Health Plan Operations in the New World Of Health Care Financing

If new consumer-directed health plan products and systems can continue to be effectively implemented and supported by payer organizations, they could prove to be the sought-after solution to the health care cost dilemma.
Kevin R. Brown, DST Health Solutions, Inc.

Introduction
Very few market dynamics over the last 20 years have garnered the attention of the health care payer community as has Consumer-Directed Healthcare. Over the last four to five years, much has been written – positive and negative – about the concept designed to put health care consumers in control of the health care buying decision, and whether or not it could work in the current health care delivery system.

Today, in mid-2004, it is obvious that consumer-directed health care is gaining momentum. Preliminary evidence suggests that the model has had some success in helping to control utilization costs. Most forecasts are predicting broad market acceptance for consumer-directed health plans (CDHP), given the recent legislation creating health savings accounts (HSAs) – a concept expected to expand the CDHP market to small and mid sized employer groups.

In this paper, we explore the history of consumer-directed health care, from its creation to service the employer market to becoming a major component of a health plan’s product strategy. We will also look at how the market will evolve and how health plans need to strategically plan and adapt in order to maintain a competitive position in this new environment, now and well into the future.

The Beginning
In the late 1990s, several health care innovators had varying visions about the future of the industry, although the fundamental concepts were very much the same. These visions were fueled by excellent economic conditions, including one of the greatest bull markets in history, and the belief that the current health care system was poised for innovation not seen since the development of the HMO and other managed care initiatives.

By the year 2000, employers were faced with double-digit premium increases, due to increasing utilization rates and rising prescription drug costs. Most of the insured had only nominal copays as their contribution to the financial risk in the health care decision process. The thinking behind the CDHP concept was to make the insured
more responsible for how their health care dollars were spent. They were provided with incentives to find a balance between seeking cost-conscious, necessary care versus the all-too-familiar, scattered utilization approach. This new philosophy ensured that consumer-purchasing dynamics would finally be brought to the
health care industry.

To achieve this goal, consumers were armed with decision-support tools to better manage their own health care needs. They were given access to health care content, provider cost data, their own claims and encounter data, and a funded account to subsidize health care expenditures.

It was on these grounds that HealthMarket and Lumenos® were founded, and Consumer-Directed Healthcare was born. The major CDHP players had their own unique twist on the market. HealthMarket sought state licensure and marketed themselves as an insurance company. Lumenos contracted exclusively with the ERISA-exempt, self-funded employer market. Each had slight variations on product design.

By midyear 2001, Lumenos was gathering sales momentum with the signings of Novartis and Radnor Holdings.
HealthMarket was also experiencing significant membership growth. The companies continued gaining momentum and attempted to further promote the benefits of the new consumer-directed concept by joining forces, along with other companies, to create the Consumer Driven Health Care Association.

As more and more large employers started adopting full replacement options with the consumer-directed upstarts, it became apparent that health plans needed to start addressing this new competitive threat. Years earlier, when employers shifted employees to PPO plans to answer backlash against managed care in terms of provider selection, health plans started developing their own PPO products to promote product choice. Naturally, when national employers started moving some or all of their business to consumer-directed plans, some health plans began responding to the competitive threat by developing their own consumer-directed offerings and products.

Consumers’ demand for more control and choice are not the only factors fueling this movement. Recent technological advances and government regulations on standards have combined to move the health care industry toward a real-time enterprise featuring the seamless exchange of digital information. This invariably will help to lower administrative costs for health plans; better integrate the users, providers, and payers of health care  services; and will cause the health care industry to operate more as financial institutions do in the consumer-based transactions that health plans will be required to handle.

The Present
The current wave of Consumer-Directed Healthcare began as health plans started formulating a response to the new phenomenon. A handful of large, national players immediately began development of their consumer-centric strategy. Aetna, WellPoint, CIGNA, and Humana all unveiled CDHP strategies very early, attempting to  establish themselves as visionaries in terms of product development.

