Benefit Design Innovations: Implications for Consumer-Directed Health Care

Innovative Benefit Designs and Their Implications for Consumer-Directed Health Care

Health insurance benefit designs that relied solely on uniform, across-the-board increases in patient cost sharing had only limited potential to slow the pace of rising costs. But a February 2007 study by the Center for Studying Health System Change (HSC) found that a range of innovations in benefit design could make cost sharing a sharper and more effective instrument. These innovations included financial incentives to promote healthy behaviors, cost-sharing structures that varied by service type or patient condition or enrollee income, and incentives steering patients toward more efficient providers.

Most of these approaches, however, remained in early stages of implementation. Their limited adoption suggested that any meaningful effect on aggregate health spending was still many years away. Furthermore, the regulations governing high-deductible health plans eligible for health savings accounts (HSAs) actually blocked some of the most promising design innovations and weakened the incentives in others. The study's authors argued that moving away from the rigid, one-size-fits-all HSA benefit structure toward more flexible designs could broaden these plans' appeal while incorporating features that promoted cost-effective care.

Why Traditional Cost Sharing Falls Short

Employers had been steadily increasing patient cost sharing through higher deductibles, copayments, and coinsurance as their primary strategy for slowing premium growth. The federal government reinforced this trend by establishing tax-advantaged HSAs paired with high-deductible health plans, which required minimum deductibles of $1,100 for individual coverage and $2,200 for family coverage in 2007.

But several structural factors constrained how much cost containment traditional cost sharing could achieve. First, when out-of-pocket costs grew too large relative to a consumer's financial resources, the result was either financial hardship or people going without needed care. Second, health spending was highly concentrated: roughly 10 percent of patients accounted for 70 percent of expenditures in any given year. Most of that spending occurred above the deductible, where financial incentives were much weaker, or above the plan's annual out-of-pocket maximum, where incentives vanished entirely. High-deductible plans, therefore, had little practical effect on utilization among the sickest patients who drove most of the costs.

Beyond these limitations, existing benefit structures offered few incentives for patients to choose more efficient providers. Physician copayments were typically uniform across all in-network doctors, and even coinsurance arrangements substantially diluted price differences. Plans also failed to differentiate between services that were clinically essential — such as diabetes monitoring, insulin, and regular physician visits — and services that were more discretionary, like elective knee surgery for recreational athletes. Finally, benefit structures were designed uniformly without regard for variation in patients' financial capacity, meaning that cost-sharing levels appropriate for higher-income families could be burdensome for lower-income ones.

Incentives for Healthy Behaviors and Self-Management

Large employers had begun using financial incentives to engage workers in maintaining their own health and reducing risk factors. Programs ranged from nutrition and physical activity initiatives to health risk appraisals, disease management, lifestyle coaching, and personal health coach programs. Until five to ten years before the study, employers had rarely attached meaningful financial rewards to participation, and enrollment was typically low as a result.

Johnson & Johnson had been a pioneer, offering a $500 premium discount for participating in a wellness program that included completing a health risk assessment. Enrollment jumped to 90 percent. Other employers followed with premium differentials, and a few made completing a health risk appraisal a prerequisite for insurance eligibility. With the introduction of health reimbursement arrangements (HRAs) and HSAs, many large employers began funneling incentive payments into spending accounts rather than offering premium reductions or cash bonuses. Benefits consultants and employers reported that HRAs were more popular vehicles for this purpose because they offered greater design flexibility than HSAs.

Among employers using self-management incentives, many structured them incrementally: a reward of $50 to $200 for completing a health risk appraisal, an additional amount for enrolling in a health coaching program, and a final incentive upon completing the coaching. An aggressive employer might offer $400 to $500 across all steps. As one benefits consultant noted, a health assessment alone produced no return on investment — the value came from getting people engaged in follow-up programs.

King County government in Washington state stood out as a particularly aggressive adopter. The county implemented a three-tier benefit structure tied to enrollee participation in wellness activities. All enrollees started at the highest (bronze) cost-sharing level. Completing a wellness assessment moved them to the middle (silver) tier, and following through on an individualized action plan designed by the county's wellness vendor qualified them for the lowest (gold) tier. More than 90 percent of enrollees completed the wellness assessment. Despite this success, most other employers waited for stronger evidence on cost savings before adopting similar models.

