There's a big problem with consumer driven health plans (CDHPs), which many employee benefits thought leaders in Dallas Fort Worth, Texas, and throughout the country claim are the "next great idea" to control rapidly escalating group health insurance premium inflation. 

But the "problem" is not what its opponents claim.  The problem is something totally different.  Something so obvious, that it has been totally overlooked by now.  But first, let me explain.

Group health insurance premiums for an employee in Dallas Fort Worth now average about $4,000 to $5,000 per year.  There is some let up this year in inflationary trends, but with an aging population, the obesity epidemic, and the deterioration of healthy lifestyles anyone would easily conclude that Texans are in for a decade of double digit health insurance increases, perhaps around fifteen percent annual inflation in premiums.

So for the Dallas Fort Worth area employer who wants to attract talented employees, and for the employee who wants decent benefits to go along with their job, they can expect to pay at least twice the current  amount by 2015 if the current trend continues.  Something obviously has to radically change, and change fast.

A big proponent of CDHPs is Wal-Mart Stores, Inc.  Tom Emerick, the  vice president of employee benefits for the world's largest retailer, spoke in Dallas yesterday, Wednesday, May 23rd, addressing a gathering of emplyee benefits specialists at the Dallas-Fort Worth Business Group On Health conference in downtown Dallas.

Mr. Emerick had a three word recommendation for the audience ton how businesses can how to control health care: "high deductible plans."  

Cost Shifting = Consumer Driven Plans

"Consumer driven health plans,” or CDHPs, is a term that describes high deductible plans that use “cost-shifting tactics” plus another tactic, “incentives” to reward employees for reducing their medical insurance claims.  These incentives include monetary and tax incentives approved by the IRS that reward the employee for controlling the cost of their medical claims.

The rationale behind CDHPs is that if employees have to pay a greater portion of their own medical expenses, they will learn to be savvy consumers and become better  and more motivated shoppers for their family's health care expenses. 

The main keys for CDHPs to be successful in controlling medical insurance costs is first, to provide consumers with the edcuation and information tools so that they know how and where to shop for the best care at the lowest cost. "Price transparency" is the term used to describe the tools that consumers can learn which medical provider provides the best rated care at the lowest price.  There is some progress in this area, but price transparency has quite a way to go.

The other tools are incentives, usually in the form of tax advantaged contributions to savings plans that the employer or the employee or both can set up to help the employee pay for some of their out of pocket medical expenses. 

The general philosophy is that if consumers view these contributions that can cover the higher out of pocket expenses that an employee would incur with a CDHP, or high deductible health plan, as "their own money," they will spend it more wisely on their health care, than if they were given a very expensive health plan with very low deductibles, coinsurance, and copays.

Here's a brief overview of the most common types of CDHP incentives:

Cost Shifting = Consumer Driven Plans 

The types of consumer driven health plans typically include High Deductible Health Plans.  The types of IRS approved incentives include Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), and Medical Expense Reimbursement Plans (MERPS). 

Health savings accounts (HSA) were first introduced in 2004.  These allow an employee or employer to make contributions into a tax-favored account that can be used for medical dental and vision expenses. 

The amount that can be contributed to this account is set by the IRS each year.  Any funds contributed to this account are taken as an income tax deduction, and the funds in the account grow in interest and appreciation tax-free.  Funds not used in the year contributed rollover and grow tax-free to future years. 

As long as the money in the HSA is used for IRS approved medical, dental and vision expenses, the funds in the HSA are never taxed.  Money contributed by an employer or an employee to an HSA is controlled by the employee.  

In order to set up an HSA, the employee must have an IRS qualified High Deductible Health plan.  There are specific differences in these plans, namely that the plan has a higher deductible (for 2007, a minimum of $1200 for an individual and $2400 for a family), and does not offer office visit copays or prescription drug copays until the deductible is reached. 

In other words, the employee uses the money in their HSA to pay for medical expenses, and can “keep” any remaining contributions in the HSA which then grows tax-free for use in the future.  If the employee is a “good consumer,” so the thinking goes, they will find ways to save more of their HSA contribution that they can use in future years.

Cost Shifting + Incentives + Self funding = HRA

The second most popular CDHP incentive is the Health Reimbursement Arrangements (HRAs).  These are another common form of “carrot and stick” cost shifting and incentive tactics, but add the tactic of partially self-funding.  HRAs allow an employer to reimburse employee medical claims, usually through a third party administrator (TPA) service. 

In the case of an HRA, the employer purchases a group health insurance plan with a higher deductible, for instance, a $3,000 deductible plan instead of a $1,500 deductible plan. The employee submits claims to the TPA for review and reimbursement, and the employer reimburses the TPA for the claims and the services.  The employer has in this case “taken on” or “partially self-funded” the risk of $1500 per employee in medical expenses. 