At present, consumer-directed adoption patterns fall into three general categories: visionaries, followers, and naysayers. The visionaries are mainly large health plans that desire to be the first to market a CDHP offering and be viewed as leaders. Followers are waiting for proof-of-concept in order to mitigate the financial and business
risks of implementation for the new product. The naysayers believe that the consumer-directed phenomenon is a short-term fad – that either the product will not reduce medical and administration costs as promised or that something new will replace the demand for CDHP products in a few years.

According to the 2003 survey, Technology Decisions for Defined Contribution Products, Oct. 9, 2003, 50 percent of health plans had no intention of developing a consumer-directed product. Over the next few years, this number will drastically diminish, perhaps to as low as 5 percent by 2006, as health plans find it necessary to adopt the products to effectively compete and survive (see Figure 1).

Figure 1: CDHP Market Evolution, 2003 to 2005

Over the last several years, competition in the payer space has not only been about new products and the lowest price; health plans have increasingly competed on the grounds of customer service and product flexibility. This demand places increasing pressure on the information management systems that payers use and will require that they serve the entire enterprise, be user friendly for both employees and health plan members, and be able to interpret and provide data that helps both health plan executives and members reduce costs. Technology will become more important as CDHP products become more popular because Web transactions are central to successful adoption of consumer-directed programs. Joanne Galimi, research director of Gartner’s Healthcare Industry Research and Advisory Services, recently wrote in Managed Healthcare Executive magazine, “Web initiatives for payers continue to advance by establishing improved transaction and service capabilities between the organizations and their business partners. The initiation of multi channel Web functions integrated with critical business applications will be needed to achieve Web business objectives and ROI.”

As more evidence becomes available as to how CDHP lowers utilization rates and administrative costs, employers will continue to clamor for the product. Customer retention rates and new business wins will plummet without a consumer-directed product to offer. Plan designs will continue to vary as they evolve and keep pace with consumer demands and government mandates.

With the recent passing of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, most projections anticipate the further growth of the consumer-directed concept with the creation of HSAs. These improve upon the Archer Medical Savings Accounts in several key areas that will make them a more attractive solution for the general population:

• Ability to fund the account from employer and employee contributions, both of which are tax deductible;
• Elimination of the “use-it-or-lose-it” provision; employees are now allowed to accumulate funds;
• Increased portability in the event of a change of employment;
• No limits based on size of employer; and
• Only for use with high deductible plans ($1,000 for single coverage, $2,000 for family coverage).

Other savings vehicles, such as flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs), were available to a broader range of employer groups and also figure into a health plan’s overall CDHP strategy, although much of the HRA-based and FSA-based product designs will likely be completed by or evolve to hybrids based on the new HSA model.

The Future
The HSA legislation is truly a landmark event in the future of consumer-directed health care for both employers and payers alike. The HSA promotes accessibility for all commercial groups, and it is only a matter of time before health plans open some aspects of CDHP to other market populations, such as Medicare and Medicaid.

While individual groups have elected to use CDHP as a full replacement option to their traditional insurance coverage, components of managed care should remain a significant part of the health care delivery model. But CDHP will be a vital part of a health plan’s product strategy [similar to how the HMO and POS (point of service) products were positioned in the 1990s], accounting for 20 percent to 25 percent of overall enrollment. The dynamics determining CDHP premium rates will make it a very competitive alternative to managed care products. Because rates for CDHP premiums are based on fixed contributions, they’re more predictable than rates for other products. Laurie Ingram, health care analyst for the META Group, told Insurance and Technology magazine that “employers see their costs rising and they want to go to a fixed price from a budgeting perspective.”

There will also be an evolution in how health plans choose to administer CDHP products. In the current environment, speed-to-market is critical. The health plan visionaries at the forefront of the CDHP movement secured a considerable head start; now, everyone else is trying to get their products up and running in an attempt to catch up. Industry observers question whether some insurers can build the technology infrastructure quickly
enough to support CDHP products. The implications are significant. Given the health care group enrollment cycle, with the vast majority of groups becoming active or renewing Jan. 1, missing a date in the product development process by a month could delay the launch an entire year.

