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The future of consumer-driven health plans

by Tony Novak, CPA, MBA, MT
, revised 2/19/2004 and 11/28/2011

Consumer-driven health plans are here to stay despite initial resistance from managed care companies and slow acceptance by mid-sized and smaller employers. Almost all large employers are now using some version of consumer-driven health plans. The consensus of opinion is that these plans are working as intended to contain health care costs and improve consumer satisfaction. Mid-sized and smaller employers are expected to continue the trend toward adapting these plans.

There are three possible models of consumer-driven health plans of the future:

A consumer account system like the current Health Savings Account (HSA) program. This plan is getting much attention from the financial press, but the coverage tends to be overly optimistic. Success of this program will depend upon three key changes, none of which are likely in the immediate future: a) loosening of federal tax laws to allow more consumers to participate, b) acceptance by the nation’s healthcare companies – despite the fact that these plans reduce revenue and operating margins, c) acceptance by employers – despite the fact that employers do not pocket the savings achieved under the system. At this time the number of Americans eligible for such plans is so limited that HSAs are more of a “niche” health plan than a national proposal. Neither employers nor the largest health plans have shown serious interest in these plans. Under the current plan design, HSAs are the health plan of choice for affluent individuals only but are not effective for the vast majority of middle-income Americans.

Employer-based plans like the Health Reimbursement Arrangements (HRA) that financially reward employers for allowing employees to make individual choices. At this point employer-sponsored HRA plans have a clear advantage over other options because HRA plans have the fewest legal restrictions and the financial savings are retained by the employer – thereby creating a built-in financial incentive adapt the new plan design. These plans are effective for all businesses except self-employed persons. (For health plans, the term “self-employed” includes partners, owners of S-corp. and LLC members). HRAs are not useful to consumers who do not receive health benefits through their employer. The only bottleneck seems to be the requirement to use an independent third party administrator to handle claim validation for tax purposes and meet requirements of health care privacy laws. This means that HRA plans are similar to retirement plans in that the employee must hire a firm to handle the HRA plan. HRA plans cannot be effectively self-administrated. The availability of administrative services for small businesses separate from a health insurance company is limited. Despite the significant savings achieved by the employer, some small businesses are reluctant to incur the cost of about $1000 per year to operate a HRA plan. Eventually these plans will be available to all businesses at a cost that is easily justified by the cost savings.

Government-defined healthcare programs. Several states have tried to reform health plans through legislative measures but have generally not been successful. Many people are skeptical that we would be any more successful following the same course of action on a national basis. Yet it seems increasingly likely that eventually we will have at least some type of national “safety net” to cover individuals not picked up by other health plans. This issue is likely to be on the national agenda in 2005 following the presidential election for possible implementation in 2006 or 2007 at the earliest. Presumably, a national health plan would pre-empt the current state-controlled health plans and may also replace COBRA health plans. For now, states will continue to offer their own health plans to high risk individuals under the guidance of the current federal law known as HIPAA.

At this point the HSA appears to be the plan of choice for self-employed individuals, HRA plans will dominate as the employer-provided health plan design and government-defined programs will cover high-risk individuals.

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