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This report was produced by the Advisory Council on Employee Welfare and
Pension Benefit Plans, which was created by ERISA to provide advice to the
Secretary of Labor. The contents of this report do not necessarily
represent the position of the Department of Labor.
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On
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November 7, 2003
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The ERISA Advisory Council, in a report dated November
14, 2001, studied the challenges to the U.S. employment-based health care
system. One of the fundamental conclusions of the Council at that time was,
that if designing a health care system, starting with a blank slate and
learning from the problems of the current system, a new system would be very
different from today's model. However, the report pointed out that designing
a new system would not be feasible from both a practical and political
perspective, and that the approach of the Council should be to consider how
to improve the current system and move forward.
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The defined contribution health and welfare plan model
was one of the alternative concepts reviewed by the working group in that
November 14, 2001 report.
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The term “defined contribution (DC) health plan
”,(1) in general, denotes a health plan in which the employer provides the
participant a contribution of a fixed dollar amount, as opposed to a fixed
benefit. In such a plan, any health care costs above the fixed dollar amount
are the responsibility of the participant.
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DC plans can take many forms, from a plan in which the
employer provides more dollars in the employee’s pay check that the
employee can use to purchase health coverage on the open market, to a plan
in which the employer provides a fixed dollar amount that can be spent by
the employee on one of a variety of health plans selected and maintained by
the employer. The role of the employer varies considerably in each of these
designs, ranging from merely a variant of current employment-based plans to
approaches in a completely different conceptual territory.
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The term defined benefit employment-based health plan, in
general, denotes a health plan in which the employer provides a determinable
benefit which may be in the form of a reimbursement to the covered plan
participant or a direct payment to providers or third-party insurers for the
cost of specified services. This benefit can be self-insured (employees’
medical expenses are paid for by the employer), fully insured (benefits are
paid through the direct payment of premiums to the insurance company by the
employer) or a combination thereof.(2)
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In the November 2001 report, the Council concluded that
defined contribution plans that eliminate the employer as intermediary would
likely not be as effective and cannot provide the same advantages (pooling,
corporate purchasing power, etc.) as a defined benefit employment-based
plan.
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Since 2001, as costs for health insurance products as
well as medical costs have continued to escalate, defined contribution
health and welfare plans have become increasingly popular as an alternative
form of health and welfare benefits offered by employers. In particular,
consumer-directed health plans, a hybrid type of defined contribution health
and welfare plan virtually unknown until a few years ago, are gaining
acceptance as an interesting alternative health care product offered to
employees. These consumer-directed health plans vary widely, but, generally,
the plans attempt to engage the participants more directly in the health
care purchasing decisions by making them aware of the costs and providing
them increased power to make decisions about their health care.
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In a consumer-directed plan, participants have more
financial responsibility for the health care choices they make and are more
involved in the selection of services and providers. Consumer-directed
health plans attempt to shift greater responsibility for the cost and
quality of services to the participant and away from the plan sponsor. A
typical consumer-directed plan design has a health care spending account
that the employer provides to the participant, and a high-deductible health
policy (see page 8 for alternatives in structuring consumer-directed health
care arrangements).
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The usage of consumer-directed health plans is on the
rise, rapidly gaining acceptance by employers and employees. Since these
plans have only been in existence for a few years, the Working Group felt it
is too early to provide valid comparative statistics on the potential for
these plans to impact health care costs and usage. Given their growing
popularity but relatively short time in existence, the working group
determined that it would be beneficial to provide the general public with
useful information on the workings of these plans as well as some points to
consider before adoption of or enrollment in such a plan. This report
provides general information on consumer-directed health plans as well as
insight and “lessons learned” from companies and service providers who
already have implemented these types of plans.
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The consumer-directed health care arrangement (CDHC) is an alternative
health care product that has come about solely as a response to rapidly
rising health care costs. According to an annual study by the Kaiser Family
Foundation and the Health Research Educational Trust, employers increasingly
passed along higher health care costs to employees in 2003 - a year that
marked the largest rise in health insurance premiums since 1990 and the
third consecutive year of double-digit premium hikes. Rapidly increasing
premiums have generated speculation that employers may move to new types of
health insurance arrangements in order to help control future costs. While
it is argued that the CDHC may not be the “silver bullet” to drastically
reduce health care costs, some employers and health care providers believe
it may be one alternative to help control costs.
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The idea behind the CDHC is that, if consumers are held financially
responsible for the health care choices they make, they will increase their
awareness of health care costs, and they will make cost savvy-choices for
health care, thereby reducing the costs for the employee and, ultimately,
the employer. This idea is also known as “health care consumerism”.
Consumerism is a movement to raise the employee’s awareness of cost and
quality, to eliminate waste and to reduce costs for discretionary care. It
promotes a more prudent use of services. For example, if consumers are
provided information regarding a generic alternative for a prescription,
they may choose the lower-priced generic drug that provides the same
benefits as the higher-priced brand name drug.
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In CDHC arrangements, incentives can be provided to employees to encourage
awareness about consumption and accountability for their health care
decisions. Both education and tools are provided to get consumers actively
engaged. The concept behind CDHC plans is to promote greater self-reliance
and use of self-service tools. CDHC plans attempt to encourage a healthier
lifestyle and provide cost-saving benefits with the ability to accumulate
savings for future health care needs. By providing the proper incentives,
information, skills and tools, it is hoped that consumers will make informed
decisions.
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A popular argument promoting CDHC arrangements is that participants actually
want to have greater purchasing power regarding their health care and will
welcome greater decision-making ability in the health care benefits offered
by the plan sponsor. A key factor in empowering participants with greater
decision-making ability is that participants will be given the proper level
of healthcare information from which to base their decisions. They will need
health care information from which to base their initial decisions upon
enrollment regarding personal spending account levels and deductibles. They
will also need health care information to make decisions regarding their
ongoing day-to-day decisions for health care.
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Since the Internal Revenue Service ruled in favor of health reimbursement
accounts - the funding mechanism for CDHC arrangements - the number of
companies offering these products has greatly increased. According to an
analysis from Forrester Research, Inc., consumer-directed health plans
currently make up less than 1 percent of the market. Bradford J. Holmes,
lead author of the analysis, told BNA August 18 he estimates that 500,000
people currently are enrolled in CDHC products. The analysis projects that
the number of enrollees will jump to 43 million and will account for 24
percent of the health insurance marketplace by 2010. According to Mercer
Human Resource Consulting, 30 percent of large employers say they are likely
to offer CDHC plans in the next two years. Several witness testified that
while large employers are starting to test the waters, small employers are
holding back with a wait-and-see attitude.
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Many forms of consumer-directed plans exist, and they are
usually offered as part of a group benefit plan. Typically included is a
health reimbursement arrangement (explained below), a high deductible plan
design, web-based tools for employee research on health issues and
providers, and other support features such as health care coaches and
disease management programs. CDHC arrangements focus on behavior
modification toward healthy lifestyles, preventive care and more personal
injury or disease monitoring, education and general participation.
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In June 2002, the Internal Revenue Service formally
recognized Health Reimbursement Arrangements (HRAs). An HRA is an
arrangement that (1) is financed or paid for solely by the employer, (2) is
not provided pursuant to an employee salary reduction election or under a
cafeteria plan and (3) reimburses generally only Code Section 213(d)(1)(A)
medical expenses (medical care includes amounts paid for diagnosis, cure,
mitigation, treatment or prevention of disease, or for the purpose of
affecting any structure or function of the body). The HRA is typically
offered in conjunction with a high deductible insurance product.
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The consumer-directed arrangement is a hybrid defined
contribution/defined benefit health and welfare plan because it incorporates
elements of both; benefits being paid out of individual participant accounts
as well as additional amounts at risk to be paid by the company once the HRA
is used up.
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Plans incorporating the use of an HRA are only one of
several new approaches in the market today. For example, some employers make
a fixed contribution to the employee, and the employee then chooses among an
array of products, with different design features, provider networks and
employee cost sharing.
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A key determinant in the success of the CDHC is the
ability of the participant to make informed decisions regarding initial
enrollment and ongoing day-to-day health care. Consumers need to be educated
regarding the terms of the plan, which can be complex depending on the
design. Companies will need to have the infrastructure, or outsource to an
outside service provider, to manage the education process regarding plan
terms and initial enrollment decisions. In addition, the availability of
useful health care data, which participants would need to make day-to-day
health care decisions, is still developing and somewhat uncertain. While
some insurers offer quality ratings of doctors and hospitals on their Web
sites, it does not yet appear that centralized depositories of standardized
health care information are available to the general public.
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While there are many variations of CDHCs, the following
illustrates the typical plan offerings.
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Health Reimbursement Account. A key component of the CDHC
is the health reimbursement account. Funded by employer contributions, these
personal spending accounts are set up for each employee who draws down on
the accounts to pay for their health care needs. The unused HRA may be
rolled over each year. While the HRA is normally set up to cover Code
Section 213 medical expenses, the definition of expenses covered can
potentially be tailored to suit plan sponsor/participant needs.
