1. Consumer Driven Health Plans: Early Findings from the Field and Future Directions Stephen T. Parente, Roger Feldman, Jon B. Christianson University of Minnesota Presented to Rochester, MN Chamber of Commerce October 5 th, 2004 Funded by the Robert Wood Johnson Foundation Health Care Organization and Financing Initiative For more information: www.ehealthplan.org

2. Presentation Objectives Describe the CDHP business model. Illustrate the mechanics of a CDHP. Provide an Overview of our RWJ evaluation. Address with research two primary questions: –Who enrolls? –What is the cost & use impact? What does the future hold? –Are CDHPs a Fad? –How do HSAs fit in?

3. Issues Driving CDHP Creation  Patients  Dissatisfaction with provider access  Patient incentives are to consume  Limited choices of benefits and providers  Combative relationship with managed care companies  Providers  Loss of autonomy  Erosion of physician/patient relationship  Misalignment of physician reimbursement and incentives  Employers  Plan costs are increasing  Employees are not happy  Increase of employer administration burdens

4. CDHP Business Enablers –‘Ready to Lease’ Components of Health Insurance: Electronic claims processing National panel of physicians National pharmaceutical benefits management firms Consumer-friendly health data web portals Disease management vendors –Internet Transaction medium for claims processing 2-way communication with members –ERISA-exemption Lack of state oversight Half the US commercial health insurance market is self-insured.

5. Early CDHPs in Operation –Definity Concept developed in 1998, Funded in April, 2000 Minnesota based Clear first mover & dot-bomb survivor –Lumenos Started in 2000 Based in Atlanta Harvard B-School inspired (Regina Herzlinger) –Destinty Operating as Medical Savings Account model In operation for 10 years in South Africa

6. CDHP Component Details Nurse/HealthCoaching Web- and Phone- Based Tools Health Tools and Resources Care management program Extensive easy-to-use information and services Health Coverage Preventive care covered 100% Annual deductible Expenses beyond the HRA Nationwide provider access No referrals required Health Reimbursement Account (HRA) Employer allocates HRA 1 Member directs HRA Section 213(d) “scope” Roll over at year-end Apply toward deductible 2 Annual Deductible Preventive Care 100% Health Coverage Annual Deductible 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets. HRA $$

7. New RWJ-Funded Research Key Research Questions 1. Who is choosing a CDHP? Traditionally, adverse selection is defined as the situation when healthy individuals choose a CDHP leaving the sick in a traditional plan that will soon implode its premiums because of disproportionate share of sick individuals in the insurance pool. 2. What is the CDHP impact on cost and use? CDHPs have been chosen as a response to rising premium prices in an attempt to make the consumer ‘drive the market’ be examining price variations and constraining their personal consumption, if possible.

8. Research Design –2 Year study (11/1/2002 - 10/31/2004) –Six employers examined: University of Minnesota, MN Medtronic, National Ridgeview Medical Center, MN Hannaford Bros, New England Welch-Allyn, Upstate NY Raytheon, US Market –Data collected Claims data of all utilization for all health plan choices, pre (2001) and post (2002-2003) CDHP. Employer info on flexible spending accounts and employee income Survey information on CDHP choices in 2002 & 2003 from U of M.

9. Measuring the Effect of a CDHP on Cost & Use Study Setting Health plan choices by employees: –HMO, 2000-2002 –PPO, 2000-2002 –CDHP, 2001-2002 Variation in cost sharing by contract Take-up of CDHP approximately 15%. General caveat: Each of the six employers’ experience can be quite different due to: –Alternatives offered –Plan design –Communications with employees –Sponsor’s objectives for the plan

10. Presentation of Results Results are limited to two groups of employees who worked for their firm continuously for three years (2000-2002) where: 1.Employee chose the CDHP in 2001 and 2002. 2.Employee chose another health plan in 2001 and 2002. This limitation removed 40% to 50% of all employees from the analysis. Why make this limitation? We want to see both adoption and maturing impact of CDHP while controlling for prior spending. –2000: Pre-CDHP experience controls for prior spending –2001: CDHP adoption year –2002: CDHP ‘maturation’ year

11. Baseline Demographics

12. What was the ADJUSTED impact on provider and patient payment? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full PMPM expenditures. Also note: 1) Patient expenditures from the Personal Care Account (PCA) are included in the employer payment category. 2) Consumer payment reflects deductibles, copayments, and coinsurance expenses.

13. What was the ADJUSTED impact on provider & patient payment by different services? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full PMPM expenditures.

14. Was ADJUSTED service use different for CDHPs? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full admissions and prescription drug experience.

15. Distribution of CDHP Population by HRA Usage Levels Continuously enrolled population

16. Early Conclusions The most important factor affecting choice is income. The consumer drive health plan was not disproportionately chosen by the young and the healthy (for the U of MN population). For the non-U of MN pop, in adjusted dollars, the patterns remains, despite the likely event that the CDHP experienced favorable expenditure selection. Year 3 of CDHP experience will reveal if they can stem high cost growth trajectory from years 1 & 2.

