale for CDHC is that giving consumers a financial stake in making health
care decisions will result in better decisions. However, better decisions do not always result. The member,
in some cases, may marshal resources unwisely, forgoing potential longer term health gains to achieve short
term financial savings. While in most cases this is a necessary part of increasing member accountability, in
some cases there are responsible steps that can be taken by employers and insurers to encourage more
responsible decisions.
CDHC plans also shift the financial risk for health care, since the member must pay a much larger portion of care
out-of-pocket. Again, CDHC plans can take steps to help members and providers better navigate this new
environment. And finally, any new approach that significantly shifts financial incentives may lead to new forms
of gaming by stakeholders. CDHC plans should monitor for gaming, and counteract it when necessary.
Retain an Insurance (Catastrophic) Component to the Health Plan that Places
Reasonable Limits on Out-Of-Pocket Medical Expenditures
One of the basic tenets of health insurance is to provide protection against unusual or unaffordable medical
events that are beyond the control of the health plan member. CDHC should rightfully focus on providing
financial incentives around health care decisions that are under the control of the member. For those health
care expenditures and events that are beyond the control of the member, CDHC plans are more likely to be
agnostic, leaving coverage to more traditional forms of health insurance. However, for CDHC to be seen as
23
HealthLeaders Research, New England Health Plan Analysis, Winter 2004, Vol. 3, No. 1, pg. 5.
- 29 -
responsible, it needs to fit within a framework that encourages not only responsible health care decisions, but
also responsible insurance decisions.
For example, there are health plans in the market today that do not provide catastrophic health insurance
protection. These plans are called limited benefit plans, and provide maximum annual benefits in the
$1,000 to $10,000 range. Some of these “affordable health plans” do not even provide insurance coverage.
Rather, they only provide access to a discounted network of providers. Most often these plans are offered
to lower-wage workers, and care is paid for out-of-pocket by the workers on a discount basis. While
perfectly legal in most states, these types of plans offer no insurance protection. The advisory board does
not believe that this CDHC approach is in the long term best interests of consumers.
A more responsible approach to CDHC would include an assessment of the need for back-up catastrophic
health insurance coverage and the protection it affords.
Catastrophic protection is of two varieties. One type of protection involves protection of personal assets,
for example a home. An individual purchases health insurance, in part, for asset protection during times of
illness, to be able to afford expensive care without having to auction a home to pay medical debts.
The other kind of protection is to provide access to the heath care system. CDHC plans that do not cap outof-pocket expenditures may result in the member being denied access to expensive treatments, because the
treatments are judged by the provider to be unaffordable to that member. The risk of nonpayment to the
provider may simply be too great to engage the provider’s services.
RECOMMENDATIONS
Catastrophic Coverage. Employers should continue to include a catastrophic policy to back up a CDHC
approach.
Mitigate Provider Bad Debt
With the recent rise in the uninsured, and the increase in out-of-pocket limits for insureds, provider bad
debt has risen. For example, recently Hospital Corporation of America (HCA) and other publicly traded
hospital companies have reported reduced profits due to increased bad debt (Davies, 2004). While this is an
expected consequence of an economic downturn, it should not necessarily be an expected consequence of
an innovative health insurance concept.
There are at least two issues that CDHC plans have brought into play in this regard. The first involves
information needed by the provider at point of care. The provider needs to know how much the admission
or visit is likely to cost out-of-pocket. The second involves the consumer’s ability to pay. Can the patient
afford the expected out-of-pocket costs?
The information component is relatively straightforward, but is not commonly available to providers at
point-of-care. The hospital, for example, needs to know at the point of admission what the patient is likely
to owe out-of-pocket. This means there must be an estimate of likely costs (given the diagnosis and likely
procedures) and an assessment of the patient’s current deductible and spending account status, as well as
the patient’s financial condition. This will give the hospital admission personnel the information needed to
determine what up-front payments the hospital will require. The hospital can then calculate how much it
needs to collect up-front and how much it is likely to collect over time, based upon the patient’s financial
condition, available savings account balances, and what the health plan will pay. CDHC plans and insurers
in general are beginning to develop web-enabled systems to authorize service, and then estimate the likely
out-of-pocket payments. However, even if not yet web-enabled, this information should be available
telephonically from the plan’s customer service group.
- 30 -
The second issue, ability to pay, goes beyond information systems. If out-of-pocket limits are unaffordable
for a patient, then the patient may lose access to the system. It is one thing for a consumer decision to be
made, based on price, that a service is not needed or not worth the cost. It is another thing for the patient to be
denied care because the out-of-pocket expenses are judged by the hospital or other provider to be uncollectible.