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Health Coverage Beyond the HRA Prior to Major Medical
Coverage. When the employee's personal HRA account is depleted, the employee
pays out-of-pocket medical expenses up to an annual deductible limit.
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Health Coverage Post Major Medical Coverage. When the
deductible is reached, a traditional major medical policy goes into effect.
In addition, an annual out-of-pocket limit on employee expenses may be
included.
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When setting up the plan, the employer must make an
assessment of the trade-offs regarding deductibles, premiums and HRA levels
based on the financial needs and the desired behavior of their employees.
For example, some employers are averse to the idea of first-dollar coverage
in the HRA if the funds aren’t depleted in the HRA by the end of the year
and may consequently choose to add a front-end deductible to the HRA.
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The employee oftentimes must make trade off decisions as
well regarding deductibles, premiums, and HRA levels based on their
individual needs and perceived health care risk. For example, if an employee
is relatively healthy with no known health care issues, he/she may choose a
higher deductible and lower monthly premium.
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The HRA may be offered in conjunction with a
cafeteria-type medical health care flexible spending account (FSA). In such
an arrangement, employee funds are directed to the FSA, while employer-only
funds are directed to the HRA. The availability of both a FSA and a HRA
expands the options for tax-favored funding of benefits and provides more
flexibility to the employee.
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From the perspective of a participant, the structure of
a CDHC plan is more complex than a traditional indemnity or PPO plan. An
effective CDHC plan would rely to a great extent on participants making
informed decisions. The basic assumption underlying these plans, as Joyce
Dubow from the AARP described in her testimony, is that when given
choices, participants will maximize and optimize their preferences and
needs.
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The decision-making process for a participant begins with
an evaluation of the initial enrollment choice. While 35% of employees with
health care coverage have only one plan offered to them by their employer,
according to “An Employers Guide to Patient-Directed Healthcare Benefits”,
included in the testimony of Ronald Bachman of PriceWaterhouseCoopers, the
remaining 65% must evaluate enrollment options which may include traditional
indemnity plans, Preferred Provider Organizations (PPO’s) and,
increasingly, a CDHC option. In the process of evaluating enrollment
options, participants must assess their future health care needs, and
determine which option provides the best fit for their particular
circumstances. The financial implications for employees are not clear-cut.
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Participants should be aware that in assessing future
health care needs, Dubow refers to an optimism bias, which may impact these
decisions. Dubow indicates, “Substantial evidence exists that people
consistently underestimate future personal risk…” As such, the Working
Group believes that participants must take care to recognize the potential
for an optimism bias in their decision-making process. The Working Group
also recommends that employers design enrollment information in a way, which
fully informs the participant of the advantages, disadvantages and potential
risks of their CDHC plan. This is particularly true when the CDHC plan
design is a new option for participants to consider, since most employees
are likely to be unfamiliar with the concept.
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There are a variety of models for CDHC arrangements. Some
plan designs are structured so that pricing is determined by choices a
participant makes before enrolling in the plans. In such a model, as
discussed in testimony, a participant must choose providers for numerous
(nineteen, as indicated in one example) different services prior to
enrolling in the plan, since the plan is priced based on the choices made.
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A participant in a CDHC plan, confronted with a
pocketbook spending decision, must evaluate service providers, therapies and
treatment options. Confronted with various options, the participant must
require enough information to make good choices, and realize that in
evaluating these choices, price information may be available but quality or
performance information may be lacking. Several witnesses cautioned that
participants may see higher cost sharing arrangements as a disincentive to
seek proper care or they may be less likely to comply with a physicians
recommended course of treatment, or more likely to defer regular exams.
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From a participant viewpoint, the out-of-pocket element
of CDHC plans, which appears to be essential to increasing participant
awareness of true health care costs, may appear to be unattractive. Also,
since the HRA account must be funded by the employer, the participants may
also feel that the money in the account is not their own, and therefore the
concept of spending it rather than saving it for future needs is less
significant. Unless an employee feels “ownership” of the account, the
concept of an educated health care consumer and a rationalization of health
care expenses, the driving concepts behind CDHC plans, may not be effective.
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CDHC arrangements do include features, which may be
particularly appealing to some participants. One of the potentially
attractive features of CDHC arrangements for participants is that the HRA is
often structured to provide first dollar coverage when it is needed, and for
care and/or treatments which the participant desires but which may be
excluded from coverage under the guidelines for other types of plans. Thus,
under certain CDHC arrangements, the HRA may be used for treatments such as
chiropractic services, acupuncture, homeopathic therapies or other
non-traditional therapies, which may not be covered under traditional plans.
A recent IRS ruling also permits HRA accounts to be used for
over-the-counter medicines.
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A second potentially attractive feature is that under an
HRA, a participant is generally permitted to rollover unused amounts for use
into the following year. Although there are no legal limits on how much may
be rolled over from year to year, some employers incorporate a limit in
their plan design. Balances may rollover to pay for future qualified medical
expenses without adverse tax consequences to employee. Participants must
note, however, that these accounts are currently not “funded” accounts
but are notional accounts. The disposition of the account upon termination
of participation in the CDHC option would be guided by the plan design, and
the participant should take note of these features before enrolling in such
a plan. The status of the notional account, should the employer declare
bankruptcy, may vary from plan to plan, or may be addressed by bankruptcy
courts.
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Notwithstanding the cautions listed above, the rollover
of unused HRA balances may be an attractive feature for many CDHC
participants. Depending on plan design, the funds may be used for medical
expenses after the participant has changed jobs, retired or become
unemployed. Distributions for qualified medical expenses are not counted as
taxable income to the participant, even if the distribution is from a former
employer.
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Several witnesses alluded to the notion that rolling-over
HRA balances could provide a funding mechanism for post-retirement health
care, which, in the opinion of the Working Group, would be a good thing. The
HRA is an unfunded notional account to which employee contributions cannot
be made under current tax law. Therefore, as discussed earlier, participants
may view the funds as the employer’s funds and not as their own funds, and
may be more likely to spend the amounts rather than conserve funds to roll
over for future expenses. The Working Group believes that permitting an
employee pre-tax contribution to the HRA might increase their attractiveness
and provide more options for participants; however, this raises a number of
tax issues that are beyond the Departments purview.
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We note that the Federal Employees Program is now
offering a CDHC option with an HRA, and that a maximum amount of $4,000 is
permitted in the HRA. One shortcoming of the Federal Program is that
participants may have an incentive to spend funds unwisely perhaps on
unnecessary goods or services, rather than lose the funds. The Working Group
believes that plan designs should avoid encouraging over-utilization of
health care resources through unnecessary use-it-or lose-it provisions.
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Additional potential issues and risks for participants
were identified in testimony as follows:
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Dissatisfaction for those participants
with chronic conditions;
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Cost shifting to the less healthy
employees
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Participants may have out-of-pocket
expenses that are difficult to budget for once HRA funds are exhausted;
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Participants may not want the
increased consumer role with decision-making responsibility;
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Participants may skip necessary and/or
preventive care in order to save money if preventive care is paid
through the HRA;
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Participants may not have adequate
sources from which to draw information.
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Participants may not be able to use
the available information due to inability to process information,
illiteracy or language barriers.
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An education component is a critical element of CDHC
arrangements. At their core, CDHC arrangements attempt to rationalize health
care expenses by shifting to the participants some part of the costs through
a cost-sharing arrangement. Critics of current health care arrangements
point out that if a doctor visit costs a participant $10 through a
co-payment, then the perception for the participant is that the visit only
cost $10, when in reality the cost was many times the out-of-pocket cost to
the participant. The goal of CDHC arrangements is to educate participants to
the true cost of health care, and encourage a rational selection of services
and providers through the use of information regarding costs, efficacy and
quality. All of the witnesses agreed that, at this point, there still needs
to be significant improvement in both the quality and quantity of
information.
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CDHC arrangements are presented to participants and their
families as offering more choice in the health care marketplace. Testimony
indicates that, from the employer perspective, the lynchpin for the
successful implementation and operation of CDHC health plans is the
widespread availability of accurate, relevant and understandable consumer
information regarding those choices (e.g., the quality and competence of
hospitals and providers). Until those sources of information are developed
and have a track record of success, employers, who have an interest in
healthy employees, may be reluctant to expose their employees to the
consequences of ill-informed choices.
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While participant education is critical to the approach
to health care, employers may not be willing to undertake costly
communication efforts unless they are satisfied that the tools to make those
efforts successful are reliable. In efficient markets, educated consumers
can be influential in shaping the market. Currently, however, an efficient
marketplace does not exist in the health care industry, so the extent to
which markets will become more responsive to consumer concerns is uncertain.
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Joyce Dubow indicates in her testimony that research
shows that consumers, who are engaged in their care, are part of the
decision-making process and help to determine the goals of their own care,
have better health outcomes. The success of the consumer-directed approach
rests on the basic assumption that if consumers are given financial
incentives, choices, and information to support their decisions, they will
take charge of their health care and make prudent choices. Being in charge
implies more than just having the right information. It means understanding
and accepting a higher level of responsibility and possessing the knowledge,
skills, and confidence to take this on. Dubow indicates that there is no
question that the health care system would be more appropriately used and
individuals better off if they were more activated. The key question is,
what will it take to activate more consumers, and what will happen to those
who do not become activated?
