Consumer-Directed Health Plans: Mixed Employer Signals, Complex Market Dynamics

Consumer-Directed Health Plans: Employer Ambivalence and Market Complexity

Health plans had significantly expanded their consumer-directed health plan (CDHP) product lines — typically high-deductible health plans paired with a spending account — and a growing number of employers were making these products available to their workers. But actual enrollment remained modest, constituting just 5 percent of total employer-sponsored health plan enrollment in 2007. These findings emerged from the Center for Studying Health System Change's 2007 site visits to 12 nationally representative metropolitan communities, which revealed a complex set of factors shaping adoption across employers of different sizes, workforce types, and geographic markets.

In developing and marketing CDHPs, health plans positioned them as part of a broader employer strategy to shift more responsibility to workers for their health care costs, lifestyle decisions, and treatment choices. Plan respondents and benefits consultants generally expected CDHPs to play a larger role in the future, but for the moment, many large employers were engaged in what amounted to watchful waiting — offering CDHPs as one option among several while hoping employees would gradually warm to the designs.

HSA and HRA Basics

CDHPs came in two primary flavors, distinguished by the type of spending account attached to the high-deductible plan. Health reimbursement arrangements (HRAs), established through U.S. Treasury guidance in 2002, were employer-owned and solely employer-funded accounts that reimbursed qualifying medical expenses. Unused funds stayed with the employer when workers left the company. Health savings accounts (HSAs), created by federal legislation in 2003, were employee-owned and portable — workers kept their balances if they changed jobs or switched plans. Both employees and employers could contribute to HSAs, though contributions were optional. HSAs had to be paired with a high-deductible plan meeting minimum deductible thresholds.

Plenty of Interest, Limited Uptake

HSC researchers had reported two years earlier that employers were cautious about introducing CDHPs. By 2007, the pace had picked up somewhat — more large employers were adding CDHPs to their benefits menus — but significant barriers to rapid adoption persisted. Some respondents noted that relatively modest premium increases in the preceding two years had reduced the urgency for some employers to pursue CDHPs, since they could address cost pressures through incremental increases in cost sharing within their existing HMO and PPO products.

At the same time, other respondents predicted that an economic downturn could push more employers toward CDHPs. And health plans and benefits consultants anticipated that momentum would build as employers and employees grew more familiar with CDHP features, as plans developed more sophisticated consumer support tools, and as more employers could learn from early adopters' experiences.

CDHPs as Part of a Broader Consumerism Strategy

When marketing to large employers, health plans framed CDHPs not as standalone products but as components of a larger consumer-engagement strategy. As one Cleveland plan respondent observed, HSAs were just one piece, and employers were looking for a comprehensive approach. Key complementary elements typically included disease management programs, health promotion and wellness initiatives, and consumer support tools.

In the two years leading up to the 2007 site visits, many health plans had developed a range of online tools for enrollees: information on hospital and physician quality and efficiency, cost estimation calculators, and resources about healthy lifestyles and treatment decisions. Plans typically made these tools available to all enrollees regardless of benefit design, viewing them as essential for competitive positioning. Employers increasingly preferred working with a single carrier for all their health plan offerings, which pressured plans to provide a full product range, including CDHPs, to win and retain accounts.

Some employers had begun tying spending account contributions to employee participation in health behavior programs. In Indianapolis, one CDHP product automatically deposited $50 to $250 into enrollees' HSAs as rewards for participating in health prevention or improvement activities. Employers offering health risk assessments — often available online — used them to collect information on personal and family medical history, current diagnoses, health behaviors related to diet and exercise, and tobacco and alcohol use.

Product Complexity as a Barrier

The complexity of CDHP designs concerned some employers. They believed these products were difficult for many employees to understand and therefore required extensive education before rollout — some large employers reported spending 12 to 18 months educating their workforce before introducing a CDHP. Employees needed to grasp federal tax rules governing HSAs, including contribution limits and eligible medical expenses. In some cases, consumers also had to shop for an HSA administrator if their employer did not contract with one.

The portability of HSAs, while attractive to employees, was seen as a negative by some employers, particularly in industries with high turnover. These employers responded by making minimal or no contributions to HSA accounts, or by offering HRAs instead, since HRA balances reverted to the employer when employees departed. A few employers reported observing a bunching of care utilization at year-end among employees who had exceeded their deductible — a potential behavioral response to any high-deductible plan design. Employees' ability to shift care from years when the deductible might not be met to years when it was met diminished the potential savings these designs were meant to produce.

How Employer Size and Type Shaped Adoption

The factors driving CDHP adoption differed markedly between large and small employers. Large employers sometimes valued CDHPs as part of a strategy to transfer more health care responsibility to workers, but they were reluctant to structure premiums and benefits in ways that aggressively pushed employees toward these plans. Most had been raising cost sharing through higher deductibles, coinsurance, and copayments in existing products for several years and feared that introducing what employees might perceive as yet another round of less comprehensive coverage would provoke a negative backlash. For the most part, large employers set employee premium contributions at similar levels across plan options, avoiding strong financial incentives to choose the CDHP.

Some health plans helped large employers transition gradually. A Cleveland plan offered a PPO option paired with health coaching, consumer support tools, and monetary incentives for employees who participated in health maintenance activities — an intermediate step before a full CDHP introduction. Larger employers with young, highly educated workforces were less worried about the perception of reduced benefits and more confident their employees could use online tools effectively.

