Consumer Driven Benefits Race over a Cliff

The scene is playing out at client offices all across the country. Benefits brokers are being asked to find some way—any way—to put the lid on healthcare premiums that are increasing annually, in some cases at a double-digit pace, with seemingly no end in sight.

Employers have tried plans with higher co-payments and increased deductibles. They’ve signed on to preferred provider networks and ratcheted up the employees’ share of the premium bill. But the result is still the same—higher and higher costs for the traditional $250 or $300 deductible fee-for-service plans.

“We’ve been the bearer of bad news for quite a while, and our clients have tried to do their best, but here we come again with more bad news,” says Dennis Donahue, executive vice president and employee benefits practice leader at Hub International Midwest Limited in Chicago. “The typical scenario is that the CFO calls you and says, ‘I want you in my office next Tuesday, and I need to get to a zero trend in the next three years.’ But they have exhausted most of the open-market options to do that. They say, ‘I cannot be without benefits. I am still interested in the wellbeing of the workforce. It is still a deductible expense on my taxes, and I still need health insurance to be competitive.’ And that has fueled a very fast movement toward defined contribution discussions.”

Whether you call this trend “consumer-driven healthcare,” “consumerism” or “cost shifting,” businesses are rapidly changing the face of employer-provided healthcare, pushing the old, relatively small-deductible plans off the ledge and replacing them with high-deductible health plans that make the employee responsible for the first $1,000 or $1,500 or more of medical expenses. Often, the employer supplements the high-deductible plan with some sort of health savings account (HSA) or pays a portion of the annual deductible to encourage employees to make the move into that coverage arrangement.

Often the high-deductible plan is the only option on the table. The old, low-deductible option may still be available in some cases, but more often it’s becoming yesterday’s news.

“The time of the $250 deductible is gone,” says Liz Smith, president of employee benefits at Assurance Agency in Schaumburg, Ill. “People are recognizing that the way the healthcare system is structured today is broken. The only way to drive down costs is to change behavior, to educate and empower consumers.”

The average deductible for an employer group plan is now close to $1,000. For employers who couple a high-deductible plan with health savings accounts, the annual employee deductible can be $2,000 or $2,500—sometimes as much as $5,000. Many employers contribute a set amount—say, $500 a year—to those accounts to encourage employees to move to the high-deductible option and help them meet the deductible. Once they get there, reimbursement under the employer’s health insurance plan kicks in at 80% or higher.

“The premium differentiation (for an employer) between a $250 and a $2,500 deductible is significant,” Smith says.

“From an employer standpoint,” Donahue agrees, “there is a huge difference in what they pay the carrier compared to the premiums of the high-deductible plan as the exposure shifts from the plan to the claimant. With that savings, they are able to offset additional exposure and migrate the workforce into a consumer-driven healthcare arrangement.”

The concept is based on the premise that, to fix the system, you need to change behavior by making individuals better healthcare consumers. To do so, employers need to help employees understand the real cost of their care.

“A lot of employees just don’t understand that, when you go to a doctor, the cost is not $20, it’s $200,” Smith says.

“When everything involves a co-pay, there is very little incentive for an individual to truly understand the cost, to truly manage that,” says Lisa Hawker, executive vice president and employee benefits practice leader for Hylant in Toledo, Ohio. “If everything is considered a $10 co-pay, you don’t think twice about going to the doctor, picking up that prescription or wasting that prescription. For services that do have a wide variation from a cost standpoint, evolution to a high-deductible plan actually gets that purchaser more engaged in that decision, checking the price for blood work, MRIs, X-rays, or using a clinic instead of going to the emergency room.”

When they are spending their own money, she says, “we see that employees are making different decisions.”

Hawker has a personal example to prove her point. When Hylant moved from a regular-deductible PPO health plan to a high-deductible plan, she had to decide how much money to put into her family’s HSA. So she researched the cost of her daughter’s acid reflux medication. What had been a $20 co-pay prescription turned out to cost $320 a month, with her employer picking up the difference. She worked with her pediatrician, taught her daughter how to swallow a pill using Tic Tacs, and now uses a generic drug that costs $15 for a 90-day supply—and she pays for it, not her employer.

Still, the key to making these consumer-driven plans work is employee education and easy access to detailed information on cost, outcomes and the quality of care delivered by physicians and hospitals, as well as the cost and options for prescription drugs. And as much as employers, brokers and insurance carriers might wish it to be so, there’s a long way to go. Indeed, consumers can get more information and get it faster and easier when buying a car or hiring a plumber than when trying to pick a doctor or hospital or researching the cost of a medical procedure.

Castlight Health, which was started in 2008, is a firm trying to add some transparency to the real costs of medical treatment in an effort to give consumers a realistic idea of what healthcare really costs. The idea is that educated consumers such as Hawker, when armed with the facts will make rational financial decisions.

“Where else in the economy is the price of a service or commodity unknown until after the service is rendered of the product consumed?” asks Jay Walker, curator of TedMed, a health care thinktank.

Christopher Nadeau, principal/EB and head of benefits for William Gallagher Associates in Boston, has heard it all, watching firsthand as Massachusetts enacted a healthcare insurance reform law mandating a minimum level of health insurance for residents and providing subsidies for those less able to pay. The legislation, frequently cited as the model for the federal Affordable Care Act, became law in 2006 and has been changed several times as the state struggles to contain costs.

“There are people who believe if you put a couple thousand dollars in the employee benefit bucket, that will change employee behavior,” Nadeau says. “But I’ve watched these HSAs for the last couple of years, and I am more and more convinced it is just a cost shift. A vast number of employers did it just to control costs. My experience has been, unfortunately, that employees forced into these programs are spending the same amount of money during the year. The fundamental problem is that consumers don’t have access to good outcomes data. Except for some anecdotal situations—some carriers have these cutesy websites with one dollar sign or two dollar signs—if you try to get total costs for a procedure, it’s very, very difficult.