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The difficulty of the decision tasks required of
consumers and the skills needed to manage within these plans may be beyond
the level of effort many consumers are willing to expend, and may be beyond
the ability of others. If this is the case, many consumers may not make the
types of informed choices that are necessary to achieve either individual or
policy goals. The amount of effort, skill and knowledge needed to make
choices could discourage voluntary enrollment in these plans by those with
low decision and literacy skills, possibly leading to an important source of
selection bias.
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Making an initial enrollment choice when offered a
variety of health care arrangements involves making trade-offs concerning
deductibles, premiums, and personal spending accounts. Does the individual
want more discretionary dollars for spending on a broad range of health care
and health products, a lower monthly premium cost, or a lower level of
financial risk? If a consumer does not anticipate needing much care, then
having a higher deductible and a lower monthly premium might be a sensible
choice.
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These trade-offs require judgments about the likelihood
and extent of care needed in the coming year. Research suggests that
individuals consistently underestimate personal risk. This is particularly
likely when hazards are perceived as low in probability, when individuals
have little personal experience with the risk, or when the risk is judged to
be controllable by personal action. This optimism bias in risk judgments, as
discussed in the Dubow testimony, is robust and widespread. Thus, there is
likely to be a strong tendency for those who are in good health to assume
the best and make choices that may not turn out to support their best
financial or health interests. Those who use health care services often may
be better able to fine-tune their needs as a result of their experiences.
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There are also day-to-day decisions about which enrollees
need to make educated decisions that have financial and health consequences.
These include decisions about:
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When to seek care,
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Selecting providers,
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Spending the personal spending account
versus saving funds for a future serious illness, and
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Seeking care once the account is
exhausted.
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Randy Johnson of Motorola, representing the ERISA
Industry Committee, discussed a promising venture related to efforts to
bring useful information to health care consumers. The effort is the “Consumer
Purchaser Disclosure Project”. The project is funded by the Robert Woods
Johnson Foundation, and involves both purchasers, purchaser coalitions and
consumer groups, including the AFL-CIO and AARP. The goal of the project is
that, by 2007, consumers will be able to select their hospital, physicians,
physician groups or integrated delivery system and treatment programs based
on publicly-reported, nationally standardized measures of quality and
consumer experience, equity and efficiency. As described by Mr. Johnson,
national standards are essential as is commonality across markets, so that
there can be credibility for those standards. Randy Johnson testified that
he estimated consumer directed health care designs could potentially result
in a 50% increase in quality health care and a 40% decrease in health care
costs.
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For the third consecutive year, health care costs for
employers are rising at double-digit rates. In the words of witness Ron
Bachman, “health care costs represent the greatest cost pressure facing
corporate America today”, adding that not only is it one of the highest
costs, but it is the least appreciated benefit provided to employees.
Employers who have attempted to control costs by negotiating with vendors,
improving administrative efficiency and shifting costs to employees are
looking at CDHC arrangements as an alternative to traditional plans.
Employers appear willing to try alternatives such as CDHC arrangements in an
attempt to control costs, rationalize health care benefits and develop an
appreciation for the benefit dollars they are spending.
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Employer-provided plans cover approximately 67% of the
population. As indicated by several witnesses, employers have a vested
interest in healthy employees. For employers, health care issues impact
productivity, absenteeism, disability, worker’s compensation and other
issues. Under the current system, employers face not only the challenge
presented by the rising cost of health care benefits, but also a complex
administrative burden with health care programs, and a perceived need to
offer employees more choice.
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Offering additional and innovative health care choices
may increase an employer’s administrative burden; therefore it is
important that each employer carefully consider the type of plan design to
offer. As discussed earlier, CDHC plans vary widely. Some of the issues an
employer should consider to determine the type of CDHC arrangement, which
would be appropriate for their particular situation, include:
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The number of employees,
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The profile of covered workforce,
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The Company’s philosophy regarding
benefits, overall business objectives, and Options available in the
Company’s particular geographic area.
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Small employers who do not currently offer healthcare
benefits may find that CDHC plan arrangements offer a viable option.
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In offering a CDHC plan, employers must also develop a
strategy for effectively communicating the potential risks and benefits for
participants in CDHC arrangements, develop a strategy for ongoing employee
education and address transition issues. The employer has fiduciary
responsibility to provide accurate and complete information to participants.
Providing accurate and complete information allows the participants, to make
an informed choice when the plan is offered and may avert problems down the
road. Participants will have to make decisions that they have not made
before, requiring the employer to address and manage increased employee
information needs.
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Employers must be aware of the possibility that those
participants who will opt for the CDHC plan will be those without chronic
health care needs, the healthiest employees. This concept is known as
adverse selection. If an employer offers several health care options, it is
possible that the healthiest employees will choose the option that allows
them to accrue funds for future use in an account. As a result, those
employees with the greatest health care costs, for whom a CDHC arrangement
would not make sense, would likely stay in traditional plans, potentially
causing higher premiums for those options.
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Employers must also be aware of the COBRA issues with
CDHC plans, especially the treatment of the HRA. The disposition of the
assets upon termination of employment also must be addressed, as does
treatment of the account in divorce cases. Arrangements that distribute
unused HRA amounts at termination as a death benefit or as a severance
payment will not qualify as an HRA. All benefits received under the HRA are
taxable if any person has the right to receive cash or any other taxable or
non-taxable benefit under the HRA.
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Employers need to be aware that offering CDHC plans
creates additional fiduciary responsibilities which may be more difficult to
satisfy given the information and educational issues involved in these
plans. The law is not yet fully developed in this area, which creates
uncertainty.
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In addition, there could be possible accounting issues
for employers relating to whether or not a liability should be recorded for
notional account balances due employees, possibly creating further
uncertainty.
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The development of Consumer-Directed Health Care plans
has the potential to impact the overall health care system. While CDHC
arrangements may not ultimately be the “silver bullet” that some may
hope they are as a vehicle for controlling health care costs, they do, as
Phyllis Borzi, Of Counsel, O’Donoghue & O’Donoghue and Research
Professor of Health Policy, School of Public Health and Health Services, The
George Washington University Medical Center, indicates in her testimony,
have a potential to rearrange the incentives somewhat in the health care
system. Employees eventually pay the cost for health care, either directly
through higher premiums and cost sharing, or through lower wages offsetting
higher premiums. There is, therefore, an incentive for employees to lower
true health care costs, and rationalize health care spending. Engaging the
consumer in health care decisions through more choice and providing more
information should lead to better decision-making by participants.
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A number of witnesses testified as to the concentration
of costs in the current health care system within those who are either
chronically ill or suffer a catastrophic illness. According to a recent
study, in any given year, 15% of the participants generate 78% of the costs.
One of the concerns around CDHC arrangements is the issue of adverse
selection and the potential for concentration of the chronically ill in
traditional indemnity plans, which would drive up costs for those plans. As
a consequence, traditional plans could experience a death spiral where,
because of higher and higher premiums, such plans are no longer offered.
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While traditional health care plans are based on a
defined benefit model, CDHC plans are a mix of both the defined benefit
model and a defined contribution model. The HRA represents the defined
contribution element. The defined benefit attributes include the l indemnity
coverage above the threshold level and may include other plan features such
as first dollar coverage but this in not universal.
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Several witnesses testified that CDHC plans, as they are
generally structured, have positive attributes but expressed concern that,
at the extreme, a CDHC plan could be composed entirely of an employer
contribution to a health care account, with all further insurance, purchase,
decision-making and spending issues decided and negotiated by the employee
participant. Such an approach would rely solely on a defined contribution
model, with individual ownership and selection of health insurance. Some
proposals also endorse the replacement of the current employer tax exclusion
for health care benefits with individual tax credits.
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The Working Group believes that a move toward a complete
defined contribution model for health care, including individual ownership
and selection of health insurance, would be counterproductive. The Working
Group shares the concern that such a model could increase overall health
care costs substantially, as employers are typically more capable and
proficient at screening options, negotiating discounts and administering
plans than would be a typical individual participant on their own.
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The advent of CDHC plans raises a number of other public
policy considerations. The unfunded nature of the accounts presents
challenges in determining policy toward portability of notional account
balances as well as the treatment of notional account balances in bankruptcy
cases. Potential accounting issues are raised to the extent that financial
statements accurately present a liability for notional accounts while
healthcare expenses are expensed when incurred (as opposed to when the
notional account is created). An additional issue for both employers and
participants is that under current law employers are able to cancel
accumulated health care account balances.
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One of the main public policy issues in the health care
area today is the large and increasing number of number of citizens without
health insurance. Through the current employment-based system, approximately
two-thirds of non-elderly Americans are covered for medical expenses by an
employer-provided plan. According to a recent study by the “U.S. Census
Bureau, more than approximately 43 million Americans lacked health insurance
in 2002. Most of the uninsured are employed. 78% of the uninsured are
full-time employees, and 84% are in families headed by someone who is
employed.
