Risk segmentation related to the offering of a consumer-directed health plan: a case study of Humana Inc

Health Services Research, August, 2004 by Laura A. Tollen, Murray N. Ross, Stephen Poor

In this article we examine what happened when one employer expanded its employee health benefit offerings to include a "consumer-directed" option--a benefit design that gives enrollees some first-dollar coverage but asks them to accept greater financial risk, often in return for lower monthly premiums. Our analysis is restricted to this single employer and its early experience with the consumer-directed option. The richness of the data allows us to examine the characteristics of those who chose this option in a comprehensive manner not usually possible.

Because consumer-directed plans may be most attractive to employees who expect to have relatively low health care costs, offering such plans may cause risk segmentation. If such segmentation occurs and plan sponsors do not adjust their contributions to counteract it, premiums for comprehensive health insurance products could become less affordable to the extent that those products primarily attract less-healthy employees. In this analysis, our question is not whether risk segmentation is problematic for the specific employer we studied, but whether it occurred.

BACKGROUND

Consumer-directed health plans (CDHPs) are a relatively new form of health care benefit design, hailed by some as a solution to two problems. The first problem is the pinch felt by employers who face rising health benefit costs and are desperate for something that will help them bring their health care expenditures under control (without seeming to shift the entire cost burden back to their employees). The second problem is that the quality of care Americans receive is far from what it could or should be, according to a consensus of health care stakeholders, including the Institute of Medicine (2001). For example, a recent groundbreaking report notes that Americans are likely to receive appropriate and necessary care just half the time (McGlynn et al. 2003). Consumer-directed health plans are meant to address both these problems by encouraging consumers to make more cost- and quality-conscious health care choices.

To understand the attractiveness of CDHPs, we must be clear about the position in which employers find themselves. Employers sponsor health insurance for more than half the population of the United States--161 million adults and children in 2002 (Fronstin 2003). Premiums have risen at a double-digit average annual rate in recent years (Mercer Human Resource Consulting 2003; Hewitt Associates 2003), putting significant pressure on labor costs at a time of generally weak consumer demand. But what are employers to do? Broadly speaking, effecting change in markets means putting pressure on the supply side (physicians, hospitals, and other providers), on the demand side (employees and their families), or on both. In the early 1990s, employers faced cost trends similar to today's and chose a supply-side solution--managed care. However, many argue that managed care, if not dead, is in critical condition (Robinson 2001; Draper et al. 2002). It is the victim of a semantics battle in which neither employers nor employees could separate appropriate care management from the heavy-handed utilization review and provider negotiation tactics of many insurers who called themselves "HMOs" and their products "managed care."

If employers believe that restraining costs through supply-side managed care techniques is no longer a viable strategy, they have little choice but to turn to the demand side of the market. Here, however, they must tread carefully, because health benefits are a highly visible and personal element of employee compensation. As recent collective-bargaining strikes--both threatened and actual--attest, increasing the share of costs borne by employees can raise the possibility of significant morale problems (see, for example, Armour and Appleby 2003). Moreover, we have not yet found a demonstrably superior way to shift costs. Simply increasing employees' share of premiums does little by itself to address underlying cost trends. Furthermore, the strategy may backfire (from a policy perspective) if it leads employees to drop coverage. Increasing point-of-service cost sharing will generally reduce employees' use of services--and thus premiums--but not necessarily in a desirable way.

To fill the void left by the retreat of managed care--and to put a "kinder, gentler" face on increased employee cost sharing through the promise of lower premiums--insurers have developed the so-called consumer-directed health plan. The origins and types of CDHPs have been well documented elsewhere (Gabel, Lo Sasso, and Rice 2002). These plans differ in their details but share three common elements:

* Greater point-of-service cost sharing--usually in the form of a much higher deductible--than in the typical PPO or HMO product;

* Reimbursement arrangements (sometimes called "allowances" or "accounts") that give enrollees at least some shelter from high cost sharing and that may or may not allow unspent dollars to be used for other purposes or carried forward to subsequent years; and