This suggests that out-of-pocket caps should be reasonably related to a member’s annual income, so that
even in the event of catastrophic illness, the lower income member has access to the health care system.
RECOMMENDATIONS
Out-of-Pocket Limits. CDHC plans should continue to include reasonable limits (caps) on out-of-pocket
expenditures, and consideration should be given to establishing such limits based on the member’s annual
earnings. CDHC plans should carefully consider the potential impact of their deductibles and out-of-pocket
maximums on utilization, particularly for lower-wage earners. It is important that out-of-pocket limits be
transparent to give consumers a full understanding of their choices.
Consumer Resource Information. CDHC plans should develop systems to inform providers, electronically
or by phone, at the point of service, what the patient’s financial obligations will be, and what plan resources
are available to pay for them.
Avoid Segmented Insurance Pools When Offering CDHC
The issue of segmented insurance pools (and adverse selection) arises when members can choose among
several benefit plan options, one of which is a CDHC plan, with other options offered by different insurers.
This multiple insurer approach, often used by larger employers, can make it difficult to establish member
premium pricing that properly reflects the differing risk characteristics of the segmented pools.
The competition of the different insurers for healthy members at the time of plan and benefit selection can
lead to adverse risk selection by one pool, and can undermine the CDHC goal of reducing health care costs
by substantially increasing premiums for less healthy workers in another risk pool segment.
Such adverse selection can occur if older, sicker, more at-health-risk members opt into conventional plans
with lower cost sharing, while younger, healthier members opt into higher out-of-pocket CDHC plans.
Since the older, sicker members are responsible for the vast majority of the health plan’s medical
expenditures, the CDHC cost containment goal can be undermined if those with the likelihood of larger
expenditures do not also choose the CDHC plan.
There are ways to reduce the potential for adverse selection. One approach is for the employer to go with
full replacement (a single insurer covering the entire employee pool with one product or multiple plans), so
that a single carrier is at financial risk and can make appropriate actuarial adjustments among the different
plan offerings. This approach should be available to most mid-size and smaller employers, though it is not
likely to be a preferred choice for the Federal Employees Benefit Plan or large employers that need to
provide a range of coverage options with various insurers across many regions.
Another approach is to include special features to attract older and sicker members into CDHC plans. For
example, Medtronic, which has a large number of its employees residing in Minneapolis, decided to
include the Mayo Clinic in its provider network for its CDHC plan. Since Mayo was not included in the
network of its conventional plans, the CDHC plan ended up enrolling a membership with a significantly
higher health risk profile than the risk profile of those remaining in its traditional PPO plan.
A similar approach is to include effective disease management services as part of CDHC benefits, and use
those added services to encourage the chronically ill to choose the CDHC plan.
- 31 -
RECOMMENDATIONS
Adverse Selection.
ƒ Companies offering CDHC plans should consider a full replacement product to avoid problems that arise
from adverse selection and segmented risk pools.
ƒ CDHC plans should consider including, during a transition period, special incentives that will appeal to
older members and to sicker members, to counterbalance higher out-of-pocket costs under the CDHC
plan. These incentives may be built around disease management or special high value provider offerings
that are attractive to this population.
Reduce Likelihood That Members Will Avoid Needed Treatments to Save Money
One of the goals of CDHC is to engage the member in decisions about use of health care services by
removing one of the major motivations to overspend: first-dollar insurance coverage. The flip side is that
an approach that works too well may lead to under-use of needed treatments.
It seems clear that CDHC incentives can contain health care costs. Many employers and insurers
implementing CDHC programs have reported overall declines in utilization, and resulting mitigating effects
on premiums during the following year.
Utilization Patterns. However, deciding whether utilization declines are appropriate, or instead represent
under-use, is difficult. One approach is to evaluate utilization changes that occur and infer an answer to the
question from patterns. In this regard, a rise in the use of preventive services may be considered a positive,
as would cost savings from a shift to generic drugs. A drop in use of primary care physician services, or
hospital inpatient services, however, sends an ambiguous message. Were those serves needed or not?
Member Surveys. A different way to answer the utilization question is to survey membership and ask
members about their health care decisions. For example, Destiny Health has reported on the results of 2003
and 2004 membership surveys and found that 16 percent of those CDHC members surveyed reduced their
number of doctor visits by using Destiny Health’s 24-hour nurse line and/or audio library. Twelve percent
negotiated costs with their doctor before receiving care (see Table 5, Destiny Health Member Survey
(2003)). These approaches to lowering costs seem appropriate and unlikely to compromise health.