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It is unclear whether an increasing trend toward CDHC
arrangements would have an impact on the uninsured. To the extent that such
plans offer options and opportunities to small employers who otherwise would
not offer a health care benefit, the trend could have the potential to
increase healthcare availability. On the other hand, should CDHC plans gain
greater acceptance and usage, the potential exists for the consequences of
adverse selection to shift health care costs to the unhealthy, which,
remaining in traditional plans, may cause premiums for those plans to
increase and become unaffordable for the employee to purchase or the
employer to maintain. In such a case, the availability of health care may
decrease.
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What Employees Should Consider Regarding Enrollment In A CDHC Plans
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-
Consumer-Directed Health Care Plans are new and differ
in meaningful ways from traditional health care plans. It is important
that employees carefully review the plan description and information
distributed by the employer, and develop an understanding of the plan.
-
Employees must recognize that under most CDHC
arrangements, a higher level of involvement concerning their health care
choices will be required. This involvement will require the employee to
seek more information and become more educated regarding doctors,
providers, and courses of treatment. The employee must determine if this
information is readily available, understandable, reliable and
objective.
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If offered in conjunction with a flexible spending
account, the employee must consider the implications of spending the
funds in the FSA or HRA. Current IRS rules indicate that unless
otherwise indicated in the plan, the HRA account must be tapped first.
FSA funds can’t be rolled over.
-
Employees should consider consequences to the HRA
coverage should they elect to move to another medical option in
subsequent years. It is important for the employee to fully understand
the disposition of HRA account balances upon separation, and to plan
accordingly.
-
Participants should be aware that there appears to be
an optimism bias among individuals when evaluating future risk,
especially where personal behavior may impact those risks. Employees
should consider the financial impact of a worst-case scenario – for
example a catastrophic illness – when choosing the CDHC arrangement.
-
CDHC arrangements potentially provide for a broader
coverage of health care expenses for some employees, through coverage
for expenses, which may not be covered under a traditional plan.
-
If so structured, a CDHC plan can provide the means to
accumulate funds in the HRA through the rollover of unused funds from
year to year. Funds may also be accumulated for post-employment/retiree
health care expenses. This feature provides flexibility in budgeting and
the potential to pre-fund retiree health care expenses.
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What Employers Should Consider Before Offering A CDHC Plan
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-
CDHC plans offer the opportunity for employers to
engage their employees in health care decisions, provide choices, which
give more flexibility to employees, and illuminate the value of health
care benefit dollars. For these plans to be successful at rationalizing
and perhaps controlling costs, an education component is essential.
-
As a new plan design, CDHC arrangements offered as an
option may increase administrative burdens and expenses.
-
Employers must be mindful of the potential impact of
adverse selection when structuring the plan. Having a strategy to manage
the impact of adverse selection at the outset may avert additional
problems later.
-
CDHC plans allow employers to discontinue their roles
as arbiters of coverage and medical necessity by transferring levels of
responsibility to employees and health care providers. This may lower
liability risks and legal exposure in this area.
-
Employers must develop a strategy for managing and
delivering information and resources to employees in CDHC plans, who
will be making healthcare choices which were not available under other
plans.
-
CDHC plans currently in the marketplace vary widely. An
employer must evaluate their particular circumstances, those of their
employees and local markets to determine which type of CDHC arrangement
makes most sense in their particular situation.
-
In structuring a CDHC plan, employers will need to
develop different, explicit contribution levels for employees with
different requirements related to marital status, family status,
location, etc. These subsidies exist today primarily behind the scenes,
so developing a coherent approach to the issue and anticipating employee
perceptions going in will avoid issues later.
-
The extent to which CDHC plans produce savings in
medical costs is not yet clear. In some instances, the early savings
being reported appear to be largely due to savings in prescription drug
benefit costs. Savings coming from better use of prescription drugs
benefits may be achievable through changes in traditional benefit
delivery systems without the CDHC component.
-
The HRA contribution may represent employer
expenditures to those employees who need it least; the 80% of the plan
participants who comprise only 20% of the annual cost of the plan.
-
Employers need to be aware that offering CDHC plans
creates additional fiduciary responsibilities which may be more
difficult to satisfy given the information and educational issues
involved in these plans. The law is not yet fully developed in this area
and that creates uncertainty for employers.
-
There may be possible accounting issues for employers
relating to whether or not a liability should be recorded for notional
account balances due employees, which could create an additional
uncertainly for employers.
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CDHC options for group health plans are new models for
providing employee health coverage. The usage of CDHC options is on the rise
and rapidly gaining acceptance by employers and employees. While several
witnesses have testified that CDHCs have potential to favorably impact
health care costs and benefits, the Working Group believes it is too early
to comment since they have only been in existence for a few years.
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The Working Group recommends the following with respect
to CDHC options in group health plans:
-
Employers should take care to design
enrollment information, which will fully inform the participant of the
advantages, disadvantages and potential risks of the CDHC plan.
-
CDHC plan designs that provide for
rollovers of unused HRA balances for future medical expenses should be
encouraged. This type of design also discourages excess and unnecessary
health care consumption, which results from end-of year use it or lose
it provisions.
-
A move to a complete defined
contribution model including individual negotiation, selection and
ownership of personal insurance policies would be counter productive.
Employers are typically more capable and proficient at screening through
options, negotiating discounts and administering health care plans.
-
Employers who offer CDHCs face
additional fiduciary issues relating to providing information and
educational materials to plan participants. The Department should
thoroughly review and issue formal guidance on the fiduciary
responsibilities facing employers who offer a CDHC option.
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The Working Group also believes that CDHC plans could
have a positive impact on health care benefits by providing the possibility
for smaller companies to provide coverage through CDHC plans, whereas
otherwise they would have chosen not to provide health care benefits (or
chosen to reduce previous levels of benefits.
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Summary of Testimony of Ronald E. Bachman
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Mr. Bachman testified that the rapid rising costs of
health care over the past several years has really pushed the health care
cost issue up to the CEO level at companies to find a solution. It is not
longer just a “VP of HR” issue. The healthcare costs represent the
greatest cost pressure facing Corporate America today. It is also the least
appreciated benefit. CEOs are looking for answers on how to manage costs as
well as provide employees with greater appreciation of the benefit.
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Consumerism and aspects of the consumer approach are
taking hold in the marketplace. This is also known as consumer-driven.
Patients have lost control and are frustrated. They don’t understand
health care because there is not much transparency in the system and managed
care is not controlling costs. Consumerism means involving planned
participants in health and healthcare decisions. It includes information and
decision support tools combined with financial rewards, incentives and other
benefits that encourage personal involvement in altering health and
healthcare purchasing behaviors. The idea behind consumerism is to change
behavior to reduce costs. Studies show that individuals are more interested,
more prepared and more capable of getting involved in areas like healthcare
than anyone gives them credit for. The biggest resistance is multi-language
problems.
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Consumer-driven health care has been picked up as a
possible answer to frustrations in the market place on behalf of the CEO and
employees. Early offerings in the consumer-driven health line have really
only been in place for 1-2 years and represent offerings of mainly Definity
and Lumenos. Only recently have the major carriers been introduction
products. Now Aetna, United, Cigna all have major product lines in the
marketplace.
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Quality information on health care is developing rapidly.
In the future, there will be more information on consumer quality rather
than clinical quality. Most vendors are developing new systems to get
quality information out there for their participants.
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Bachman recommends a consumer driven health care plan
that has preventive care coverage at 100% with a health care reimbursement
account with some type of catastrophic coverage added. With this type of
plan, you get first dollar coverage for items the participant is personally
interested in. You can then tailor the plan to get the behaviors from
employees that the employer is interested in.
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Bachman recommends legislation to be modified to allow
varying HRA amounts with different employee contributions. Also, the
definition of qualified medical expenses needs to be clarified. Also, being
able to get an immediate tax deduction for funding the HRA would be helpful.
He also would like to see the creation of a zero balance HRA created on PPO
plans as they exist today. There are a lot of other creative uses.
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Summary of Testimony of Jon Gabel
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Consumer-driven health care is a result of the managed
care backlash and the reemergence of health care inflation. The managed care
backlash has reduced the use of gatekeepers and there is not a lot of
medical management.
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Defined contribution refers to employer contribution
formula. In pure defined contribution plans the employer cashes out of the
health benefits business and offers a managed competition model of fixed
absolute contributions for health insurance. Consumer driven health care
refers to plan design and empowers the stakeholder to improve value. Benefit
consultants drive these new models. The common elements of consumer-driven
products are increasing financial risk for consumers; increase choice of
providers and/or benefit design, and use of e-health insurance medical
information products. There are three models; personal spending plans,
personalized plans, and customized plans. The upgrade is a tiered network.
