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The Truth About Consumer Driven Health Plans and HRAs

The Reality

Itís hard to know where to start in all the media generated hoopla about these types of plans. Letís get this straight though, these plans are not "Consumer Driven." They are media frenzy driven, employer driven, "me too" broker driven, consultant "jump on the bandwagon when we think itís safe" driven, but not consumer driven. The consumer is not flying this plane, he is a passenger on it and has about as much control over it as the average consumer has control over his commercial airline flight, and maybe less.

"Fix it Doc"

Donít get us wrong, we donít believe doctors and hospitals are Gods that should not be questioned, but letís face it, we canít shop for doctors the way we shop for cars. There is no price list because doctors are "practicing medicine". Sometimes they will know what is wrong with you and sometimes they wonít. How do you price for the unknown? We donít condone the prices, but from a consumerís standpoint, it is difficult to ask for anything more than to "fix whatever it is doc, and if you think itís that, then try it." Once you have a second opinion and maybe even a third, you still might not know what caused the problem anymore than the doctor. So how do you ask the doc to set a price? For Office visits, Yes. For Fix whatever it is, No. The big charges in the healthcare system are not coming from the day to day office visits.

What Does it Cost?

Call a claim center and ask what is reasonable and customary for an appendectomy. Chances are they wonít quote you a price. Ask the doctor and he/she probably won't know either. The doctor also wonít know the anesthesiology, pathology and radiology costs. The doctor won't know the hospital costs. You'll have to ask those providers too. Be sure to know your  CPT code and ICD 9 Code when you call for prices.  And by the way, if you asked for the price of the appendectomy only, you didnít ask for the extras. You bought the car with the sunroof, but didnít put the sunroof in the specs. A doctor may be able to tell you for Only that procedure for only him. But if there is a complication, do they know how much the assistant surgeon will cost? Do they know your recovery time and how many $5 Ibuprofen you will take while lying in bed? Do they know that all you need once they cut you open is an appendectomy? What if they find something else? Now ask another doctor about the same operation. I think you get the picture?

Leveraged Self-Empowerment Strategy? Love the Lingo....

One carrier reports that in 1960, consumer out of pocket expenses as a percent of total health care costs was 49%. In 1980 it was 24% and in 2001 it was 14%. For that you can thank the failed concept of the HMO that was supposed to be the wunderkind of curing healthcare costs. That was, until CDHPs came along as the next panacea. Obviously, things are going in reverse as costs are increasing, but if you listen to the proponents of CDHP (Consumer Driven Health Plans), this is all about increasing the "Transparency" of health care costs (meaning we were all in the dark and now we will be able to see it). They are calling it "consumer engagement" to make it look better. Itís all in how you present it. "Itís about giving employees the tools and options to balance their coverage in ways that are meaningful to them."

Consumer Driven is pure baloney. These plans are high deductible plans. They are part of a "leveraged self-empowerment strategy" only if the employee chooses the higher deductible and also has a low deductible choice and the money to decide to take either plan. The employer may empower the employee to decide (whether to sign up for the program) simply because it will most likely be the employer that chooses to offer the high deductible plan. Consumer Driven health care is nothing more than cost shifting back to the employee. Period. We are not saying that cost shifting is wrong. From the employer standpoint it may be necessary and with the economy these days it probably is. The great new lingo just means weíve just found a way to spin it.

When people say the number of doctor visits and scripts are reduced with these programs, weíre never sure if they are talking about visits as it relates to a percentage of the whole group, or the portion of the group that opted for the consumer driven plan. Thereís a big difference. Then again, in either scenario, if visits are reduced, did just the unnecessary visits and scripts decrease, or did people choose not to spend the money even if there may be  something wrong?

The HMO Strategy with a Different Twist

By the way, all these consumer driven specialty companies that want to just take a part of your employee group are really only taking the healthy part of the group for now. Any one person that will spend significant dollars for care does not want these plans. Separating out the healthy part of the risk was the strategy of the HMOís in the early days too. When they finally had themselves in the price position to take on the whole group, the rates would not support the risk. Same strategy, different product. And the results will be the same as the failing HMOs. Either way, if you split the group between carriers, you will kill the group for most less than 1000 employee companies. In the meantime, the consumer driven plans will be touting the healthy results of THEIR group (of only the healthier people that join the program), while conveniently forgetting (and the reporter too stupid to know) that the rest of the group was the group causing the high rates to begin with. Itís going on right now, but the reporters and most brokers, consultants and buyers are not educated enough on risk to see the truth. You see, you need a basic understanding of the transfer of risk that is supposed to be insurance, to see how things really will develop. Consumer driven health care transfers much of the risk of healthcare back to the unhealthy. We aren't condemning that, but we aren't going to make these plans out to be something other than what they are.