“The whole argument for consumerism in high-deductible plans is that we need to make members better users of healthcare by putting them at risk for the first thousand dollars. I just don’t see that happening. Claims don’t happen to employers for $1,000 or $2,000. They happen at $5,000 or $10,000, where the consumer is already 100% in. Consumers are blowing through the deductible…and then insurers pick up the full cost. Because people are now paying more out of pocket, they are going to get their money’s worth. Once they are in for 100% coverage, they are going to go for the best facilities. I just don’t see consumerism as the panacea we were looking for.”

Under the Massachusetts plan, Nadeau says, “we were promised that there would be a fabulous consumer-centric website that provides all outcome data on doctors, pricing by facility, outcome by facility. That was the first thing they cut out of the budget.”

Although the state’s attorney general has done some extensive studies in the last few years showing the cost differential of hospitals, the names of those hospitals were not released. And if there is a doctor who has had a malpractice suit filed against him, Nadeau says, “it is almost impossible to find that information.”

The Obama Administration released comparative pricing information for the 100 most common hospital procedures in May and the difference in pricing was vast, even for hospitals near each other. Of course the prices do not reflect what insurers really pay, but what the hospitals would charge the uninsured.

Before the move to consumer-driven health plans, employers were essentially paternalistic, working in concert with their human resources departments and benefits brokers to research costs and coverage options and presenting that information to employees in a benefits package that contained few options, all of which had been vetted. Now, as that responsibility shifts to the employee or to consumers in general in the case of healthcare exchanges under the Affordable Care Act, the questions arise: Who will provide that information, and how will consumers get it?

“It is becoming more readily available all the time, but there is still a need for more,” Hawker says. “Not only for more information, but for the employer directing those employees and individuals to where that information is—connecting the information and the tool. Plans are evolving to become more consumer-driven. The disconnect where our firm and other firms have to connect the dots is between evolving plans and evolving tools.”

Michael Paschke, executive vice president, Brown and Brown of California, says the new dynamic will be based on consumers assessing their individual and family circumstances and buying only the coverage they need. “We as brokers have a lifelong career educating these human beings on these different products and ways to buy products,” Paschke says. “Our role is not going anywhere, but it will change.”

Scott Carver, president of PlanSource, a technology company, believes there’s now a “disconnect” between matching the quality of care and outcomes with employees’ decision on which plans to buy. PlanSource provides a platform that can help employees manage their overall benefits portfolio, educate them on benefits that are available, and help them make plan selections.

“The long-term plan is to start to marry some of the information now housed at health plans, but as an industry we’re not there yet,” Carver says. “I think it is probably a four- to six- or seven-year process. In the interim, I think there will be a little survival of the fittest, but I believe a trend will occur and some of this will stabilize. However, I don’t think it will have any meaningful impact on healthcare costs in the next four years.”

Technology clearly is key, brokers say, if there is any chance of making the consumer-driven healthcare concept work. Otherwise, it may be a repeat of the move from expert-managed, employer-offered pension plans to 401(k) retirement saving accounts, where employees had control of their retirement money but frequently lacked the skills, information and acumen to make good decisions.

The need for better technology and more information is true not only for employees moving into consumer-driven health plans but also for consumers in general once the healthcare exchanges—mandated by the Affordable Care Act but not yet active—come into play in 2014. At that point, individuals will be required to have healthcare coverage, and employers with 50 or more employees will be required to provide it or pay a penalty.

“All the exchanges are going to be online. But technology can be overwhelming,” Smith says. “There are a lot of options and a lot of intricacies of each plan and each network, and that could be confusing. Who is going to guide these consumers through that and make sure that they make the right choice based on their needs? The need of a family versus that of a 25-year-old male is going to be different.”

Many benefit brokers are concerned that their employer clients, fed up with years of rising healthcare costs and seeing predictions of more increases to come as healthcare systems transition into their next incarnation, may simply drop out, pay a relatively low penalty—$2,000 per employee next year—and send their workers to healthcare exchanges.

Benefits brokers are actively working with employers to help them understand the nuances in the Affordable Care Act and show them why dropping healthcare benefits for their employees to save money may not be the best option.

“The concern is a groundswell of companies will literally cancel their plan, write a check for $2,000 per year for insurance and be done with it, sending employees to the exchanges,” Nadeau says.

A lot of brokers, he says, are breaking down “play-or-pay” calculations for their clients, showing them that what appears to be a cost-saving move may not be that at all. “For a lot of employers, thank God these pay-or-plays aren’t coming out with a decent break-even calculation. If more employers decided to do that, the federal government would be burdened with costs they never expected,” Nadeau says.

“Although there are a number of lawyers out there providing advice,” Donahue says, “I don’t see advice coming from accountants or insurance companies. It is the broker that is leading the education process. The consumer education process with regard to healthcare reform has become a big part of our job. I wouldn’t call it the Benefit Consultant Full Employment Act, but it has changed our role. Healthcare reform consulting has become the big broker-added value. How do we navigate the nuances of keeping employers informed and running out and doing a healthcare reform analysis? We’re out doing new analytics the employers have never seen before.”

“It is the best of times and the worst of times,” Nadeau says. “For years, our job was about fighting with the carriers for better rates, shopping for the best carriers when appropriate, and tweaking what was there. Now that is only 20% of what we do. Now it is all compliance, health reform strategy and clarification because a lot of this law doesn’t make sense. Larger brokers are in a much better place (in terms of these consulting services) than smaller brokers because it is nearly impossible to keep up with. We have two attorneys on staff and five consultants, and this is all they do. It is amazing how much time we are spending advising clients on healthcare reform.”