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Case for consumer-driven health care:
-
New strategy needed due to political
failure of managed care
-
Cost-sharing may prevent consumers
from viewing cost control as taking away benefits
-
Cost-sharing reduces use of services
-
Cost-sharing does not reduce health
status for healthy people
-
More choice is associated with better
satisfaction
-
Internet provides tools to empower
knowledge
-
Some insurer-based plans will increase
pooling
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Case against consumer-driven health care:
-
Cost-sharing impairs access to care
for low-income populations, is a tax on sick persons, impairs health
status for some chronic conditions
-
Plans less able to secure discounts
-
Could raise administrative expenses
-
Who will hold providers accountable
for quality of health care
-
Breaks down risk pools
-
Need more rather than less
coordination in health care especially for chronic care.
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Key issues:
-
Will consumers use the web tools?
-
Will it really control costs?
-
How will it affect access to care?
-
Selection bias
-
Legal and legislative issues
-
Quality of care
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Humana used its Louisville employees as test site for
their HRA product. In the first year, 31% of participants had no claims
costs. 18% exceeded the $500 use it or lose it spending account. 5% exceeded
the deductible. Claims expense fell 30% in first year.
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Most employers will see 10% to 25% migration to CDHPs if
using a flat contribution strategy. Some employees will always want a
traditional plan and will be willing to pay for it.
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Lessons learned:
-
Low utilizers and higher income
employees more likely to enroll in CDHP.
-
Lower income more willing to pay more
premiums for better coverage
-
Adverse selection is a risk for
traditional plans
-
Positive selection will occur in CDHPs
-
Keep risk pool together and price for
adverse selections
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20% of largest employers are offering high-deductible
plans and most have HRAs. At best, CDHC could be competition for managed
care. At worst, CDHC could transfer costs from healthy to sick people.
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Summary of Testimony of Paul Fronstin
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EBRI is a private, nonprofit, nonpartisan public policy
research organization based in Washington, DC, which is committed to the
accurate statistical analysis of economic security issues. Through its
research, EBRI strives to contribute to formulating effective and
responsible health and retirement policies, but does not lobby or advocate
specific policy solutions.
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Mr. Fronstin noted that the titles “defined
contribution” and “consumer-driven” are used interchangeably to
describe a wide range of approaches to designing employer-provided health
care plans to give employees more incentive to control the cost of their
health care and to reduce the amount and volatility of employer cost of
these benefits by shifting more costs to employees. The most common new
model combines a high-deductible health plan with a health reimbursement
arrangement (“HRA”). Typically, the HRA provides coverage for an initial
amount of out-of-pocket and deductible expenses under the plan. The employee
must pay the difference between the HRA coverage and the plan’s total
deductible out of the employee’s pocket (the “deductible gap”).
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Employers have significant flexibility in determining the
amount provided in the HRA, the level of the plan deductible, the
comprehensive coverage provided by the plan, the services that count toward
the deductible, and the services that can be reimbursed from the HRA, all of
which control the deductible gap. The employer also decides whether an
unused balance in the HRA can be rolled over to the following year, and any
limits on HRA balances that can be rolled over or accumulated.
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HRAs can be set up as funded accounts, but are most
commonly only notional arrangements that exist on paper. An employee’s HRA
“balance” is adjusted whenever an expense is reimbursed to the employee.
The notional nature of most HRAs puts the employee at risk if the employer
goes out of business, because the employee would lose any current or
accumulated amounts in the HRA.
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HRA balances accumulate tax-free as long as they remain
employer-provided funds and are paid out only for qualified medical
expenses. Distributions from an HRA for qualified medical expenses are
tax-free even if made to a former employee. HRAs can also “earn”
interest, again at the discretion of the employer, and any interest “earned”
is also tax-free as long as it is distributed only to pay for qualified
medical expenses.
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Mr. Fronstin noted that allowing rollovers of unused HRA
balances could act as a disincentive for employees to use HRA funds for
preventive health care services. Limiting the amount that an employee is
permitted to rollover can encourage an employee to use current year HRA
funds for preventive health care services.
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Mr. Fronstin indicated that the amount employers annually
allocate to employees’ HRAs varies widely, and there is no significant
survey data at this time on this question. He noted that some employers link
the amount allocated to an employee’s HRA each year with the type of
health care option the employee elects under the employer’s group health
plan.
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Healthy employees benefit from HRAs more than unhealthy
employees, because healthy employees can accumulate an HRA balance to be
used for a catastrophic event. However, unhealthy employees may exhaust
their HRA each year and incur more total out-of-pocket expenses than under a
more traditional health plan design. Lower-income employees with health
conditions are the most adversely affected by the high-deductible/HRA
combination.
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An employer can permit rolled over HRA balances to be
used for retiree medical expenses. Employers are also creating retiree
medical accounts (“RMA”), to be used exclusively for post-employment
health care costs. RMAs are also typically notional accounts. RMAs balances
can be established based on years of service, age and years of service, or a
flat dollar amount. The advantage for an employer is that the employer’s
retiree health care cost is a fixed dollar amount. However, an EBRI survey
shows that the gap between potential HRA/RMA accumulations and the projected
cost of retiree health care is “depressing,” indicating that retirees
bear the financial burden for retiree health care once HRA/RMA accumulations
are exhausted.
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According to Mr. Fronstin, one of the greatest challenges
facing an employer who adopts HRAs or RMAs, or both, is to change how
employees and retirees think of the balances in their accounts. Employees
and retirees still generally think of amounts in their accounts as employer
money, not as their money, and do not spend those amounts as carefully as
they would spend their own money.
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Summary of Testimony of Raylana Anderson
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SHRM represents more than 175,000 human resource
professionals, and serves the needs of those HR professionals by providing
the most essential and comprehensive set of resources available. SHRM also
advances the human resource profession by ensuring that HR is an essential
and effective partner in developing and executing organizational strategy.
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Ms. Anderson stated that health care costs are not only
an HR issue, but are also a CEO and CFO issue because of the significant
employer costs involved. She also indicated that large employers must lead
the health care market in the area of defined contribution and
consumer-directed health care plans. Once large employers develop models,
insurance carriers will be able to offer the same or substantially similar
models to smaller employers. Also, it is difficult for small and medium
sized employers to obtain data on health care use in order to make effective
plan design changes, and these employers rely on patterns and trends
designed and tested by large employers who have access to useful data.
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Ms. Anderson noted that better information on health care
providers and health care costs is needed by both employers and employees in
order for employers and employees to become informed health care consumers
and make informed decisions on plan design and effective and efficient use
of plan benefits. An employee cannot make the same informed decision about
obtaining health care, as the employee makes about a significant purchase of
any consumer good because the comparative data is not available. In the
absence of information about total costs and comparative data, an employee
thinks a physician office visit only “costs” the $10 or $20 co-pay that
the employee pays out of his or her pocket, rather than the total cost of
the office visit paid by the employee and the plan combined.
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Health reimbursement accounts (“HRAs”) are one
element of health care plan designs that give employees a fixed amount of
employer funds to use tax-free for pre-approved health care expenses. These
plan designs are intended to make employees responsible for their health
care decisions and related expenditures. The HRA provides the first level of
coverage for health care expenses. The employee then has to pay for a “bridge”
amount between the HRA limit and the plan’s out-of-pocket or deductible
maximum. Health care expenses in excess of the bridge amount are paid at a
specific percentage (usually 80% to 100%) under the plan.
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Employer cost savings from defined contribution health
plan designs are already reported by employers including Budget Group, Inc.,
and Humana, Inc. Budget has reported a cultural shift in employees who
participate in its defined contribution plan; those employees ask more
questions about their health care costs. For both of these employers,
extensive and thorough communication has been essential in encouraging
employees to elect the defined contribution option and to use the HRAs
effectively.
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In order for defined contribution plans to achieve their
cost-saving goals, employees need information and education that enables
employees to effectively and efficiently manage their health care.
Information, such as information on conditions and illnesses and options and
costs for treatment, can be provided through internet-based tools if
employees are given the skills needed to use these tools. Employees also
need to be educated to change their relationships with their health care
providers, and to apply consumer skills to those relationships, e.g.,
inquiring about fees and costs upfront, requesting information on optional
treatments, and even shopping around for lower fees.
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Ms. Anderson recommended that a new “system” of
defined contribution plan accounts be adopted to replace the overlapping and
confusing distinctions between HRAs, medical expense flexible savings
accounts, and medical savings accounts. The new system should create an
opportunity for all individuals, regardless of income or employment status,
to save for future health care costs on a tax-favored basis. The health
savings accounts proposed by Representative Thomas of California is a good
starting point, but imposes limits on account contributions based on income.
The new system should address employee concerns with the current “use it
or lose it” rule applied to medical expense flexible spending accounts
under a proposed Treasury Regulation, by permitting rollovers or cash-outs
of unused employee contributions. Similarly, the new system should address
the requirement, imposed by the same proposed Treasury Regulation, that an
employer must reimburse expenses to an employee before the employee has
contributed the amount to be reimbursed.
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New technology such as debit cards can enable employees
to more easily access funds in their HRAs and medical expense flexible
spending accounts. This increased access can assist employees in becoming
more informed consumers. However, employers must find ways to ensure that
withdrawals made by debit cards are limited to reimbursements of expenses
eligible for reimbursement.