Defined Contribution- What You Should Have Been Doing All Along

So you say, "No, that is not all of what Consumer Driven Healthcare is. What about defined contribution plans? Arenít they consumer driven?" Well, yes, if the consumer can afford the higher contribution for the more rich plan, then the consumer is at least in a position of choice if there are two or more plans. Affordability is also a choice. But having defined contributions for a single plan or a variety of plans is nothing new. We hate to tell that to all the Consumer Driven Media Fanatics (and most of the consulting and brokerage community that is too uneducated and /or too young to know). Defined contribution, is nothing more than the employer saying, "I will pay this amount and no more." If there are multiple plans involved, it becomes a cafeteria plan. Havenít they been around for at least 30 years? Give it a new name and the uneducated suddenly think they actually have something new.

By the way, when it comes to defined contribution, isnít that what the employer should be doing and should have been doing all along? "My budget is $1million. What can I get for it?" Make the plan fit the budget and not the budget fit the plan. Pretty simple, but most brokers and consultants donít understand it, so they never ask the question of, "How much do you, Mr. Employer, wish to spend on health benefits?"

The Almighty HRA

OK, letís get to the crux of the matter. Since the introduction of what is presumed by the media to be "Consumer Driven", the one differentiation people want to talk about are contributions to a fund. The contributions now have a formal, government given to them name, the HRA (Health Reimbursement Account).

At first some of the lunatics that decided they had discovered something new didnít pay much attention to the tax code. They were saying that the employer should allow the employee and the employer to pre-fund this account with pre-tax money. Wrong! The government finally had to step in and say that only employer money is allowed in HRAs on a pre-tax basis. If the employee wants to contribute, they get to do so with post-tax dollars when it comes to HRAs. HSA and FSA money is pre-tax, but for now, HRA money is not allowed to be pre-tax for the employee.

Unlike HSA's, there is no minimum deductible requirement for plan designs. HRA accounts can be offered with a high deductible plan, but that is not required. Distributions must me made for medical expenses that are qualified under Code section 213 (d), except for qualified long-term care services. Premiums for long term care insurance are reimbursable.

Who Will Spend Employer Money in an HRA?

Anybody will. So why would an employer want to fund a pre-tax account for an employeeís health care expenses when that employee has all the job loyalty of a rabbit in heat? 

The answer isÖif you feel compelled to buy a cost-shifting plan, DONíT PRE-FUND the HRA, especially if you have a company with high turnover. Why? Because when it is someone elseís money, generally, the employee could care less how it is spent. They will spend it if they have it. They wonít save it to build for retirement. They will spend it to go to the doctor for sniffles. Employees saving employer money for future expense is just pie in the sky.  If it werenít, youíd see a lot more MSA plans than you do right now. Devilís advocates say that they will save it. Great! They will save your money and then take it elsewhere unless you restrict the plan. 

By the way, COBRA applies to HRAs. You have to treat COBRA people the same as all others employees, so if you give an HRA contribution to your employees, your COBRA people must be given the same contribution. Having fun yet? If you want an HRA, and donít mind the COBRA part, at least do not prefund the liability.

If an account holder dies, the account may continue to be used by a spouse or eligible dependents for reimbursement of medical expenses.

Rollover Beethoven-HRAs and Choices and Employer will need to make

Do unused dollars get to rollover? Are they limited? Or is the HRA account only for year to year? Does it apply to only expenses covered by the plan, or to other expenses as well (such as vision care)? If you didnít have a vision care program before and then you start an HRA that allows vision as a covered expense, you have just created a vision care program! If you believe in the HRA enough to allow the money to rollover, youíve got a lot more decisions to make and those decisions could be costly.

The Probable Future

The plans wonít stop materializing. It is estimated in 2006 that there are 1.3million workers enrolled in these plans, down from 1.6 million in 2005. The decline in enrollment in these plans is probably due to HSA plan growth. Thatís not that man workers. Will the population be healthier because of these plans?

Will costs actually decrease?

The answer is No. Why? Hereís why (and this is plagiarized from a friend): 

"The basic total cost of healthcare is the out of pocket cost of the employee plus employee contributions plus employer contributions."

 All that will happen is that the cost will have shifted. Someone will have to talk to the medical community about cost reduction. Itís not going to come from these plans, although employer costs may be temporarily reduced.

If you have any comments or wish to learn more: please contact jseiler@ssbenefits.net

We hope to update this page from time to time as new thoughts and plans develop. 03/22/2004, 08/14/2007