Behind the Slow Growth of Employer-Based Consumer-Driven Health Plans

Behind the Slow Growth of Employer-Based Consumer-Driven Health Plans

Issue Brief No. 107
December 2006
Jon R. Gabel, Jeremy D. Pickreign, Heidi H. Whitmore

Do Consumers Want to Direct Their Health Care?

In recent years, numerous benefits consultants, health plan executives, and policymakers have declared that a new generation of health benefits -- consumer-directed health plans (CDHPs) -- will gain dominance as the previous generation -- tightly managed care -- wanes.

A CDHP is generally defined as a high-deductible health plan paired with a tax-advantaged savings account -- typically either a health reimbursement arrangement (HRA) or a health savings account (HSA). One key distinction between HRAs and HSAs lies in their portability. HRAs are owned and funded exclusively by employers, while HSAs belong to employees and are fully portable, meaning workers can retain account balances if they leave their position. Both employees and employers may contribute to HSAs, but employer contributions are optional. For both types of accounts, the plan deductible typically exceeds the employer's contribution to the savings account, leaving the employee exposed to higher out-of-pocket costs. To qualify for an HSA, an individual must be enrolled in a health insurance plan with a specified high deductible, whereas employers offering HRAs have more flexibility.

The fundamental premise of consumer-directed health care is that to help rein in costs, employees must assume greater responsibility for their health care decisions. Consumer-directed health care seeks to make patients more informed consumers by providing information about providers and treatments, developing enhanced Internet tools, and -- perhaps most importantly -- giving patients a larger financial stake in care decisions.

Many CDHP Enrollees Lack a Choice of Plans

Of the approximately 70 million American workers who receive health benefits from their employer, about 2.7 million, or 4 percent, were enrolled in a high-deductible health plan with a savings account in 2006, statistically unchanged from 2.4 million in 2005, according to the 2006 Kaiser Family Foundation/Health Research and Educational Trust Employer Health Benefits Survey (KFF/HRET). HSA enrollment grew from an estimated 800,000 workers in 2005 to 1.4 million in 2006, while HRA enrollment was statistically unchanged at 1.3 million workers in 2006 from 1.6 million in 2005. Firms covering 14 percent of insured workers offered a CDHP in 2006.

Advocates of CDHPs frequently argue the plans provide employees greater choice and independence in the health care marketplace. Ironically, 39 percent of the 2.7 million individuals enrolled in employer-sponsored CDHPs had no option of selecting a different plan type in 2006. The majority of employees enrolled in an HSA-eligible plan (53%) were not offered an alternative, while 24 percent of enrollees in HRA plans lacked a choice of plans.

When workers did have a choice between a CDHP and another plan type, including PPOs, HMOs, and point of service (POS) plans, comparatively few selected a CDHP. Of the 8.9 million employees who could choose between a CDHP and at least one other health plan, fewer than one in five (19%) picked a CDHP in 2006, statistically unchanged from 22 percent in 2005. By contrast, when PPOs were offered alongside other plan types, 55 percent of employees chose the PPO. The comparable figures for HMO and POS plans were 40 percent and 34 percent, respectively.

Of the 8.9 million workers with a choice of a CDHP and at least one other traditional plan type, some could select an HRA, an HSA, or in some cases both. Of the 3.3 million workers who could choose between an HRA and at least one traditional plan, 28 percent opted for the HRA, while 12 percent of the 5.6 million workers who could select an HSA plan over at least one traditional plan chose the HSA.

Regarding exposure to higher out-of-pocket costs, HMOs represent the opposite end of the spectrum from CDHPs. When offered alongside an HMO plan, CDHP enrollment was on average nine percentage points lower than when HMOs were not available. This lower CDHP enrollment occurred whether the employer was offering an HRA or HSA plan.

Where are the Savings?

How CDHPs perform with respect to employer and employee costs and financial protection for workers will significantly determine their success in the health insurance marketplace. When workers had a choice of plans, average monthly premiums for CDHPs for single coverage ($299) were significantly lower than for other plan types -- PPO plans were the most costly at $364. However, when employer contributions to the savings accounts were factored into the monthly premium, CDHPs and traditional plans did not differ significantly in cost.

Similarly, workers' average monthly premium contribution for single coverage in CDHPs ($56) was not statistically different from employee contributions for traditional HMO, PPO, and POS plans. Likewise, among CDHPs, HMO, PPO, and POS plans, the percentage of the total premium contributed by employees for single coverage showed no statistically significant differences.

However, employee cost sharing was substantially greater in CDHPs than in traditional plans. In 2006, the average annual in-network deductible for CDHPs -- when offered as a choice to workers -- was $1,459 for single coverage, considerably higher than for HMO plans ($30), PPO plans ($261), and POS plans ($94). Furthermore, CDHPs largely relied on coinsurance for physician office visits (only 15% of enrollees were in a CDHP using copayments for office visits), while traditional plans overwhelmingly used copayments. With copayments, employees pay a fixed amount for each physician office visit. With coinsurance, employees pay a percentage of the total negotiated bill. Seventy-nine percent of workers in PPOs were enrolled in plans that use copayments for physician office visits, as were 95 percent and 98 percent of workers in HMO and POS plans. Moreover, many employer plans with copayments for office visits waived the requirement for employees to satisfy the deductible and provided first-dollar coverage for preventive care.