Smaller employers with low-wage workforces typically offered HSAs as enhancements to existing high-deductible plans and often made no contributions to the accounts. For some of these employers, the lower premiums associated with CDHPs represented the last option before dropping health coverage altogether. In Greenville, the popularity of CDHPs among small employers was attributed to the fact that many consumers in that market were already accustomed to plans with relatively large deductibles and coinsurance — features that small employers had introduced earlier to hold down premium costs.

Smaller employers with high-wage professional workforces were more likely to offer HSAs because their employees valued the tax advantages, and these employers were also more likely to contribute to accounts. Small employers of both types were more likely than large employers to offer a CDHP as the sole health plan option. In Orange County, some smaller employers were working with third-party administrators to "build their own" HRA-type plans — purchasing a high-deductible health plan and then separately establishing an HRA account through a TPA and broker.

Employers with high workforce turnover, such as retailers, gravitated toward HRAs rather than HSAs because unused HRA balances stayed with the employer. Two large retailers in Indianapolis and Phoenix began offering HRAs in January 2007. The Phoenix retailer explained the choice directly: with an 80 percent turnover rate, the company was reluctant to fund portable accounts. Public employers had generally not added CDHPs, as their employees were accustomed to comprehensive benefits often negotiated through union contracts. Most public employers continued relying on incremental cost shifting through existing plans, though a few states had begun offering CDHPs to state employees.

Geographic and Market Variation

CDHP adoption varied significantly across the 12 communities studied. In competitive labor markets, employers tended to offer more generous health benefits and approached CDHPs cautiously, fearing that higher out-of-pocket costs would make them less attractive employers. In Orange County and Boston, where HMO enrollment remained strong, many respondents saw HMOs as offering more coverage at lower cost than CDHP options, making it difficult for CDHPs to compete as long as employees and employers accepted some network restrictions.

In communities with strong union presence — Cleveland, Lansing, and northern New Jersey — organized labor typically viewed CDHPs as offering less comprehensive coverage and resisted employer attempts to introduce them. The state of Indiana had introduced an HSA plan for state employees in 2006 but attracted only 4 percent enrollment. After adding a second HSA option with a lower deductible and including full coverage for preventive services in 2007, enrollment rose to about 16 percent. The state of Arkansas had offered an HSA plan for four years, gradually lowering the deductible to make it more appealing, and reported growing enrollment, especially among employees under 35 who expected few medical expenses and employees over 55 who valued the HSA as a retirement savings vehicle.

Legislative Changes and the HSA Outlook

Several respondents pointed to the December 2006 changes in HSA law as having the potential to accelerate enrollment growth, particularly among higher-wage workers. The legislation increased the maximum amount that could be deposited into HSAs, removing the previous requirement that annual contributions could not exceed the plan deductible. As one respondent characterized it, HSAs had become a potential vehicle for wealth accumulation — better than a 401(k) plan for some purposes. Some respondents reported observing employers shifting focus from HRAs to HSAs in light of the new rules, though the timing of the legislation meant the impact was expected to be more visible in 2008 benefit offerings.

The Road Ahead for Consumer-Directed Plans

Plan respondents and benefit consultants generally expected CDHPs to become more prominent, particularly as components of broader strategies to increase employee engagement in managing their health care. Many large employers were offering CDHPs as options while hoping employees would become more comfortable with the designs over time, eventually allowing other options to be dropped or restructured. Some large health plans and national benefit consultants were setting an example by replacing their own employees' benefit options with CDHPs — Aetna, UnitedHealthcare, Towers Perrin, and Watson Wyatt were all cited.

There was less consensus about the future of CDHPs among small employers. Respondents expected HSAs to continue gaining ground in high-income professional firms because of the tax benefits. For lower-wage small firms, the bigger question was whether these employers would continue offering health insurance at all. Some might offer HSAs with high-deductible plans but without employer contributions to the accounts.

The picture that emerged across the 12 communities was one of significant employer ambivalence. Large employers were drawn to CDHPs conceptually but reluctant to push employees aggressively toward them. Small employers adopted CDHPs for different reasons depending on their workforce composition and financial pressures. Health plans had developed sophisticated CDHP products and consumer tools, but actual enrollment growth remained incremental. Whether CDHPs would eventually become dominant features of the employer-sponsored health insurance landscape or remain niche products depended on a host of factors — from future premium trends and economic conditions to legislative developments and the willingness of employers to more actively steer their workers toward these plan designs.

About the Data

HSC conducted site visits to 12 nationally representative metropolitan communities as part of the Community Tracking Study: Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. Approximately 500 interviews were conducted between February and June 2007 in the 12 communities. In each community, representatives from at least two of the largest health plans were interviewed, including the medical director, a marketing executive, and a network executive. Interviews also were conducted with benefit consultants, brokers, and representatives of at least two large employers.

Sources and Further Reading

Regopoulous, Lydia, Jon B. Christianson, Gary Claxton, and Sally Trude. "Consumer-Directed Health Insurance Products: Local-Market Perspectives." Health Affairs, Vol. 25, No. 3 (May/June 2006).

Tax Relief and Health Care Act of 2006 (Public Law 109-432). HSA contribution limit changes effective January 2007.