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Consumer-driven health plans offer cost savings

01/27/2003 08:11 AM By David Cowles

In the face of a sluggish economy and a tight skilled-labor market, employers in 2003 are facing double-digit health insurance premium increases for the third straight year. So far, companies have coped by absorbing the lion’s share of the cost and passing the rest to employees through increased payroll deductions.

There are alternatives to insurance carriers’ off-the-shelf health benefit plans. One of them is a consumer-driven health plan, also known as defined contribution.

These plans can be attractive because they generate immediate cost savings and stabilize cost increases over the long term. There’s something in it for employees, too. The plans cover preventive care and employees are free to choose their own health care providers and services.

Consumer-driven plans hold down costs by giving employees financial incentives to make prudent health care decisions. This encourages patients — and their health care providers — to consider less expensive treatment options, such as arranging a phone consultation rather than scheduling an office visit, or prescribing a generic drug instead of a brand name, or using a community hospital rather than a downtown teaching facility.

Typically, the employer purchases a plan with a high deductible, usually $1,000. Right away, the employer saves anywhere from 10 to 50 percent compared to the cost of a traditional managed care plan. This doesn’t mean that the employee is saddled with full responsibility for meeting the deductible. That’s because the employer also sets up a tax-free personal care account (PCA) of, say $500 for each employee, who can earmark the money as he or she sees fit for health care expenses.

The insurance plan covers routine checkups as usual, along with a small co-payment. Then all additional claims, up to $500, are paid in full from the PCA. After that, the employee is responsible for the next $500 to meet the deductible. Then insurance coverage kicks in again to pay any claims over $1,000.

The advantages for employer and employee are:

• Premiums are substantially reduced

• Gatekeepers are eliminated

• Checkups and well care are covered in full and without limit

• Employees’ out-of-pocket expenses are modest.

Plus, any funds remaining in the PCA at the end of the year can be carried over to the following year. So an employee who spends $250 in the first plan year will start the second plan year with a PCA fund of $750.

This puts employees in charge of their own health care dollars. As employees learn the true retail cost of health care — for instance, that a doctor’s visit costs $150 and full price for a brand name drug could run as high as $120 — they will spend those dollars wisely, just as they would for any important purchase.

There are a variety of ways to design a consumer-driven plan to suit small- and medium-sized businesses as well as Fortune 500 companies. The underlying concept, however, is always the same: employers reduce fixed costs by buying less insurance — that is, plans with lower premiums and higher deductibles — and then use a portion of the premium savings to fund part of their employees’ out-of-pocket health care expenses.

Here is an example of one company that designed a consumer-driven plan to deliver comprehensive health care benefits at an affordable cost.

With its new consumer-driven plan, monthly premiums were reduced by 30 percent. The deductible is $500 for individuals and $1,000 per family, but employees are responsible for just $200. The company uses its premium savings to pay the balance of the deductible and all of the co-insurance, that is, the portion of medical claims the plan does not cover. The company also self-funds a direct reimbursement dental plan.

Instead of taking a bigger chunk out of each employee’s paycheck for higher premiums, the company plans to reduce overall costs by 10 percent this year while employees remain free to make health care decisions based on what is right for themselves and their families.

In the long run, spending less on insurance premiums lets employers pay for more real health care. That’s because the cost of care reflects actual use rather than the inflated community averages on which insurance premiums are based.

By combining these underwriting savings with funding mechanisms like PCAs, companies can continue to offer top-of-the-line health benefits without absorbing annual double digit premium increase — and without shifting a heavy cost burden to employees.

David Cowles is a co-founder of Benemax in Medfield, which designs, negotiates and administers employee benefits. He can be reached at dave@benemax.com.