But since a majority of employees never meet their deductible, the employer will more years will pay fewer claims, and will save because the cost of a $3,000 deductible plan is less than a $1,500 plan.  And since the insurance company has fewer medical claims to pay, the claims history of an employer with an HRA is reduced, which can lead to a lower rate of increase in premiums. 

With an HRA, the employer may elect to allow any portion that the employer contributes to each employees deductible may be used in future years by the employee, which is an incentive for the employee to shop for lower cost health care.  Unlike an HSA, the HRA funds provided by the employer for the employee’s health care belongs to the employer, and if the employee leaves the company any remaining funds can remain with the company.  And unlike an HSA, with an HRAthe health insurance plan can include Rx and office visit copays.

MERPS

Medical Expense Reimbursement Plans (MERPS) are governed by a 50 year old federal regulation, the IRS Section 105.  The Section 105 regulations outline how an employer can set up a tax-favored reimbursement plan for specific medical expenses of employees.  MERPS require a plan document describing the plan, and the plan itself and the administration of the plan and how medical expenses are reimbursed are handled by a third party administrator (TPA). 

Properly drafted and administered medical expense reimbursement plans provide employers with additional methods for reimbursing specific medical expenses of employees and dependents. MERPS can be used as stand alone, or in addition to an HSA or HRA plan.

Again, MERPS can incorporate the cost-shifting, incentives, and self funding tactics described above.  MERPS can also allow an employer to reimburse employees on a tax-favored basis and at a lower cost for than if the expenses were covered in a fully insured group health plan. 

For example, an employer can select a high deductible health insurance plan that does not reimburse Rx or office visit copays until the deductible is met, but then through a MERP and through a TPA reimburse employees completely or partially for the cost of copays or other medical expenses.  These copay benefits can often be provided to employees at a lower cost than if they were included in the group health plan, and this tactic may save an employer as much as 10 to 20% of the premium than if they purchased all of the benefits in a group health insurance plan.

MERPS also allow an employer to reimburse employees on a tax-favored basis for specific expenses that are usually not covered in fully insured group health plans.  This is the area where MERPS really shine.  Combined with the other tactics discussed above, MERPS can save employers and employees in medical expenses. 

MERPS can also be used to fund on a tax-favored basis employee benefits programs that are not covered by fully insured group health insurance plans but that can significantly reduce the number of catastrophic medical claims, lost time and wage productivity, and deaths.

Conclusion

So there you have the alphabet acronym stew of how health insurance industry pundits propose to make health insurance more affordable.  As a group benefits consultant and group health insurance agency in Dallas Fort Worth and North Texas, Group Benefits Advisors uses all of these tools listed above.

Generally, and perhaps after some gnashing of teeth by employees, companies that purchase high deductible heatlh plans and provide their employees with HSAs, HRAs, or MERPs can generally expect to see a significant, but moderate reduction in inflationary increases in group medical insurance expenses. 

However, we are increasingly convinced that CDHP advocates are making the wrong argument, and missing the point.  In fact, CDHP advocates might be winning the battle, but they are losing the war on affordable health care and health insurance. 

With a national election less than a year and a half away, the general public's and business community's dissatisfaction with the current health insurance and health care system are raising the likelihood that candidates in favor of universal or nationalized health insurance or health care will be elected.

As a concerned patriotic citizen, the spectre of nationalized heatlh care scares me sick.  This same government that watched while New Orleans sank, and that alienated the Muslim world and justified invasion of Iraq over WMDS that never existed is now supposed to fix our broken health care and health insurance system?

CDHP and High Deductible Group Health Insurance Plans Fail to Protect Employees and the Bottom Line

The fact is, these concumer driven health plans and high deductible health plans and the overall philosophy that drives them are all too little, too late.  They do not do enough to control a Dallas Fort Worth company's health insurance costs.  Its a little like organizing a bucket brigade when there's a fire already raging in the barn.  And the CDHP philosophy just emboldens the universal health care national health insurance proponents to work that much harder to get their candidates elected.

Don't despair, and don't think we've gone sour.  We'll explain why, what and how Dallas Fort Worth employers can effectively control health care and health insurance costs in our next few posts.

This brand new strategy is ever so simple, and so powerful, and so effective, you will wonder why it has never been attempted, and why not politician or legislator has ever endorsed it.  It is a strategy so effective that it could save the country enough money to provide private health insurance to every citizen, and that could provide employers with double digit health insurance premium decreases for years to come!