Q and A About Consumer-Driven Health Care

March 27, 2003
Alexander Domaszewicz answered questions posted by Workforce members relating to consumer-driven health care. Here are his answers:

Q: I have a liability question. Employers will be "empowering" employees but it will still be an employer sponsored plan. What safeguards does an employer have to help avoid the lawsuit that comes from arguably incomplete information or an alleged abandonment of employer responsibility?

    A: This is a concern for many employers as they move toward an information-rich health care environment. This is also a question with legal implications that can only be fully addressed by legal counsel (inside and/or outside).

    One of the best analogies is the move from passive defined benefit retirement plans to the "empowered" defined contribution retirement plans we're seeing more of today. Plan sponsors continue to expand the resources they make available for their employees in the financial area, despite the potential liability issue.

    By keeping health care information resources distinctly separate from company resources and with proper disclaimers, many employers feel they are able to effectively address the liability issue. To my knowledge, no plan sponsor has been held liable for detrimental outcomes after providing health care information to an employee. However, since the potential exists, it is important to address this area when moving towards greater health care consumerism.

Q: What is the FASB liability for HRAs? Example: Employer establishes a $500 HRA for each of 100 employees with a carry forward provision. During the plan year $20,000 is used and paid. Does the employer have to accrue an expense of $30,000 to reflect "rolled over" amount?

    A: As a consulting firm we're not in a position to give tax or legal advice, but we're seeing a number of approaches in the marketplace.

    The majority of plan sponsors are viewing the first or second year of CDHP account accumulations as insignificant or diminimus in terms of the overall plan costs, and are not accruing liability yet. They will revisit this as the accounts and balances mature.

    One plan sponsor, using a major accounting house, has deemed it necessary to accrue and report the liability on an ongoing monthly basis. As of now, this approach seems to be the exception.

    With corporate debacles such as Enron and WorldCom, this is one of the areas that we may soon see further health reimbursement account IRS guidance.

Q: One company describes an account that an employee can take with them after termination. These funds are actually in custodial asset accounts.

In what circumstances will this type of account still sanctioned by the IRS?

    A: You may be talking about CareGain’s ( HealthcareIRA. In reviewing the IRS’s Revenue Ruling 2002-41 and Notice 2002-45 on Health Reimbursement Arrangements (HRAs), there do not seem to be any barriers to an employer setting up an HRA that is portable and personal to an employee. An employee could still access funds after employment has ended, as long as they incur a qualified medical expense and aren’t allowed access to the funds for any other purpose. For now, the issue of how the account is funded is at the discretion of the sponsoring employer who allocated the funds in the first place. The guidance is fairly broad and allows the employer quite a bit of freedom in structuring the HRA, but securing qualified tax and legal guidance would be an important step if structuring an HRA with a funded custodial asset account.

Q: Most of us have been hearing the success stories of some Consumer Driven Health Plans, which is great, but might not actually paint a true picture. Are you aware of any companies that took the CDH initiative and failed miserably with it? If so, what were the faults with the program? I know these plans are new, so there might not be enough information out there to answer this question.

On a different note, aren't the majority of employees signing up for these types of plans young and have few health problems? What I'd be interested in reviewing is the medical increases on the plans that are still being run with a managed care philosophy for some of the companies that are seeing very low increases on the CDH renewals. For example, if half the group is on a CDHP and that plan only experienced a 5 percent increase, but the HMO and PPO plans that cover the other half of the group saw a 25 percent to 30 percent increase are there really any savings on these plans?

    A: Your question has two parts, so I’ll address them one at a time.

    There have been a few failures in the CDHP market, but it is early in the process and programs for the most part haven’t had a chance to prove themselves (or not). Besides, it’s a lot more fun to tout successes. On the plan sponsor side, I heard about one 5,000-employee wholesaler (non-Mercer client, I might add) that offered a CDHP in 2002 and only attracted eight enrollees. Of course the program was only piloted as a "slice" option in three locations and it’s likely that communications, design, and alignment with the traditional plans was less than optimal. The employer dropped the CDHP and reenrolled the eight employees in other plans. Moving toward a consumer-directed health strategy can take quite a bit of time, effort, energy, and money. Making the new program worthwhile for the employer and the members is critical and any less could be viewed as a failure.

    Another anecdote that is in some respects similar to the example above but is really a success comes from a large employer who offered a CDHP in 2002 and only attracted 30 employees to enroll. The difference here is that the employer actually targeted and was perfectly fine with very low enrollment (less than 100) as it allowed them to gain experience with CDHP for the following year. The employer has now expanded the option and has thousands of enrollees in CDHP.

    The final piece of this equation is around vendors in the CDHP marketplace that have not made it. HealthSync was a great idea--create a health plan marketplace where firms give employees a fixed amount of money to go ‘shopping’ on a Web-based platform allowing them to choose (based on cost and quality) between all the health plans in a given market. Then the health plans would have premiums paid to them out of the entire pool of money adjusted for demographics and disease burden. Unfortunately, this consumer-directed model took too much coordination between health plans and employers, while initially being a solution in a very limited number of markets. HealthSync didn’t make it. Planlinx was another vendor in the consumer directed benefits and education space that didn’t gather enough business to stay afloat. The lesson here is to choose who provides services to your employees carefully.

    The second part of your question has an easy answer: it’s too soon to tell. Of course that is a little cowardly, so I’ll expand just a bit for now. There have been very few full replacement CDHP cases with enough available experience to measure, but what little uncorroborated evidence is available suggests the plans help dampen the cost increase trend. In slice offerings, a lot of what we do with plan sponsors is help create an offering that will not cause excessive selection based on demographics or health status between the plans. In early CDHPs there seems to be little selection based on demographics and low to moderate selection towards the healthy. This is not surprising for the first year or two of any new offering, considering that people with health concerns or undergoing a course of treatment are often not anxious to change plans.

    Also consider that there is still selection between traditional plans with different benefit and cost-sharing structures. Generally, we have not seen the huge increases on the traditional plans that are offered along side CDHPs as in your fictional example. Every CDHP scenario is different and it is hard to generalize the results at one company to others--we see different employer goals, different offering environments, different eligibles and enrollees, different geographies and different administrators. Well-designed CDHPs that are properly aligned to the other benefit offerings with a thoughtful contribution strategy and a strong educational effort are the best defense against the undesirable selection scenario you’ve created.

Alexander Domaszewicz works for Mercer Human Resource Consulting and is an expert on consumer-driven health care.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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