Table 5. Destiny Health Member Survey 2003, 2004*
2003
2004
Shopping for value
Sought lower cost prescriptions from
pharmacist (47%)
Used nurse line and/or audio library (16%)
Negotiated costs with doctor (12%)
Attempted to reduce amount paid for
healthcare services (60% Destiny members;
15% comparison group)
Prevention and
health promotion
Took more active role in well being &
physical activity (41%)
Improved preventive health regimen (37%)
Started exercise program in past year (85%
Destiny members; 24% comparison group)
* Different survey questions were asked in 2003 and 2004
Source: Destiny Health
The nurse hot line, or personal health coach, can also help assure appropriate utilization. Under CDHC plans, the
member is given financial incentives to ask questions about cost and about health service needs. The plan
- 32 -
provides answers through a responsible agent who can advise the member based on evidence based guidelines.
This may help to avoid under-care as well as over-care.
Capping Out-of-Pocket Costs. Another approach to addressing potential underutilization, discussed earlier,
is to cap out-of-pocket costs at a level that is reasonably related to annual earnings.
RECOMMENDATIONS
Utilization Monitoring.
ƒ As noted above, companies offering CDHC plans should consider a full replacement product to avoid
problems that arise from adverse selection and segmented risk pools.
ƒ CDHC plans should also monitor utilization to ensure that incentives designed to motivate responsible
consumer-driven behavior are functioning as intended and are not being undermined by products such as gap
policies and the like, that might impact the consumer’s financial risk. (See “gaming” discussion below.)
Consumer Decision Support. CDHC plans should consider including live consumer decision support, in
the form of a nurse hotline or personal health coach, to provide assistance to members in determining their
need for health services, including preventive and wellness services that may be in the member’s best
interest, regardless of medical necessity.
Develop Barriers to “Gaming” by Stakeholders
CDHC shifts part of the responsibility for paying for health care from the third-party payer to the member.
Over time, third-party payors have developed sophisticated systems for claims review and payment. These
systems focus on assuring that the service billed was in fact the service performed, that it was medically
necessary, and that it involved a covered service for an eligible member. These systems attempt to track
patterns of use of services, and to discourage fraud and abuse by members and providers.
Under CDHC arrangements, those systems will likely remain in place on behalf of the third-party payment
system, to review claims for which employers and insurers retain responsibility. But much of the payment
burden will now fall to the health plan member. As a result, the member will have sharply increased
motivation to manage health care costs. Many of the member’s strategies for controlling costs should be
encouraged under CDHC plans. Some strategies may, however, undermine CDHC incentives and may
represent attempts to game the system.
One type of game involves gap policies, which are designed to fill the gaps left by high deductibles and
coinsurance. These policies are analogous to Medicare supplement policies, but tend to use an indemnity
approach (e.g., a payment obligation of $50 for an office visit) rather than a “cover the gap” approach
involving full or partial coverage of costs up to the deductible.24 Many insurers are already specializing in
selling gap policies, in response to rising deductibles in recent years. Typically, gap policies are purchased
by middle income employees who pay the premiums out-of-pocket.
A related approach that could undermine financial incentives of the deductible would be to use family
policies of working spouses at a different company to cover deductibles in a CDHC plan.
Because CDHC plans are relatively new, not all of the ways in which they can be “gamed” are now known,
and others may evolve.
24
Interview, Monica Francis, Director of Product Marketing, Colonial Life and Accident Ins. Co, October, 2003.
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RECOMMENDATIONS
Gaming. CDHC plans should monitor utilization to ensure that “consumerism” incentives intended to be
in effect are actually functioning as intended and are not being undermined by products such as gap policies
that can eliminate the consumer’s financial risk.
Continue to Manage Utilization and Pricing Outside the Consumer-Driven Arena
CDHC plans do not operate in a vacuum. CDHC approaches are being developed within the general context
of traditional insurance coverage that now usually includes managed care features.
Managed care has developed some effective ways to align the incentives of physicians and hospital systems
with the goal of delivering cost-effective care. These tools can be constructively deployed by CDHC plans
to complement CDHC cost-containment incentives.
Companies with CDHC products have taken a variety of approaches to traditional managed care techniques,
in some cases embracing them and in other cases bypassing them. For example, most CDHC plans have
preserved network fee schedules and negotiated hospital rates. Some CDHC plans have carved out higher
cost services (and, in some cases, preventive services) from CDHC out-of-pockets and have retained them
under an insured plan, using normal managed care utilization review techniques to control costs.
Even where services are not carved out of CDHC products, once the CDHC deductibles and out-of-pocket
maximums have been met, (e.g., for a member with an expensive hospital episode) managed care techniques
can be usefully reintroduced.