17. BIG Critical Caveat: Benefit Design will Drive Expenditure Results ‘Draconian’ benefit design for family contract: $1,0000 PCA, $4,000 Deductible, 20% co-insurance after deductible Current industry standard design for family contract: $2,000 PCA, $4,000 Deductible, 10% to 15% co-insurance after deductible Generous benefit design for family contract: $2,000 PCA, $3,000 Deductible, 0% co-insurance after deductible

18. Policy Opportunities What is the Upside to CDHPs? Innovative means to bring consumer choice into the medical marketplace as well as consumer awareness of the trade-offs of liberal medical insurance coverage policies. Creates infrastructure for personal, portable health care coverage. Hybrid variants could be crafted to serve low income, part time workers and possibly the uninsured through tax credits and vouchers.

19. Policy Conundrums What is the Downside to CDHPs? What if CDHPs accelerate the consumer’s burden of health care spending ‘too’ quickly? Not much incentives for managed care’s proven assets (e.g., disease management) to play a role.

20. What Employers Might These Plans Be Best For? Moderately educated population. Already have cost-sharing experience. 3-Tier drug pricing no longer having an effect. Employer willing to use co-insurance. Employer willing to experiment for two years to get benefit design ‘right-size’ for the population. Employers hungry for wide, national network of provider choices. Employers who have thought out long-run HSA/HRA trade-offs market evolves.

21. CDHP’s Legislative Cousins: Health Savings Accounts  Introduced in the 2003 Medicare Reform Law  What it enables: Any U.S. citizen can create a ‘qualified’ HSA account. Must have ‘catastrophic health insurance’ with minimum deductible of $2,000. Max is $10,000 for a family contract. Individuals or employers can make annual pre-tax contribution to an HSA, separate from the insurance policy, of 100% of the deductible (max of $5,150).

22. CDHP Component Details Nurse/HealthCoaching Web- and Phone- Based Tools Health Tools and Resources Care management program Extensive easy-to-use information and services Health Coverage Preventive care covered 100% Annual deductible Expenses beyond the HRA Nationwide provider access No referrals required Health Reimbursement Account (HRA) Employer allocates HRA 1 Member directs HRA Section 213(d) “scope” Roll over at year-end Apply toward deductible 2 Annual Deductible Preventive Care 100% Health Coverage Annual Deductible 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets. HRA $$

23. …The HSA Model Health Coverage Purchased by ‘Qualified’ Plans Annual deductible Expenses beyond the HSA No managed care provisions Nationwide provider access No referrals required Health Care Account (HSA) Consumer/Employer allocates HSA Consumer directs HSA Owned by consumer and portable Roll over at year-end Many deposited pre-tax Consumer can withdrawal with penalty Can apply toward deductible Annual Deductible Preventive Care 100% Health Coverage Annual Deductible HSA $$

24. Why Would Anyone Want such a Wacky Thing? Compare & Contrast Old Way for Family Coverage:  Buy family policy insurance from individual market  Policy cost: $8,460  Plan has $500 deductible  Deductible applied per person  Deductible capped at $1,000  Cost if healthy: $8,460  Cost if 1 person sick: $8,960  Cost if 2+ people sick: $9,460 The New HSA Way:  Buy ‘qualified’ catastrophic plan  Qualified plans costs: $3,936  Plan has $2,500 deductible  Deductible applied per person  Deductible capped at $5,000  Cost of healthy: $3,936  Cost if 1 person sick: $6,436  Cost if 2+ people sick: $8,936

25. What Are We Now Doing for the U.S. Department of Health & Human Services and U.S. Treasury Department Combine our data with federal survey data to cost out HSA plan for different segments of the population through micro-simulation. –Focus on low-income because we could price a voucher/tax credit. –We know how much low-income people would spend because they are present in our data. –We know how preventive care in HSA would work with actual data for this population too.

26. Crystal Ball Time Are CDHPs a Fad? –Not likely. At worse they a transition point away from traditional indemnity insurance because they are more attractive substitute for that form of coverage. Will HSAs take off? –Individual market: Yes –Employer market: HRAs will likely function as a transition to HSAs. If employers/employees reject HRAs for cost, selection, or satisfaction issues, it will be a slow ramp up. Are HSAs viable health reform? –Depends on the election. –Depends on the quality of the political arguments made regarding the trade-offs to society of such an expansion in ‘entitlements’. –Yes, if there is the will for political compromise such as was demonstrated for the Education Act and Medicare Modernization Act. –No, if there is gridlock prior to 2008.

27. Reserve Slides

28. Health Plan Features Most Preferred

29. Results: Premium Sensitivity Employees are sensitive to out-of-pocket premiums, and surprisingly, employees with chronic conditions are more premium-sensitive If the CDHP raised its premium by 1% it would lose 4.6 % of healthy single enrollees and 5.4% of healthy families 1% premium boost would cause 6.9% of singles and 10.7% of families with chronic condition to leave the CDHP The results depend on 100% of the premium hike being passed along to the employee (i.e, defined contribution), as is the case for the UM

30. Results: Health Status and Other Employee Characteristics Employees and families with chronic conditions prefer the PPO, but otherwise, there is no evidence of adverse selection  Having a chronic condition is associated with a 3.2% increase in the probability of choosing PreferredOne vs. HealthPartners  Note that PreferredOne had the highest premiums ($189.51 for single coverage and $448.40 for family coverage per pay period), suggesting that the plan is experiencing adverse selection Higher income employees chose the CDHP or Choice Plus, suggesting these plans may evolve as favorites of the ‘well-to-do’ Older employees chose PreferredOne or Choice Plus