Consumer-Driven Health Plans See Meager Enrollment Gains
Small annual increase of 300,000 workers contrasts with the strong interest such plans have garnered among employers and insurers

workforce.com, Jeremy Smerd, October 9, 2006

Consumer-driven health care, the logic went, would be a natural fit for Americans, the most practiced consumers of goods and services in the world. But so far these consumers have not bought into consumerism.

That was part of the message that reverberated through the health care industry September 26, when the Henry J. Kaiser Family Foundation and the Health Research & Educational Trust released its bellwether annual report on health care costs.

The report stated that during the past 12 months, the number of workers enrolled in consumer-driven plans, either with health savings accounts or health reimbursement accounts, grew marginally by 300,000 people, to 2.7 million, during the past year. Though the number of members enrolled in HSAs nearly doubled to 1.4 million workers from 800,000, membership in HRA plans dropped to 1.3 million workers from 1.6 million. The small enrollment gain sharply contrasts with the interest these plans have attracted from employers, health insurers and the cottage industry that has sprung up around consumerism's hype.

"Basically, what we saw is that the talk and debate of consumer-directed health care in the business world and at the highest level of the policy world is way out in front of the reality of the marketplace," says Drew Altman, president of the Kaiser foundation.

The significance of these findings is weighty, in no small part because the Kaiser report is considered the definitive snapshot of health care costs in the country. The numbers reflect other trends in the marketplace and show that when it comes to health care, employers prefer not to force drastic change upon their employees if they don't have to.

PPOs remain popular
To understand why demand for consumer-driven plans has not met expectations and what that means for employers, experts point to several factors. Competition among insurers has kept health care premium increases lower than in past years. This has made it more affordable for employers to offer their most popular health plans—the preferred provider organization, or PPO plan.

Viewed as more generous, PPO plans have been seen as key components in attracting and retaining workers amid the current strong labor market. Finally, for these reasons or simply because of the effort required, employers have ultimately been unable or uninterested in fully plunging into the brave new world of consumer-driven plans.

The changing health insurance market is one piece of the puzzle. In 1979, when 90 percent of U.S. employers offered health insurance, 17 major health insurance carriers existed, according to Alexandra Jung, a senior vice president with Aon Consulting. Today, with 61 percent of employers offering health care benefits, four health insurance carriers dominate the market, competing for a membership pool that has shrunk by 5 million people since 2000. To compete, carriers have dropped insurance premiums, experts contend.

"The industry is fighting for market share as the overall market is shrinking," says Gary Claxton, an author of the Kaiser report.

But there is another reason why premium increases have slowed. Employers have increased deductibles and co-pays, essentially shifting the cost to employers. As a result, health insurance premiums grew more slowly—by 7.7 percent last year, according to the Kaiser report, down from 9.2 percent in 2005 and 11.2 percent in 2004. This slowdown of premium increases made the average cost of offering a PPO plan last year only marginally more expensive than a high-deductible plan with a health savings account, according to the report. Sixty percent of American workers with health insurance choose to enroll in PPO plans even though they are slightly more expensive than consumer-driven plans and HMO plans.

"PPOs have not been cheaper than HMOs, but their market share continues to grow," Claxton says. "It shows employers and employees are willing to pay more for the freedom to be in a broader plan."

Given the cost parity between PPOs and consumer-driven plans, employers in 2006 may not have been willing to invest the time and additional money needed to switch to high-deductible health plans, especially if doing so risked lowering employee morale, says Jon Gabel, a co-author of the report.

"When you implement a consumer-driven health plan, you have to institute a tremendous amount of employee education," Gabel says. "Before making that investment, employers want to make sure such a plan will "save them money and not hurt the morale of the workforce."

Employers considering whether to offer consumer-driven plans are still facing difficult decisions. Premium increases may have slowed during the past three years, but experts believe the downward trend of premiums may be hitting its nadir.

Nonetheless, health care costs have risen 87 percent since 2000, according to the report. In that context, the brief respite is just that: brief. In the long term, cutting health care costs will remain a top priority in the executive suite, benefits consultants say.

To do so, employers will have to rely on something other than shifting costs to employees to reduce premiums. A survey by Watson Wyatt, released the day after the Kaiser report, surveyed 12,000 workers across all job levels and major industries. Sixty-nine percent of workers, the study reported, say they are concerned their employer will increase out-of-pocket health care costs through higher deductibles and co-payments in the next three years; 53 percent of those surveyed say they worry that employers will limit providers or items covered in the next two years. Continued cost shifting could foment a backlash among employees—something to consider in a strong labor market.

"You are going to get the law of diminishing returns," says Paul Ginsburg, president of the Center for Studying Health System Change. "If you keep raising deductibles, you start defeating the reason you had health insurance in the first place, which is to insure people against the financial risk of health expenditures and to make sure they get the care they need."

Squeezed by rising prices and a strong labor market, employers are at a crossroads. Market conditions may have made the status quo in health care more bearable this year, but the health care crisis persists.

Taking it slow
Part of the challenge in measuring the growth of consumerism and determining the best course of action for employers is that, unlike other plans, making the change to a consumer-directed plan takes time and planning. And the payoff—reduced costs—may be years away. The rule of thumb is that it takes three years to effectively make the switch. If companies are taking several years to make a change, current enrollment figures might belie a sharp enrollment increase in the making.

Greg Scandlen, who writes a weekly newsletter supporting consumer-driven health care, says a 100,000-person company, whose name he did not disclose, was planning to replace its health plans with a consumer-directed plan, but not until 2008. Citigroup, the largest financial services company in the world, is considering a complete switch to a high-deductible plan, but not until 2010, sources say. These are hints that employers could be embarking on an effort to change plans, albeit slowly. It might skew the current picture of enrollment trends, but it also might make good company policy, observers say. Employers could be slowly diffusing employee concerns that would otherwise send them to a competitor.

Health plan design, and the numbers presented in the Kaiser report, help to quantify a company's competing needs. Changes in plan design, therefore, must be made in the context of a broader business strategy that enables employers to retain and attract a strong workforce, says Laura Sejen, a director in the compensation consultancy business of Watson Wyatt. Fumbling this balancing act may result in the kind of consumerism that's only available to workers when jobs are abundant.

"The risk of a backlash rises and falls depending on what is going on in the labor market," Sejen says. "Employees will start voting with their feet if they can get a better health care package across the street."