While there may ultimately be consumerism approaches to these “last dollar” expenditures, at present most
CDHC plans retain at least some aspects of managed care for these services (such as hospital case
management, provider fee schedules or negotiated rates and provider incentives, either risk-based or
performance-based). Some CDHC plans are experimenting with personal health coaches to assist patients
and their families make decisions once out-of-pocket limits have been exhausted (e.g., during a hospital
stay). In this circumstance, the personal health coach takes on the role of a case manager.
Managed care itself can be considered a consumerism approach in that the techniques it employs for cost
management can reduce waste and inefficiency and lower premiums. Wise consumers, then, would choose
plans that are efficient, and some of the more efficient plans may combine high deductibles with vigorous
managed care approaches for services beyond out-of-pocket limits.
RECOMMENDATIONS
Innovation. CDHC plans should be encouraged to experiment with combinations of consumer-driven and
managed-care techniques, and to continue to develop new and innovative approaches to address health care
expenditures that are not currently within out-of-pocket limits.
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Appendix I
Consumer-Driven Health Care Practice Group
McDermott Will & Emery’s Consumer-Driven Health Care (CDHC) Practice Group advises clients on the
design and implementation of all varieties of CDHC plans. The team is anchored by partners in the Firm’s
Health and Employee Benefits Departments who are uniquely qualified to provide counsel in navigating this
complex legal area. CDHC Practice Group assists clients in the following areas:
REGULATORY COMPLIANCE
The requirements imposed on health plans by ERISA, COBRA, HIPAA, the Internal Revenue Code and other
federal laws are significant and far-reaching. Our lawyers have unique insight into how the existing legal
framework applies to these innovative health plans. Our lawyers assist clients in determining how COBRA
applies to CDHC plans, whether they are subject to the nondiscrimination rules and funding limits under the
Internal Revenue Code and how to structure them for ERISA and HIPAA privacy compliance. We review
plan documents, contracts and operations for legal compliance, identify compliance gaps, evaluate alternative
compliance strategies and implement appropriate compliance measures.
PLAN DESIGN AND DOCUMENTATION
Employers frequently evaluate plan design and funding changes to their health plans, including the adoption
of new CDHC plan designs (such as health reimbursement arrangements) that use spending accounts as a
mechanism to provide employee and retiree medical benefits. We review and evaluate plan design and
funding changes for active and retired employees and help our clients incorporate consumer CDHC plans into
their existing ERISA welfare plan scheme. We can also assist in reviewing and drafting employee
communications for these complex plans.
CONTRACT REVIEW
Providers play a prominent role in CDHC plans. McDermott Will & Emery lawyers provide contract review,
evaluation, negotiation support and strategic guidance to providers with respect to CDHC plans and issues.
Employers administer consumer CDHC plans primarily through vendor contracts. We can help prepare or
review, evaluate and negotiate vendor contracts, including administrative services agreements and business
associate agreements required by HIPAA. We also assist employers, insurers and CDHC plans in contracting
and collaborative ventures with health information technology companies, disease management companies
and decision support companies.
FIDUCIARY RESPONSIBILITY
ERISA requires plan fiduciaries to choose service providers carefully and handle health and welfare plan
assets appropriately. Employers frequently encounter questions about the payment of plan expenses,
whether assets must be held in trust, the permissible uses of commissions and other assets and whether
certain arrangements are impacted by the prohibited transaction rules. CDHC plans also raise novel
fiduciary issues and potential liabilities. We help our clients avoid fiduciary problems by assuring that they
understand their fiduciary responsibilities, and by providing them with a comprehensive process to follow
to minimize the risk of liability when making fiduciary decisions.
We are committed to thoroughly understanding our clients’ business needs and working with them to achieve
their goals.
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McDermott Will & Emery LLP
McDermott Will & Emery LLP is a full-service international law firm with approximately 1100 lawyers
worldwide. McDermott is particularly known for its Health, Employee Benefits and Tax practices.
McDermott represents 75 of the Fortune 100 companies on benefits and tax matters, and is proud that our
Health practice has been ranked #1 in the country by The American Lawyer for the second year in a row.
McDermott has domestic offices in Boston, Chicago, Washington, DC, Los Angeles, Miami, Orange
County, San Diego, and Silicon Valley, along with international offices in Brussels, Düsseldorf, London,
Milan, Munich and Rome. For more information about McDermott, please visit our website at mwe.com.
This White Paper provides information of general interest. Information is presented in summary form and should not be construed as legal
advice. Professional rules in some jurisdictions may treat this White Paper as advertising.
©2004 McDermott Will & Emery. McDermott Will & Emery conducts its practice through separate legal entities in each of the countries
where it has offices. All rights reserved. Reproduction with attribution is permitted.
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