15 Big Predictions for '04: Our Experts Weigh In on CDH Trends for the New Year

Reprinted from the Jan. 9, 2004 issue of INSIDE CONSUMER-DIRECTED CARE, a brand new biweekly newsletter with news and analysis of benefit design, contracts, market strategies and financial results.

It's been only a month since President Bush cleared the way for tax-exempt health savings accounts (HSAs), but industry experts agree the new law has already provided the CDH movement with a colossal push.

The HSA provision of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 allows virtually anyone with a high-deductible insurance plan (at least $1,000 for single coverage and $2,000 for couples and families) to open an HSA. Funds from the account (contributed by the consumer, the employer or both) are used to cover health care expenses; unused balances roll over each year. Some insurers, such as Aetna, Inc. and UnitedHealth Group, announced new HSA-based products almost immediately after the law was enacted. Paul Fronstin, senior research associate at Washington, D.C.-based Employee Benefits Research Institute, expects other insurers and CDH vendors to follow suit.

Phillip Curran, a consultant in PricewaterhouseCoopers' Dallas office, says 2004 will be "a pivotal year" for the CDH movement as more employers look for innovative ways to control rising health coverage costs. He also predicts that there will be more total-replacement CDH plans as employers begin to believe the success stories associated with early adopters.

CDH Trends to Expect in '04

For our first issue of the new year, AIS asked consultants, vendors, insurers and employers what they thought would be the most significant CDH-related trends in 2004. Here's a look at their top 15 predictions:

(1) New partnerships between insurers and financial institutions: The anticipated HSA boom will give insurers and third-party administrators (TPAs) an opportunity to develop and sell new products. It also will provide financial institutions with a way to enter the health insurance market. Few insurers and TPAs, however, will want to deal with tracking account rollovers, and financial institutions won't want to deal directly with claims. That will clear the way for partnerships between the two groups, says Dave Delahanty, a principal in the Minneapolis office of Mellon Financial Corp. "We'll see a lot of blending and partnerships arise during 2004 to meet the HSA demand," he says. Case in point: The Principal Financial Group last month agreed to acquire Malloy Cos., an Indianapolis-based firm that provides TPA consulting services to insured and self-funded health plans. And UnitedHealth Group says its recent acquisition of Golden Rule Financial Corp. will help it build capabilities in individual health insurance and HSAs. Golden Rule is one of the leading writers of medical savings account (MSA) plans.

(2) CDH adoption will grow most significantly in 2006: CDH plan enrollment will balloon in 2004 to almost 1.2 million, from a base of about 500,000 in 2003, says Bradford Holmes, research director at Forrester Research, who adds that the increase is still a "drop in the ocean" of the nation's 160 million commercially insured. Enrollment, he says, will grow most significantly in 2006 when increased product availability - spurred by HSAs - meets growing demand from mid-size and small employers that typically lag behind jumbo firms in benefits innovation.

(3) HSAs will improve acceptance of CDH, but adoption will remain low: Although industry observers agree that HSAs will inspire greater acceptance of the CDH concept, John Coyle, senior vice president at the Phoenix office of Segal Co., predicts that adoption of CDH plans this year will be slower than many people expect. Employees who have grown accustomed to 100% coverage and low copays will be reluctant to accept a high-deductible CDH plan. However, it appears that the HSAs are more flexible" than health reimbursement arrangement (HRA)-based CDH plans, he says.

(4) HSAs will be favored by small employers: HSAs will lead to increased adoption of CDH programs in the small-case (50 employees and fewer) market, says Christopher Byrd, executive vice president of strategy and business development at Evolution Benefits, an employee benefits debit card provider. "Employers in this market can't always afford to fund an HRA, and reasonable-cost FSAs [i.e., flexible spending accounts] have not been widely available to small employers."

(5) HRA-based CDH plans will be seen as more effective than HSAs: Although the HSA model is better than the MSA model, it lacks the flexibility and customization of the HRA-based models, says Mike Baker, CEO of Vested Health, a CDH firm in Charleston, W.Va. "We will start to see more data proving that the [HRA-based] model is a more cost-effective plan than other types of coverage."

(6) The industry will develop new CDH flavors: Driven by a perceived market demand, insurers will develop specialty CDH products - such as Rx only, vision only and dental only - as a way to join "the CDH bandwagon," says Todd Gibson, a pharmacy benefit consultant with New Jersey-based Princeton Consultants. But, he adds, acceptance of these new products will be limited because few employers will see the value of funding only a portion of the benefit package. However, demand for, and acceptance of fully integrated products, such as medical, pharmacy, vision, behavioral and dental, will increase, he predicts.