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Ms. Anderson advised against creating a federal agency
similar to the PBGC to protect amounts in employees’ HRAs if an employer
becomes insolvent, preferring that the market handle this situation. If HRAs
become portable, government protection may not be necessary.
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Ms. Anderson indicated that small and medium size
employers are not rushing into defined contribution plan designs for two
primary reasons. First, employees of these employers do not have the
information they need to understand and appropriately use this type of plan.
Second, employers have heard that defined contribution plans can help
control costs, but they are waiting for the market to make these plan
designs widely available. Both employees and employers need data to make the
choices necessary for best use of the defined contribution plan model.
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Summary of Testimony of Phyllis C. Borzi
|
Ms. Borzi testified that the healthcare system is a mess.
It is in flux and the healthcare costs have resumed their upward spiral
after a short period when they seemed to stabilize which affects every one
including the employer. There is concern about the costs to employers in a
voluntary employee benefit system.
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Many have termed consumer directed health care as the
silver bullet for health care costs. Many thought that managed care was also
the silver bullet. But employees became dissatisfied with the tightly
managed care programs that employers first moved to. Costs increased as
employers moved to programs with more choices.
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Consumer directed health care plans are being sold to
employers as a way to reduce costs. Employees are not buying them. There are
no employee groups that are interested in these products.
|
If consumers have more choice and more information, they
will make better decisions. We should move quickly on providing more
information to consumers…that is a good by-product of these new consumer
directed plans.
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But employees have concerns with the consumer directed
products that are on the market currently. The biggest concern is that
employees are concerned about a cut back in benefits. Employees will see a
cut back in the amount of coverage for their health care. There will be a
gap in coverage above a certain level. Employers will try to convince
participants that this new plan will provide more choice but the fact of the
matter is that you are dis-insuring employees to a certain extent. You may
also have employees that don’t choose the right coverage because they have
not been sick in the past. These employees are at risk greater than before.
Employees will be confused about this new three-tier system and the choices
they have to make. Also, employees will have a difficult time getting
information to make their decisions. Health care is local and not national
and providing accurate timely health care information to make choices has
been limited in the past. I am also concerned about full replacement plans
and adverse selection.
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The HRA designs give people the ability to tailor the
benefit in a way that more reflects their personal medical needs. On the
other hand it goes back to the old fee-for-service system where people
decided what they needed and they went and spent the money on it and had a
third party pay for it. Just the fact that it’s a 213(d) medical expense
doesn’t mean it is a necessary medical expense.
|
Congress could look at the MSA, FSA and HRA rules and
make them consistent for each. The “use it or lose it” issue and “rollover”
issues are important. Rollovers are great from an employee standpoint but
not from an employer standpoint. But the problem is that most HRAs are not
funded. The best thing about these HRAs is that they can be designed to suit
an employer’s needs.
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Summary of Testimony of Joyce Dubow
|
Ms. Dubow testified that the move has been made from
managed care to cost shifting with respect to higher cost sharing to these
consumer-driven plans always looking for a silver bullet. Employers are
trying to shed responsibility for the increase health expenditures that they
are incurring. They are pushing them off to consumers who are being asked to
bear more responsibility for cost and quality.
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There are many features of consumer directed plans but
they all offer more choices with respect to cost sharing and benefit levels.
They rely on consumers to be well informed and pay a central role with
reliance on the web. The objective is to shift more cost and responsibility
to the consumer.
|
The advantage is that the consumers to get more choices.
There is a potential to save as a consumer if you are healthy.
|
The advantage to the employer is lower cost.
|
Consumers will have to make initial enrollment choices,
and day-to-day decisions on when to use HRS. The stakes are higher is they
make a bad choice. Thus, they need to understand the implications of their
choices for their future health needs. People typically underestimate future
risk.
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You also need to have information regarding doctors etc.
and that information is not yet out there. We also don’t yet know if
consumers will be able to research and make good decisions regarding medical
care. The information is not available and consumers may not have capacity
to process the information due to a number of reasons (e.g. language
barrier, illiteracy, intellect, desire). Also, this information is costly.
Will employers be willing to spend the money on providing this information?
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Summary of Testimony of Randall Johnson
|
Mr. Johnson testified that health care costs are increasing 15%. Cost of poor quality represents up to 30% of expenditures. Provider and treatment selection is a blind process. We should care because status quo is unacceptably hazardous. Caregiver selections are a life or death situation. Greater consumer responsibility requires adequate information. The market is failing to assure excellence by hospitals and doctors. The focus for the future should be to reengineer the health care system. We recommend a tax deduction for all who purchase their own coverage. There should be changes in the tax code to encourage workers to fund for their retiree medical coverage. Medicare should be reformed to include a comprehensive drug program. We should identify new quality cost effective delivery systems. The Consumer Purchaser Disclosure Group is project sponsored by RWJF with many participating organizations. The goal is that by 1/1/07 americans will be able to select health care providers and treatments based on public reporting of nationally standardized measures for quality, experience, equity and efficiency. National standards are essential for comparability, credibility, understandability, and improved quality.
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Funding for future medical care could occur with an
individual medical account established with contributions and/or transfers
on a pre-tax basis funded through rollovers or tax credits. Questions for
the future include; who should have primary responsibility for health care
coverage? Should individuals be required to have coverage? Should financial
planning and health education happen in high school?
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Summary of Testimony of John Young
|
Mr. Young testified that employers are facing sustained
double-digit cost inflation (14% for 2003). Health care costs are projected
to nearly double by 2011. Health insurance premium increases far out pace
other indicators. CFOs are facing a decision to cost shift to employees or
take away benefits. Health cost drivers include hare and technological
advances, increased chronic conditions, aging Americans, increased consumer
demand, drug costs etc. Defined contribution plans have been around a long
time and represent your classic cafeteria plan with a medical FSA. Pure
defined contribution health care plans are generally not feasible. Consumer
directed health care plans are based on individual repponsi9lbity. They
include a health reimbursement account, a high deductible group health plan,
disease management, active employee involvement, medical library, etc.
Health care consumerism aims to transform the employee into a responsible
consumer from passive participant to active consumers. With incentives,
information, skills and tools that will enable them to get their health care
needs and expectations met, consumers will make informed choices. There are
significant savings when people care about health care consumption. Definity’s
Health CDHC model includes a personal care account (HRA), health coverage
with member responsibility for balance of deductible and tools and resources
for participant use. There are many variations of CDHC model. Each model
should be tailored to a companies needs. The best practice is to give
employees choice. Definity's average renewal rate was flat. Definity’s
health tools and resources include my care account, medical library,
personal health tools, research provider, healthcare prices, on-line
handbook and telephone nurse line.
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Pros for employees:
|
Cons for employees:
-
More accountability
-
May have more out of pocket
-
May have to diet or exercise
-
Have to change from entitlement
attitude
-
May not have sources for health
information
|
Pros for employers:
|
Cons for employers:
-
More involvement in plan design
-
Limited markets for insured products
-
HR disruption
-
Care may be delays
-
Total replacement seen as taking away
|
May result in more employers being able to offer retiree
plans. We urge legislation for rollovers or consolidate all accounts into
one (FSA, MSA etc). Treat partners, sole proprietors, 2% shareholders and
individual purchasers same as group plan participants under tax code for
health care purchasing.
|
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Summary of Testimony of Greg M. Scandlen
|
Mr. Scandlen testified that the essential problem in
health care is that third-party payment leads to excess consumptions which
leads to runaway costs which lead to third-party rationing which leads to
limited supply of services, which leads to consumer discontent which leads
to governmental interference. 2/3 of the US population says that the US is
not spending enough on health care. There is a coming revolution in health
care delivery with 800 new drugs in the pipeline and new medical treatments.
There are also new services (facilities, information and customization). The
historical health care system was the Blue Cross model with an industrial
age structure that was provider no patient based. Protecting the hapless
patient (e.g. tax code and regulations) may be an obstacle to reform. New
financing mechanisms to empower the patient; balance insurance and direct
pay, make patient care central, true indemnity, personal and portable,
web-enabled information, agency, and ability to merge resources. The
milestones of reform include many governmental actions such as expand MSAs
and HRAs, allow FSA rollovers, tax credits, roll-back regulations,
association health plans, malpractice reform and the modernization of
Medicaid and Medicare. The milestones of reform also include private sector
actions such as the implementation of MSA, HRAs, and FSAs, defined
contribution health type plans, information patient supports, physician
refuseniks, and individual market improvements. HRAs began in the private
sector and were inspired by the MSA and collapse of managed care.
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Issues related to HRAs:
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Benefit design
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Cap or vesting on roll-0over
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Cap or vesting on post employment
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Funded or unfunded
-
COBRA
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No employee contribution
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Help with retiree benefits
-
Need good customer support.