Table 1: Performance of Consumer-Directed Health Plans with Other Health Plans When Enrollees Have a Choice of Plans, 2006

Monthly Premium, Single Coverage: CDHP $299; HMO $339*; PPO $364*; POS $363*
Monthly Employer Contribution, Single Coverage: CDHP $243; HMO $288*; PPO $303*; POS $307*
Monthly Employee Contribution, Single Coverage: CDHP $56; HMO $51; PPO $61; POS $56
Average Single Deductible, In-Network: CDHP $1,459; HMO $30*; PPO $261*; POS $94*
Percent of Employees Enrolled in a Plan with Copayments for Office Visits: CDHP 15%; HMO 95%*; PPO 79%*; POS 98%*
Average Monthly Employer Contribution to Savings Account: CDHP $54; HMO n/a; PPO n/a; POS n/a
Total Employer Contribution (Premium Plus Savings Account): CDHP $297; HMO $288; PPO $303; POS $307
* Difference from CDHP is statistically significant at p<.01.
Source: 2006 Kaiser Family Foundation/Health Research and Educational Trust Employer Health Benefits Survey

When One Plan Type is Offered: CDHP vs. Traditional Plans

Rather than offering employees multiple plans, some employers -- particularly those with fewer than 200 workers -- offer only a single health plan. With respect to cost to employers, total monthly contributions for single coverage were significantly lower for CDHPs at $226 when only one plan was offered, compared with $288, $319, and $285, respectively, for HMO, PPO, and POS plans. When average monthly employer contributions ($74) to the savings account were added to CDHP premiums, however, differences among CDHP, HMO, PPO, and POS plan costs were not statistically significant.

Regarding cost and financial protection for employees, in situations where only one plan was offered, there were no statistically significant differences in employees' monthly premium contributions for single coverage between CDHPs and other plans. But deductibles in CDHPs exceeded those in PPO plans by more than five times and were more than 20 times greater than those in HMO plans. Moreover, when CDHPs were the sole plan offered, coinsurance for physician office visits was prevalent.

Table 2: Performance of Consumer-Directed Health Plans with Other Health Plans When Enrollees Have No Choice of Plans, 2006

Monthly Premium, Single Coverage: CDHP $260; HMO $332*; PPO $367*; POS $336*
Monthly Employer Contribution, Single Coverage: CDHP $226; HMO $288#; PPO $319*; POS $285#
Monthly Employee Contribution, Single Coverage: CDHP $34; HMO $44; PPO $48; POS $51
Average Single Deductible, In-Network: CDHP $2,112; HMO $77*; PPO $372*; POS $236*
Percent of Employees Enrolled in a Plan with Copayments for Office Visits: CDHP 10%; HMO 96%*; PPO 80%*; POS 99%*
Average Monthly Employer Contribution to Savings Account: CDHP $74; HMO n/a; PPO n/a; POS n/a
Total Employer Contribution (Premium Plus Savings Account): CDHP $300; HMO $288; PPO $319; POS $285
* Statistically significant at p<.01. # Statistically significant at p<.05.
Source: 2006 Kaiser Family Foundation/Health Research and Educational Trust Employer Health Benefits Survey

Implications

When given a choice of plans, relatively few employees (19%) chose CDHPs. This represents a primary reason why CDHP enrollment had not accelerated quickly in the group insurance market. By comparison, based on a member survey, the industry trade group America's Health Insurance Plans estimated that 23 percent of all new policies in the individual market were HSA-eligible plans. To date, enrollment in employer-based CDHPs had grown more slowly than the early trajectory of PPO plans, where PPO market share expanded from less than 1 percent in 1984 to 11 percent in 1987.

Analyzing the performance of CDHPs versus traditional plans provides some basis for understanding why enrollments overall and selection rates in particular were not higher. From the employer's perspective, the total cost of CDHP coverage -- regardless of whether the employer offered workers a choice of plans -- was comparable to that for traditional plans. While CDHP premiums were substantially lower, the sum of employers' contributions to the savings account (if any) and the premium was equivalent to spending on other plan types.

From the employee's perspective, monthly contributions were similar between traditional plans and CDHPs, but employee cost sharing was much greater in CDHPs. Not only were average annual deductibles more than a thousand dollars higher than in PPO plans -- the traditional plan type with the highest deductible -- but CDHPs also typically used coinsurance for physician office visits while traditional plans primarily relied on copayments.

On the other hand, if an employee does not anticipate using many health care services, higher cost sharing is less of a concern, and the employer's contribution to the savings account makes a CDHP function as a savings vehicle.

