M a R K E T Watc H

This paper reports marketplace developments for consumer-driven health plans in spring 2002. Findings are from interviews with executives from start-up and health insurance firms, benefit consultants, employee benefit managers, Wall Street analysts, consumer organizations, thought leaders, and policymakers. We detail available evidence about the performance of consumer-driven health plans concerning access to care, risk selection, cost containment, use of information, and legal issues. We find that these health plans are now a central pillar of health insurers’ business strategy and that an estimated 1.5 million persons are enrolled in them. O ver the past year medical journals, business magazines, and major newspapers have boldly pronounced that the era of heavy managed care is over and that a new era of consumer-driven health care financing is beginning. Conferences on consumer-driven health care are noteworthy by both their abundance and their high attendance. When informed of this alleged changing of the guard, many Americans ask, “What is consumer-driven health care, and how did we get to the current situation?” Consumer-driven and defined contribution are two terms often used interchangeably, although they have different meanings. Defined contribution refers to an employer contribution strategy whereby employers set a fixed contribution for health insurance and place the employee at risk for costs beyond that point. Defined-contribution strategies limit employers’ costs in two ways. First, they cap the employer contribution for health benefits. Second, they reward employees financially for choosing lower-cost plans and thereby promote price competition among health plans. The term consumer-driven or consumer-directed refers to health plan design. Such plans generally involve a greater role for employees in choosing providers and health plans and in designing their own benefit package while assuming greater financial risk. Web-based medical information tools are a key element of consumer-driven plans and are viewed as essential for creating more-knowledgeable consumers of health care. Conceptually, definedcontribution plans and consumer-driven health care are not mutually exclusive: While some consumer-driven plans make more sense in a defined-contribution environment, in most cases defined contribution is not a necesM a r k e t W a t c h H E A LT H A F F A I R S ~ W e b E x c l u s i v e W 3 9 5 ©2002 Project HOPE–The People-to-People Health Foundation, Inc. Jon Gabel is vice-president for health systems studies at the Health Research and Educational Trust in Washington, D.C. Anthony Lo Sasso is research associate professor at the Institute for Health Services Research and Policy Studies, Northwestern University, in Evanston, Illinois. Thomas Rice is a professor in the Department of Health Services, School of Public Health, University of California, Los Angeles. sary condition for consumer-driven health care. In this paper we focus on consumerdriven plans. At its heart, the consumer-driven health care movement seeks to combine incentives with information to enable consumers to make informed choices about non-life-threatening health care. Managed care succeeded in restraining costs because a third party (or, in some cases, an at-risk physician) was placed in the role of saying no to patients. Managed care’s effectiveness in constraining costs was also the source of its unpopularity. By contrast, consumer-driven health care is an effort to put patients in a position to say no to themselves. This can happen only if consumers are aware of the true cost and have a personal stake in it, and if they have enough information and confidence to make treatment decisions. For purposes of clarity, we classify consumer-driven plans into three loosely defined groups. The first group we term “health reimbursement arrangement” (HRA) plans because they establish an account from which consumers draw to make health care purchases. When the account is exhausted, enrollees must typically pay out of pocket until the annual deductible is met, after which the plan becomes a traditional major medical plan. A second class of consumer-driven plans allows employees to design their own networks and benefit packages. Employees’ network and benefit selections determine the premium for their individual plan, and employees bear the financial risk for these choices above some fixed contribution from the employer. A third class of consumer-driven plans, termed “customized package” plans, allows employees, using Web-based tools, to choose from a predetermined selection of network offerings and benefit packages, such as a narrow, medium, or broad network and a rich, medium, or thin benefit package. Customized packages and “design your own network and benefits” plans require a defined-contribution formula from employers. In contrast, HRA plans do not require fixed contributions by employers. When HRA plans are offered as full-replacement, self-insured products, there is neither a choice of health plans nor a capping of the employer’s liability. Interest in HRA plans has increased in the wake of the Internal Revenue Service’s (IRS’s) recent guidance clarifying the tax treatment of such plans.1 The ruling allows employers to fund individual health spending accounts with pretax dollars, which may be rolled over to the following year if they are not spent. The Bush administration has picked up on the ruling as a good first step toward encouraging more firms to offer consumer-driven health plans.2 With the clarification of the taxation issues and with a supportive administration, employers may perceive less risk to implementing such plans.