Consumer Directed Health Care: HSAs, HRAs and the marketplace American Association of PPOs May 11, 2

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Consumer Directed Health CareHSAs, HRAs and the
marketplaceAmerican Association of PPOsMay
11, 2005Grace-Marie TurnerGalen Institute
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• Consumer-directed care gains attention but has
  no guarantee of success
• The market will decide

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CDHC is many things

• A constellation of offerings that give consumers
  more power and control over health care decisions
• New tools include
• HSAs, HRAs
• New chronic care management programs
• Consumer-focused centers such as MinuteClinics
• New group purchasing options
• Consumer-friendly medical information sources

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What is the new world about?

• Patient control Consumers will have more
  choices in health care and health insurance
  arrangements
• Cost visibility They will be more price
  conscious in shopping for insurance and medical
  services
• Savings incentives Consumers have more
  incentives to get the best product, service, and
  value for their money

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The goal

• Engaging consumers as partners rather than
  adversaries in managing health costs and getting
  the best value for health care dollars

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Some new tools, courtesy of Washington
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FSAs, HRAs, and HSAs

• Flexible Spending Accounts
• available since the mid 80s
• Health Reimbursement Arrangements
• Created in 2002
• Health Savings Accounts
• Available since 2004

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Flexible Spending Accounts

• Typically funded by employees pre-tax
  contributions
• Use it or lose it Unused balances are forfeited
  at the end of the year

• FSA

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Flexible Spending Accounts

• The policy goal is fixing use-it-or-lose-it
• Last years House-passed bill would allow up to
  500 of unused FSA balances to be carried over or
  transferred to other savings vehicles

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Health Reimbursement Arrangements

• One option for employers
• and employees

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Health Reimbursement Arrangements

• Enabled by Treasury and IRS guidance
• Accounts can be funded only by the employer
• Very flexible no limits on contributions, few
  dictates on coverage
• Unused balances can be carried forward to pay for
  health costs at discretion of employers

• HRA

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Companies can give employees control over a
portion of their salary
Value of health insurance policy
4,000
Cash wages
50,000 salary
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Health Savings Accounts

• Created by Congress as part of Medicare
  Modernization Act
• Effective January 1, 2004
• The newest option in the consumer-choice tool kit

• HSA

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Health Savings Accounts

• HSAs allow individuals, employers, or employees
  to deposit tax-free money into a special account
  to pay for current and future medical expenses
• Savings are owned by the HSA holder and roll over
  from year to year
• Individuals must have a high-deductible health
  plan to open an HSA

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One example of an HSA
Catastrophic coverage preventive care
High deductible insurance
500 deductible
Employer, employee, or individual makes deposit
to HSA. Unspent funds rollover to next year.
Funds routine health spending. Preventive care
exempt.
1,000 deposit
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HSA specifications

• Individuals can deposit up to 2,650, and
  families 5,250 this year
• Over age 55 can deposit 600 more
• The money can be used for routine health care
  services or saved for future
• Deposits are tax free, earnings are tax free, and
  expenditures are tax free for IRS-allowed medical
  expenses

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Qualified insurance plan

• Accounts must be coupled with high-deductible
  health insurance
• Minimum deductible is 1,000 for individuals,
  2,000 for families
• Maximum out-of-pocket limits of 5,000/indiv. and
  10,000/families
• Employer, account-holder or both can contribute
  -- up to100 of deductible

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• California Democrat Pete Stark says
• HSAs are an effort to shift even more costs to
  individuals while providing tax benefits skewed
  to those with higher incomes. It is more clear
  than ever before that this is a tax shelter for
  the healthy and wealthy. Nothing more, nothing
  less.

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• The facts so far
• Objections of the critics are not backed by the
  real-world experience of companies and consumers

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Assurant Health study of HSAs

• 70 of purchasers are over age 40
• 77 are families with children
• One-third make less than 50,000 a year
• http//press.fortishealth.us.fortis.com/fh/press-r
  elease-cm/newsroom/hastert/

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AHIP study of HSAs

• 438,000 people signed up for HSAs in the first 9
  months
• 30 were previously uninsured

www.ahip.org
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Aetna study of HRAs

• Use of preventive services increased by 23
• 5.5 decrease in pharmacy costs and a 7
  increase in overall generic utilization
• 3.7 medical cost increase, compared to
  double-digit increases for a similar population
• Medical costs fell by 11 for one
  full-replacement plan sponsor
• http//www.aetna.com/news/2004/pr_20040622.htm

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Watson Wyatt, NBGH Survey

• 8 of large employers surveyed now offer Health
  Savings Accounts
• Another 18 plan to offer them next year
• 47 are considering them
• 75 of employers say HSAs are effective vehicles
  to engage employees more in managing their
  health 49 arent sure if they will help lower
  costs

10th annual survey of large employers conducted
by Watson Wyatt National Business Group on
Health, Mar. 17, 2005. http//www.watsonwyatt.com/
news/press.asp?ID14366
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Booz Allen Hamilton

• HSAs will begin a new movement toward building
  personal financial security
• Expect consumers to demand package pricing for
  high-cost services
• CDHPs and HSAs will begin to restructure both
  the healthcare world and the financial services
  world in profound ways.

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Education and information are key

• Successful programs will feature strong consumer
  support, patient-education
• Managed care will focus more on high-end medical
  expenses
• HSAs are not a silver bullet and arent for
  everyone

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Keeping our eye on the ball

• Creating new incentives to engage consumers in
  managing costs and seeking value in their health
  care spending.

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• Contact
• Grace-Marie Turner
• Galen Institute
• www.galen.org
• [phone]
• gracemarie_at_galen.org

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