(7) CDH successes will breed lackluster imitators: CDH will move closer to the mainstream in '04, but a new wave of products marketed as "consumer-driven" will fail to offer necessary consumer support tools. Giving employees financial responsibility without information, tools or support to help them make decisions is a recipe for disaster, says Alexander Domaszewicz, a consultant in Mercer Human Resource Consulting's Newport Beach, Calif., office. "The huge variance around what CDH means in terms of real capabilities and member experience will continue to plague the movement," he says. "Lackluster product offerings will turn some against the [CDH] concept merely because the specific implementation of CDH that they experienced was sub-par." Bad experiences among consumers in such plans could poison the CDH movement, he adds.

(8) CDH vendors and insurers will be forced to address shortcomings: Although managed care organizations - through their captive health provider networks - can offer deep discounts, few of them have developed robust decision-support tools, Curran says. CDH vendors, by contrast, tend to offer more sophisticated, user-friendly systems and member-support tools, but rely on limited "rental network" discounts. Unless both sides address their primary shortcomings, they will lose out on significant market growth, he says.

(9) Hospitals will face more pressure to compete on price and quality: Continued growth of CDH plans and adoption of HSAs will put more pressure on hospitals to compete on price and quality with specialty surgical centers, says Michael Parkinson, M.D., chief health and medical officer at Lumenos, an Alexandria, Va.-based CDH vendor. "As consumers and employers become more aware of potential price differentials, hospitals will have to become more proactive and less reactive in defining the value proposition they offer to the communities they serve," he says.

(10) Employer-employee tension will prompt future CDH growth: Another year of double-digit health insurance rate hikes, coupled with increased cost sharing, will lead to more tension between employers and employees. That tension will inspire more employers to examine CDH as a new option for 2005, says Randall Abbott, a consultant in the Philadelphia office of Watson Wyatt. CDH plans will become increasingly prevalent among small and mid-size employers, many of which will use CDH to replace traditional managed care plans, Gibson adds.

(11) Employees will grumble about increased financial responsibility: There will be a learning curve associated with CDH plans that require employees to wait for reimbursement from their HRAs or HSAs, says Patti Goldfarb, partner with The Medical Link, Inc., an insurance brokerage that works with nearly 30 insurance companies in the New York City area. "Even with HSAs, [consumers] will have to take the money out of their pockets before being reimbursed." Domaszewicz agrees, adding that consumer rights groups and unions will work to preserve the current health benefit structure. "But this system is unsustainable, and it will self-implode in a few years if it isn't changed by CDH," he says.

(12) Information-starved consumers will spawn a new industry: As employees take on more fiscal responsibility over their health care decisions, they will want to learn all they can about medical conditions and treatment options, physician selection, and pharmaceutical costs and effects. That will lead to a whole new industry, Goldfarb predicts. An offshoot of this will be companies that offer online health programs. An example is Miavita, a New York City-based company that sells Internet-based corporate wellness programs.

(13) Positive results will help CDH pick up steam: On Jan. 1, West Bend, Wis.-based Serigraph replaced its existing health options with a full-replacement CDH plan. So far, the concept has been well received by the company's 800 insurance-eligible employees, says CEO John Torinus, who adds that "several companies in the area are watching our progress." The self-insured manufacturer is using CMS (which WellPoint Inc. acquired along with Wisconsin Blues licensee Cobalt Corp.) as its TPA. "I expect a lot of companies to follow suit once a few of us guinea pigs make the leap and report some positive results," he says. "I expect a stampede."

(14) Enrollment in optional CDH plans will increase substantially: When offered as an option alongside traditional managed care plans, enrollment in CDH plans this year will hover between 30% and 50% - significantly higher than the single-digit enrollment numbers seen in recent years, Domaszewicz predicts. The higher enrollment will "continue to show the validity and appealing nature of CDH," he says.

(15) Restricted access will be more palatable to consumers: Although restricting access to providers successfully held down costs for HMOs, it caused consumers to bristle. With consumers now in the driver's seat, however, the concept that led to a backlash against traditional managed care might be embraced by CDH enrollees, Gibson says. "I think there's an opportunity to repackage some of these restrictions within CDH products," he explains. "Now that members have skin in the game and have a vested interest in controlling their utilization and costs, they might be willing to accept - and may even embrace - such restrictions if they know they are getting the care they need and reducing their costs."