Some industry experts feel that many health insurers cannot develop the necessary IT infrastructure quickly enough to support the elements of CDHPs, including tools on health care research and HSA account management. Internal resources are scarce or stretched thin. Often, there are conflicting priorities within an organization or just a lack of capable staff to ensure that a project of this magnitude comes in on time and on budget. As a result, many health plans are looking at outsourcing the administration of the CDHP product, or buying systems to interface to their core claims processing engines. This strategy gives them access to a larger pool of resources and expertise than a firm might have by trying to perform this function entirely in house, or by contracting with a niche third-party vendor. And, most importantly, this provides a rapid launch capability to payers to meet competitive and marketing objectives.

Increasingly, as CDHP gains further market acceptance, the long-term preference will be for health plans to have the consumer-directed functionality as a component of their core system. There are two main reasons:

1. Maintaining disparate systems is costly. Procurement of the CDHP software, plus development of interfaces, testing, and integrated reporting, all add significant incremental costs and put pressure on the health plan’s already-thin margins. Having CDHP-ready functionality in the core system lowers the total cost of ownership of enabling the product.
2. Product and administrative flexibility is enhanced. Having CDHP as part of the core system enables plans to more easily change benefit plan configurations and tailor designs to each group. By having a system managed through only one vendor, it also makes deployment models more flexible. For example, contracting should be easier in an application-hosting arrangement, without the presence of a third-party product.

It is imperative that payer organizations put themselves in the best strategic position to support the Consumer-Directed Healthcare movement. The first stage of the movement has occurred, and all of the anecdotal evidence suggests that enrollment growth in the products will exceed expectations. With the approval of legislation allowing HSAs, the consumer-directed health care movement now enters a second stage involving a more sophisticated approach to management of pretax dollars to cover health care expenses. HSAs are portable, may
contain contributions from employer or employee, and balances can be rolled over from one year to the next. As a result, health plans will face added competition from financial services companies, which have more experience with the management of financial accounts and small transactions. Health plans must address these product requirements in the retention and acquisition of new business and in their technology infrastructure. A
first step has to be examining, planning, and addressing the system that must serve the enterprise and all product lines and be flexible enough to accommodate newer financial transactions.

In 2005 or 2006, the Consumer-Directed Healthcare movement will enter a third stage, which will focus on providing effective mechanisms for the insured to use their accumulated funds to best address their health care needs. Randall Abbott, a senior consultant with the Watson Wyatt benefits consulting firm, recently wrote in Employee Benefit Plan Review magazine that “plan options may include member-selected levels of co payment,
coinsurance, provider tier, and drug reimbursement.”

In addition, provider pricing surrounding episode management and comprehensive care management for specific acute problems or disease states may become quite popular. Making those payment options available to insured lives with significant fund balances could be a powerful mechanism by which consumers influence the health care market.

How well health plans implement these new products and the systems that will drive them will go a long way toward determining their success. If they’re incapable of supplying members with the necessary tools and  information to enable consumers to comparison shop, manage funds, and track and control utilization of services,
then CDHPs will be considered primarily as a way to shift health care costs from employers to consumers. If they seamlessly provide access to information, put decision-support tools in the hands of consumers, and use technology to help reduce administrative costs in the health care system, then CDHPs could prove to be the
sought-after solution to the health care cost dilemma.

The tough questions that health plan executives must answer are:

• Are they willing to risk that Consumer-Directed Healthcare is not the next biggest wave to hit health care?
• Do they have the internal capability to launch a program in three to six months and hit the next enrollment cycle running?
• Can the internal system they have now accommodate consumer directed multiple fund processing and the new HSA and financial management functionality required in the future?
• Do they have the actuarial and market data to accurately rate a CDHP product?

These questions are critical to the success of any health care payer that plans to embrace Consumer-Directed Healthcare and successfully secure significant market share.

Kevin R. Brown, Chairman, DST Health Solutions, Inc, has 24 years’ experience in the health
care industry, with a concentration in managed health care. He previously led the development of AMISYS into becoming the leading provider of managed health care information systems. Brown also serves as a director on the boards of two publicly held health care information system companies.

For more about DST Health Solutions, contact us at inforequests@dsthealthsolutions.com.