Without historical experience, health plans and employers initially may have priced CDHPs too high, which could explain why coverage costs to employers were not different between CDHPs and traditional plans. To protect against favorable selection -- where healthier-than-average individuals enroll -- employers also may have set similar monthly contributions for employees in CDHPs and traditional plans. If plans and employers did overprice CDHPs, subsequent premium increases in the following years would likely be more moderate for CDHPs than traditional plans, thereby increasing the appeal of CDHPs.

In the employer-based market, CDHP enrollment may eventually take off in a manner similar to the early experience of PPOs. For the time being, however, CDHPs had gained only a toehold in the employer-based market, and health plans appeared to be more enthusiastic about consumer-directed health care than employers, who in turn were more enthusiastic than employees.

Notes

1. In 2006, HSA qualified plans were required by federal law to have deductibles of at least $1,050 for single coverage and $2,100 for family coverage.

2. Claxton, Gary, et al., "Health Benefits in 2006: Premium Increases Moderate, Enrollment in Consumer Directed Health Plans Remains Modest," Health Affairs, Web Exclusive (Sept. 26, 2006).

3. Readers should be aware of a limitation of the KFF/HRET data, which reports figures for firms rather than establishments. These limitations are discussed more fully in the Data Source section.

4. KFF/HRET Employer Health Benefits, 2006 Annual Survey (September 2006).

5. America's Health Insurance Plans, Center for Policy and Research, "January 2006 Census Shows 3.2 Million People Covered by HSA Plans" (March 9, 2006).

6. Gabel, Jon, and Dan Ermann, "Preferred Provider Organizations: Performance, Problems and Promise," Health Affairs, Vol. 4, No. 1 (Spring 1985); and Rice, Thomas, Jon Gabel and Gregory de Lissovoy, "PPOs: The Employer Perspective," Journal of Health Politics, Policy and Law, Vol. 14, No. 2 (Summer 1989).

7. In HRA plans, where the employer owns the savings account, not all contributions to the savings account represent actual expenditures for the employer. Some employees may leave their position and forfeit their balance to the employer. Among actuaries, the general rule of thumb is that the employer will retain about 15 percent of their contribution to the savings account.

Data Source

Study data are from the public use file of the 2006 Kaiser Family Foundation/Health Research and Educational Trust (KFF/HRET) Employer Health Benefits Survey. Survey respondents were employee benefit managers who were asked in a telephone survey a series of questions about their largest HMO, PPO, POS, and CDHP. The 2006 survey entailed a sample of 2,122 randomly chosen private and nonfederal public firms with three or more workers. The survey response rate was 48 percent. In the 2006 survey, 205 firms offered a CDHP (72 HRAs and 133 HSAs), of which 38 offered no choice of plans. The sample also includes 783 PPO, 116 HMO, and 178 POS plans that were no-choice products. The KFF/HRET survey uses a series of weights to extrapolate results for the typical employee and firm. Data presented in this Issue Brief are employee-weighted data.

The survey questionnaire asked a series of questions about the provisions of the largest HMO, PPO, POS, and high-deductible plan with a savings option (either an HRA or an HSA). HRA and HSA plans are defined as health plans with high deductibles (at least $1,000 for single coverage and $2,000 for family coverage) that are offered with an HRA or are eligible to be offered with a health savings account. For more details about the 2006 Kaiser/HRET Employer Health Benefits Survey, see the KFF website.

A possible limitation of the KFF/HRET survey for this analysis is the calculation of the percentage of employees who chose a CDHP. The unit of analysis for the survey is the firm rather than the local establishment. It is possible that the CDHP was not available at all establishments within a firm, just as the firm may not have offered a traditional plan, particularly an HMO, at all of its establishments. This limitation does not appear to be serious, however. To investigate this, for all firms offering a CDHP as a choice, the CDHP take-up rate was regressed on firm size and whether the firm had one or multiple establishments. Larger firms had lower take-up, and there was no statistically significant difference between single- and multi-establishment firms.

Sources and Further Reading

KFF — Employer Health Benefits Survey Archives — The 2006 Kaiser Family Foundation / HRET Employer Health Benefits Survey is the primary data source for this entire analysis, providing enrollment, premium, deductible, and cost-sharing data for CDHPs and traditional plan types.

Health Affairs — Health Benefits in 2006: Premium Increases Moderate — The Claxton et al. study in Health Affairs, directly cited in this report, provides the broader context of employer health benefit trends including CDHP enrollment growth in 2006.

CMS — Health Savings Account and High-Deductible Health Plan Information — Federal HSA qualification requirements referenced in this report, including minimum deductible thresholds, are governed by IRS rules and administered within the broader framework of CMS health insurance regulations.

BLS — National Compensation Survey: Employee Benefits — The Bureau of Labor Statistics tracks employer-sponsored health plan offerings, including high-deductible plans, providing supplementary data on the CDHP market trends examined in this report.

Health Affairs — Preferred Provider Organizations: Performance, Problems and Promise — The Gabel and Ermann study in Health Affairs, directly cited in the endnotes, provides the historical PPO growth trajectory against which CDHP adoption is compared in this analysis.