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1.5 million enrolled in HRAs at the end of 2002. 44% of
employers are looking into them. Those plans with HRAs have better use of
generics and nurse hotlines, more physician visits, less emergency room
visits. The prospects for HRAs include strong enrollment growth, legacy
company competition, rival payment systems; MSA expansion could replace HRAs,
unified health accounts. Problems included portability and ownership of
accumulated benefits.
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Summary of Testimony of Edward Kaplan
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Edward Kaplan testified that 95% of clients are having
conversations regarding defined contribution health care but so far there is
not a lot of action seen taken yet. 20% of wages represent health care
costs. The trend is for the costs to rise at 5 times the consumer price
index.
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The reason for the cost increases is threefold:
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Over consumption due to third party
paying for services
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Consumer behavior to buy now and worry
about paying later
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No competitive pricing or supply side
economic pressures
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Pure defined contribution health plans a rare today.
There are no pure defined contribution health care plans with greater than
500 participants because they do not have pooled purchasing power. The
hybrid plans, which have defined contribution features with ultimate defined
benefit coverage, are no being considered. The problem with traditional
defined benefit plans is that there is no accountability for costs and
health employees no longer want to subsidize the costs of unhealthy
employees. The heath cost reimbursement account with a high deductible plan
is one model that is being considered. This model could have preventive care
covered at 100%, a deductible bridge that would be the responsibility of the
employee and traditional health care coverage for costs above the
deductible.
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Advantages of the hybrid approach
-
Employee out of pocket costs
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Creates employee choice
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Managed care
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Insurance coverage for high claimants
-
Group purchasing advantages
-
Strategic pricing
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A recent study on diabetes showed that with preventive
care there could be a 38% reduction in medical costs as a result of less
office visits.
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It is recommended that the Government clarify the usage
of the rollover amounts for HRAs.
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Employers need to make sure that it is not only the
healthy employees that choose the health reimbursement accounts and get the
portability of benefits or the remaining costs of the non-healthy employees
in the traditional defined benefit plans will go sky high.
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The HRA plans should be typically offered as full
replacement plans.
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There is also a question as to whether the health coach
is deemed a fiduciary if the coach helps choose health care providers. The
Government should address this question.
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These HRS plans are too new to determine if they will
result in the costs of health care decreasing. Another 2-3 years of history
on these plans in operation in needed before it can be determined if they
could reduce costs.
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Summary of Testimony of Michael Parkinson
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Mr. Parkinson testified that he was excited about
consumer-driven health care. As physicians, along with patients, he has
grappled with what’s the best way to get this system to support
evidence-based quality medicine in a cost-effective fashion. Consumer-driven
health care is very promising. Lumenos believes that health care needs a lot
of light shown on it. We need quality information. We need cost information
and we need transparency at all levels. Lumenos also believes that we have
to address the true drivers of health care costs, which ultimately are not
co-pays, deductibles, and five different tiers to get a drug prescribed. It
really is human behaviors and human health behaviors. Fifty percent of all
health care dollars come from behaviors we choose to make or do. Thirty-five
percent of all health care spending is waster and inefficiency, yet at the
individual doctor-patient level, we’re all working as hard as we can do
“quality medicine”.
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The incentives are misaligned currently. There is no
infrastructure to help with patient. What Lumenos tries to do is realign
incentives with infrastructure built around the patient to complement that
being built around the physician and the hospital.
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Lumenos currently has 150 employees and has been in
existence for four years and have been actually operating with members since
January of last year. Lumenos is coming on the second full year of
enrollment starting January 2004. At that point in time Lumenos anticipates
having 50 self-insured companies that will be offered their plan to either
as full replacements or as an option. When offered as an option, alongside
an HMO, PPO or other type of plan, they draw anywhere from 2 to 49 percent
based on the benefit design and a number of factors.
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Total replacement characteristics tend to be smaller,
self-insured companies on average anywhere from 500 to 2,000 to 3,000 with
more emphasis on the low end. They are also starting to see unions move in
that direction too.
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Defined contribution really is just giving money to
employees. Drop the money and run and nobody wants to do that.
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Nobody spends their own money if they can spend somebody
else’s. So employers who are trying to actually avoid cost shifting or who
have already shifted as much as they can are trying consumer-driven care by
giving more visibility and control over the first 40-60 percent of the
dollars directly to the consumer.
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Lumenos believes consumer-driven care preserves the true
insurance safety function of insurance, while also delinking the financing
mechanism of first dollar coverage and getting the consumer engaged with
support systems on the web, over the phone or with a personal health coach
to help them understand to navigate the very difficult system.
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Physicians are saying that they are so tired about the
status quo in terms of having to see more patients for a decrease in unit
and a lack of clinical tools and support. Baylor Health Care Systems in
Dallas finds that consumer-driven plans reduce the administrative hassles at
the point of care so they don’t have to worry about 25 different ways to
collect a co-pay or deductible with administrative rules. It also provides
tools and support information that a physician is not able to provide. There
are administrative and clinical advantages. Also, patients would have a
health coach assigned to them to make sure they are following the doctor’s
orders.
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Lumenos is advocating a health reimbursement account with
a bridge amount that is properly designed and we would like to see it no
more than half or ideally no more than one time what the health savings
account is. The out of pocket maximum with the traditional health care
coverage, which is traditional PPO, has got to be two things, competitive
and compassionate in order to attract employees in an optional menu.
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The employer advantage is that they may possibly reduce
health care baseline spending. It is also a retention tool. It is a great
way to retain employees if the money can be rolled over each year and is not
portable to another company.
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First recommendation: Legislative initiatives should
cover portability. We see the portability issue as a new way for employers
to get back in the retiree health care area. The money could be portable as
long as it is used for retiree health care coverage.
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Second recommendation: More information regarding quality
and claims information.
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Early results: After a year and a half into the program,
based on 2002 clients, 98% are satisfied with the plan and would recommend
it. It is not complicated and consumers are capable of doing it Personal
health behaviors are the true drivers of 50% of health care costs. 55% of
our participants said they were more aware of prices and quality. 25% of
members said they changed their behavior. 55% said they exercise more and
37% said they diet. Consumers empowered with new incentives and the
infrastructure will make this work.
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Summary of Testimony of Dr. Cyril M. Hetsko
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Dr. Hetsko testified that this was an important issue due
to the national health care crisis of the uninsured. The predominate system
of health care coverage in the US is the employment based system, one of the
primary health care financing issues today is the large number of Americans
without health insurance. More than $41million Americans lacked health
insurance at some time in 2001. This problem will likely get worse as health
care costs climb. Additional problems of the current health insurance system
include lack of patient choice as only one of six employers offer workers a
choice between two or more health care plans. Another problem is employees
who choose to leave their jobs, leave their insurance behind. There is also
a lack a patient control. Most coverage results from employer not employee
decisions. The cost of insurance for those of us outside the
employment-based system is unaffordable.
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The goal of the American Medical Association is to see
that all Americans have expanded coverage and a choice of health plans.
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Our proposal is for employers to shift their health
benefits from providing a defined benefits program to a defined contribution
program. The approach would transition to tax credits offered to individuals
for the purchase of health insurance.
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The proposal follows five principles:
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Define contributions from employers
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A fully portable individual ownership
and selection of health insurance
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Replace the current tax exclusion with
individual tax credits
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Develop new health insurance markets
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Streamline the market’s regulatory
environment
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Key goals would be to provide patients with more choice
and control. They will have a larger number of options and be able to select
their own health plans and their own health providers. In today’s
environment, patients have the ability to act as informed consumers through
the use of the internet and electronic educational systems that are now
available and being developed to help patients select health insurance plans
that meet their needs and their priorities. If patients were given the
control of their health benefits, then plans would have to satisfy patient
choices rather than employer preferences. Because individual purchasers
would have a greater choice of plans, those plans would need to compete on
the basis of price, plan features and quality of delivery and care. Such a
competition would push premiums closer to their true cost.
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Summary of Testimony of James Bentley
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Illness is not evenly distributed. The chronically ill
are the difficult population to consider. 10% of the population uses 70% of
the health care spending in the U.S. We have subsided the under 65 10% with
three different mechanisms; employer sponsored group health insurance,
government programs, and cost shifting. The various options around defined
contribution and consumer choice health plans are confusing to the publican
and the DOL should help standardize the terminology.
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There are 6 hospital concerns to moving to either defined
contribution or consumer choice help plans.
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The allocation in the employee’s
contribution may increase the number of uninsured. Will the way in which
the premium support money is distributed lead groups of populations?
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Healthy people may underinsure when
purchasing coverage
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People may under use low cost
ambulatory care.
-
If we move to fast without care, we
are going to wind up with a multi-tier health care system that is
incompatible with the regulatory and accreditation structure that
hospitals operate in.
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Will hospitals go back to insisting on
large cash deposits?
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Hugh barriers to consumer information
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Summary of Testimony of Gail Shearer
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Gail testified that there would be winners and losers as
a result of consumer-driven health care. Concept has evolved from at first
when it was a purely defined contribution model into the healthcare
reimbursement model of today.
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The biggest problem in health care continues to be the
folks that have no insurance coverage at all (uninsured and underinsured).