There was no broad consensus among the experts HSC interviewed about the size of health benefits and cost savings achievable through self-management incentives. Some noted that capturing both direct savings (reduced health care spending) and indirect savings (increased productivity) posed measurement challenges for employers. Others pointed out that health improvements from better behaviors might take years to materialize, meaning the employer paying for current programs might not reap the financial benefits. One area of agreement: financial incentives alone were insufficient. Strong communication from management was considered essential for driving meaningful participation.

Cost Sharing That Varies by Service or Patient Condition

Some experts pointed to "evidence-based benefit design" as holding greater potential than wellness incentives. This approach encompassed two types of strategies: discouraging the use of expensive treatments that offered no advantage over cheaper alternatives, and encouraging (or at least not discouraging) the use of services with proven clinical effectiveness.

On the overuse side, concrete innovation was limited. Insurers and employers tended to rely on administrative controls rather than benefit design to curb inappropriate utilization. A few large employers applied differential coinsurance based on clinical risk indicators for services like bariatric surgery, but the list of services subject to such treatment was short. Some experts proposed reference-pricing systems — for example, setting the least expensive hip or knee implant as the reference price and requiring patients to pay the full difference if they chose a costlier option — but these ideas had not moved past discussion.

On the underuse side, the most prominent approach was reducing cost sharing for treatment regimens (usually prescription drugs) tied to certain chronic conditions. Pitney Bowes had been a notable pioneer, cutting coinsurance for all drugs used to treat diabetes, asthma, and hypertension to the lowest pharmacy tier (10 percent coinsurance vs. 20 or 50 percent), which reduced the average cost of a 30-day refill by 50 to 85 percent. For diabetes, reduced cost sharing also applied to testing supplies. Since implementing this program in 2001, Pitney Bowes had observed reductions in emergency department visits, hospitalizations, sick-leave usage, and disability rates. More than 20 large employers had adopted similar strategies for common chronic conditions, though many others were waiting for more definitive evidence before following.

Insurers had also begun expanding the preventive care safe harbor in HSA-eligible plans. While IRS guidance originally excluded maintenance drugs for existing chronic conditions from the deductible exemption, insurers broadened the list of first-dollar drugs to include medications for conditions like arthritis, diabetes, asthma, and high cholesterol, arguing these medications prevented acute complications. Aetna led this expansion, and nearly all major insurers followed, driven by demand from large employers who wanted to offer HSA plans without forcing enrollees with common chronic conditions to meet the full deductible before receiving drug coverage.

Some experts argued that the two-category approach (highly effective services vs. everything else) was still too blunt. A more refined "value-based" design would identify specific patient subgroups who stood to benefit most from a given treatment and reduce cost sharing — potentially to zero — for that group. Statins, for example, provided the greatest benefit to patients with previous heart attacks; under such a design, those patients would face lower cost sharing than people whose only cardiac risk factor was elevated cholesterol.

Incorporating these refinements posed considerable challenges. Insurers and employers resisted retooling information systems and rewriting contracts. Communicating variable benefit levels for specific services was difficult, especially when different patients had different cost sharing for the same treatment. For fully insured products, differential benefits also had to pass muster with state regulators. And the knowledge base for determining appropriate care was limited — estimates suggested only 15 to 25 percent of medical services were supported by strong evidence of clinical effectiveness.

Incentives to Use High-Performing Providers

Several experts suggested that rather than asking consumers to navigate complex benefit structures, a better strategy was to identify providers distinguished by both high quality and high efficiency and then steer patients toward them with financial incentives. This approach simplified decision-making for consumers, who could rely on their insurer to analyze quality and cost data.

Health plans had responded to employer demands by creating "high-performance" physician networks in selected markets, built around major specialties that accounted for large shares of medical spending. Primary care physicians were generally excluded to avoid disrupting existing patient-doctor relationships. Hospitals were not directly included, but because hospital costs factored into physician efficiency assessments, physicians practicing at high-cost hospitals faced greater difficulty meeting the performance standards.

While insurers had developed these networks, it fell to employers to decide whether to use them and whether to attach differential cost sharing. Some large employers used the networks only as informational tools for employees without financial incentives. Others introduced differential coinsurance — for example, 10 percent for a high-performing physician vs. 20 percent for another in-network doctor. But strong financial incentives remained uncommon because employers lacked confidence in how physicians were being classified, particularly regarding quality metrics. A physician might be rated efficient by one insurer and not by another due to small sample sizes in separate claims databases or differing episode-grouping software. Employer groups had advocated for insurer access to physician-specific Medicare Part B claims data as a way to produce more accurate and consistent assessments.