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Early experience is mixed regarding whether these new
plans will reduce costs. We are allowing the market place to move our system
from one that features modest deductibles to high deductibles as the only
choice.
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Ten concerns about consumer-driven health care:
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Market fragmentation
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Diversion of scare funds from the sick
to the healthy
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Increased financial burden on the sick
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Increase financial burden on people
with moderate income
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Death spiral: end of traditional
low-deductible coverage
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Deceptive language that misleads
consumers
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Inadequate information
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Health care as a commodity
-
Inadequate risk adjustment
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Eronization of health care
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Too early to say what impact of consumer driven health
care will be. May possibly be a fad while until the economy recovers?
Employers may begin to offer low deductible health care to attract
employees. Could be potential to increase the burden on sick and those with
moderate income. Need to continue to support health care reform to provide
affordable health care for all.
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Summary of Testimony of Charles H. Klippel
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The market for consumer directed health care has shaken
out quickly. The conventional model is the high deductible PPA and a bunch
of informational tools has become the standard in the industry quickly. This
is a simple model that is easily understood especially for large employers.
The brokers have adopted this model has their lead horse. The IRS codified
or put in place by opinion the framework that supported this model. Aetna
and other companies worked on developing a product for small and medium size
companies. The percent of what employers pay for health care peaked in
1999-2000 at 80%. In 1980 that number was 65-70 percent. In the 60s it was
50%. For 2003 it is more like 75%. There is a current trend to share more
cost with employees. The thought is still very prevalent in large companies
that we have to protect patients when they are patients but we can also help
them when they are consumers in other ways. Potentially broader coverage is
a plus of the new CDHC product. Treasury authorized HRAs and FSAs to pay for
over-the –counter drugs last week. Another plus is that the product
connects provider pricing with consumer –relevant costs. Employers are
pricing these plans assuming that while the person’s in the plan they have
this accumulating feature but if they quick, they have lost it. If a vesting
rule comes along that says these products have to be completely portable, it
will discourage employers from getting into these products. There is a
question as to whether or not employers should fund these vehicles if they
become portable. Also, should they be accruing a FAS 106 liability if they
are for retired employees? Employers are not yet ready to give up their
defined benefit plans yet. Benefit decisions are being made by CFO in
conjunction with the benefits managers. I believe in employer based health
care and the benefits of pooling of risk. I think retirees benefits are
where we are seeing employers dropping out of the defined benefit model or
they will be providing defined contribution benefits until you to
retirement. The notion that you have a durable benefit, which may stay with
the employee regardless of which other health plan they switch to, is
important. The durability of benefits is one of the things that ERISA was
designed to promote and protect in the world. ERISA preemption is going to
be important with respect to these retiree accumulation plans. It was clear
that the treasury does not want to encourage a defined contribution health
and welfare plans and wants to distinguish them from the consumer directed
health plans. COBRA doesn’t work well with these plans. The problems is
that if you have a partial qualifying event, it was suggested that that
result would be that you had to duplicate the balance in the fund without
increasing the COBRA premium. Employers are struggling with this and the
treasury will rethink what they have proposed. There are lots of pros and
cons to portability. It is a big issue.
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Four quick suggestions about ERISA:
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You’re a fiduciary if you provide
advice and your sort of a negligent standard if your providing
information. It would be helpful to clarify this.
-
The DOL should look back at the
proposed draft regulations in light of CDHC plans and see whether there
is a little more flexibility to be provided to employers.
-
Clarification and flexibility around
the process of payment would be helpful.
-
Regarding vesting, there is a big
distinction between looking at the CDHC plans as an unstructured benefit
versus employee entitlement funds. We need to be thoughtful about
whether these benefits should vest and be portable.
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The market will drive many of these recommendations.
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June 25, 2003: Working Group on Healthcare Security
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-
Agenda
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Official Transcript
-
Outline for group’s study for the
year
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Statement on Defined Contribution
Health Care Plans by Paul Fronstin, Ph.D., Senior Research Associate and
Director, Health Research and Education Program, Employee Benefit
Research Institute
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Statement on “Are Defined
Contribution Health Plans the Silver Bullet?” by Phyllis C. Borzi, Of
Counsel, O’Donoghue & O’Donoghue and Research Professor of
Health Policy, School of Public Health and Health Services, The George
Washington University Medical Center
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Statement by Raylana Anderson, CEBS,
SPHR, National Committee on Compensation & Benefits, Society for
Human Resource Management
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Statement on Defined Contribution
Health Care Plans by Ronald E. Bachman, FSA, MAAA,
PricewaterhouseCoopers, LLP, as well as “An Employer’s Guide to
Patient-Directed Healthcare Benefits;” “Defined Contribution
Healthcare: Reframing Relationships and Benefits Delivery;” “Consumer-Centric
Healthcare;” a yet-to-be released paper on “Consumer-Centric
Medicare: Expanding Benefits and Saving the System for Boomers and
Beyond” and “Boomers Will Revitalize an Aged, Ineffective System”
by Newt Gingrich and Ronald E. Bachman
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Statement on “Consumer-Driven Health
Care 101: Getting Started” by Jon Gabel, Vice President; Health System
Studies, Health Research and Educational Trust, as well as a MarketWatch
article from the March/April 2003 issue entitled “Self-Insurance in
Times of Growing and Retreating Managed Care” by Jon R. Gabel, Gail A.
Jensen and Samantha Hawkins
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A publication issued in May 2003 and
entitled “Decision Making in Consumer-Directed Health Plans” by
Judith H. Hibbard, Dr. P.H., University of Oregon; Joyce Dubow, M.U.P.,
AARP Public Policy Institute, and Ellen Peters, Ph.D., Decision
Research, University of Oregon
|
July 23, 2003: Working Group on Healthcare Security
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-
Agenda
-
Official Transcript
-
Slide Presentation by Randall Johnson,
Director of Human Resources Strategic Initiatives, Motorola, Inc.,
Washington, DC, representing the ERISA Industry Committee as its Vice
Chair and Chair of ERIC’s Health Policy Committee.
-
“Self Funding of Health Care” by
Terry Humo, Marsh Advantage America, from Spokane, Washington, replaced
at the hearing by John Young, Midwest Region Sales Director, Consumer
Driven Marketing of Eden Prairie, Minnesota, for Definity Health on the
topics of Consumer Driven Health Care and Self-Funding
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Statement by Greg Scandlen, Director
for Consumer Driven Health Care at the Galen Institute in Alexandria,
Virginia, as well as “A Walk Through the Woods of Association Health
Plans – Separating the Forest from the Trees;” “Consumer-Driven
Health Care: New Tools for a New Paradigm” and “The New Consumerism”
by Mr. Scandlen
-
A slide show presentation on “Defined
Contribution health Plan Strategies: A Long Run Perspective” by Edward
Kaplan, National Health Practices Director, The Segal Company, New York,
New York
-
A Syndicated Survey of Consumer
Attitudes Toward Health Coverage Issues and Emerging Health Care Plans
conducted by the Dieringer Research Group and the Pareto Health Group as
well as copies of news articles: “Savvy Consumers Ready to Step into
Healthcare Cost Containment Fray” of May 14, 2003 and “Interest in
Consumer-Directed Health Plans Keyed to Company Size” of June 4, 2003
|
September 22, 2003: Working Group on Healthcare
Security
|
-
Agenda
-
Official Transcript
-
Outline of Group’s Final Report as
well as rough draft of sections five, six and seven of the outline
-
“Expanding Health Insurance: The AMA
Proposal for Reform” provided by Dr. Cyril M. “Kim” Hetsko, as
well as his written testimony for the Board of Trustees, American
Medical Association.
-
“Consumer-Driven Health Care”
Presentation by Gail Shearer, Director, Health Policy Analysis,
Consumers Union, as well as a graph, “Variation in Health Care Costs
of People with Employer Coverage, 2000” from Lewin HBSM, AHRQ MEPS
(1996)
-
Power Point Presentation on
“Consumer-Directed Plans: Perspectives on the Market Implications for
ERISA” by Charles H. Klippel, AETNA
-
Statement of James D. Bentley, Ph.D.,
Senior Vice President, Strategic Policy Planning, American Hospital
Association
|
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-
John J. Szczur, Chairman
-
Michele Weldon, Vice Chairman
-
Ronnie Sue Thierman, ex-officio, Chair
of the ERISA Advisory Council
-
David Wray, ex-officio, Vice Chair of
the ERISA Advisory Council
-
Robert Patrician
-
John S. Miller, Jr.
-
Thomas C. Nyhan
-
C. Mark Bongard
-
Norman Stein
-
Antoinette Pilzner
|
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-
Defined contribution health and
welfare benefit plans provide benefits based on the amounts contributed
by the employer and employee to the employee’s individual accounts
plus or minus forfeitures, investments experience and administrative
expenses.
-
Originally the Council contemplated
including in this report a discussion of the different models of
self-insured plans. However, upon further review, it was determined to
narrow the topic to address defined contribution plans focusing on
consumer-directed health care.
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