Income-Based Benefit Variation

Some employers varied premium contributions and cost-sharing levels based on employee earnings, though this practice was not widespread. Many who did so described it as a longstanding organizational value reflecting recognition that workers' ability to bear financial risk depended on their income. Some employers varied only premium contributions, while others also adjusted deductibles and out-of-pocket maximums. One large employer reported calibrating its out-of-pocket maximum as a proportion of gross salary to remain roughly constant across wage categories. Copayment and coinsurance levels were generally not subject to income tiering because of the complexity and confidentiality concerns involved.

Advances in information technology were making more granular income-based adjustments possible, including online determination of premium, deductible, and out-of-pocket maximum amounts. A key limitation persisted, however: employers had access only to their own employees' earnings, not total household income, which would have been a more accurate gauge of a family's ability to manage financial risk.

The HSA Compatibility Problem

Because HSAs occupied a central place in federal consumer-directed health care policy, it was important to ask whether these benefit innovations could function within HSA rules. Wellness and self-management incentives were generally permissible, with two significant caveats: incentives could not reduce the deductible below the statutory minimum, and — until the Tax Relief and Health Care Act of December 2006 removed this rule — the sum of employer and employee contributions could not exceed the plan deductible. These restrictions had led many large employers to route incentive-based contributions through HRAs rather than HSAs.

The 2006 legislation, however, left the statutory minimum deductible intact, which continued to create barriers. Deductible waivers for chronic disease management expenses — such as diabetes testing supplies — still were not allowed. The high minimum deductible also diluted incentives for using high-performance physicians, since differential cost sharing for these providers would not apply until the deductible had been met. And while the new law allowed employers to make higher HSA contributions for workers earning less than $100,000, it did not permit finer income-based differentiation beyond that single threshold.

Policy Implications and a Path Toward Flexibility

The researchers were struck by how limited innovative activity actually was among employers. Identifying enough innovative employers to interview required guidance from benefits consultants and insurers, and even companies known for innovation in one area often lagged in others. If innovative benefit designs were to eventually reach large numbers of people, it would take many years.

The study proposed that policy makers examine laws and regulations that discouraged innovation. Despite the 2006 legislation's loosening of some HSA rules, the benefit structure for HSA-eligible plans remained rigid and either blocked or diluted promising design innovations. One proposed alternative would replace the minimum deductible structure entirely with a maximum actuarial value — for example, capping the proportion of allowed medical costs paid by the plan at 75 percent. This would give insurers wide latitude to offer varied benefit structures while maintaining substantial cost-sharing requirements. Insurers could, for instance, offer HSA plans with first-dollar prescription drug coverage (with generic and preferred brand incentives) balanced by higher cost sharing for other services like hospital stays.

Such an approach had a precedent in Medicare Part D, where prescription drug plans could vary their benefit structures as long as they demonstrated to the government that their actuarial value met or exceeded the standard plan defined by statute. If applied to HSA plans, insurers would need to certify that their actuarial value stayed at or below a mandated level. The standard high-deductible plan would remain as one option among many. With greater flexibility, it would also become possible to vary actuarial values by income, allowing higher coverage levels for lower-income enrollees.

About the Research

The findings were derived primarily from interviews HSC researchers conducted with approximately 25 thought leaders, benefits consultants, and representatives of large employers and national and regional health insurers. Additional information came from literature reviews on benefit design. Interviews were conducted by telephone, primarily between May and August 2006, using semi-structured protocols and two-person interview teams.

Sources and Further Reading

Berk, Marc L., and Alan C. Monheit. "The Concentration of Health Care Expenditures, Revisited." Health Affairs, Vol. 20, No. 2 (March/April 2001).

Chernew, Michael E., Allison B. Rosen, and A. Mark Fendrick. "Value-Based Insurance Design." Health Affairs, Web Exclusive (January 30, 2007).

Eddy, David M. "Evidence-Based Medicine: A Unified Approach." Health Affairs, Vol. 24, No. 1 (January/February 2005).

Draper, Debra A., Allison Liebhaber, and Paul B. Ginsburg. "High-Performance Health Plan Networks: Early Experiences." Center for Studying Health System Change (forthcoming at time of publication).