Driving Savings with Consumer-Driven Health Care

When Humana Inc. CEO Mike McCallister saw the 19.2 percent increase in thecompany’s health-care benefits costs for its 5,000 headquarters employees for2002, he knew that changes had to be made. Managed care was no longercontrolling health-care costs.

McCallister instructed Bonnie Hathcock, chief human resources officer, tofind a solution. Hathcock launched a collaborative internal effort that includedthe company’s product-development, communications, and actuarial staffs. Theteam turned to the consumer-driven model, the newest approach to providinghealth-care benefits. Hathcock presented the new plan design to McCallister, whoasked for minor modifications and then gave his approval.

Humana, the Louisville, Kentucky-based health-care giant, introduced twoconsumer-driven plans and modified its existing health-care benefits in 2002with three objectives in mind: reducing costs, modifying employee utilizationbehavior, and maintaining employee satisfaction. Results from the first yearindicate that the company has achieved all three goals. Cost increases droppedfrom double digits to 4.9 percent, and the company saved $2.1 million on medicalclaims for the initial test group of 5,000 employees. “We found that 60 percentof these savings came from behavior modification,” says Debbie Triplett,director of benefits.

Managed care, as a cost-control strategy, has been dead and cold for threeyears. Some corporate executives are still kicking the body, desperately lookingfor signs of life in what was once thought to be a lasting solution to thesoaring cost of health-care benefits. But like McCallister and Hathcock,executives with a better grip on reality are moving on to the most promisingsolution on the horizon: consumer-driven health care. Such plans include avariety of models designed to compel employees to take a more aggressive role intheir health-care purchasing decisions and, ultimately, to modify theirutilization behavior.

Consumer-driven plans commonly combine an employer-funded, tax-free personalaccount or allowance with a high-deductible medical plan. Account balances carryover from year to year. Because employees hit the high deductible when theiraccount is exhausted, these plans create a compelling incentive for employees tobecome better informed and make careful decisions about their medical spending.Employers can use the plans to drive changes in utilization that produceimmediate savings and create a more competitive environment among health-careproviders.

“The long-term objective is to change the market, so that buying health careis more like buying a car,” says Mark R. White, senior health-care consultantfor Watson Wyatt Worldwide. “Employers need to make information available to thehealth-care consumers–their employees–to stimulate competition amongproviders, which will improve quality and lower costs. Information is the key tomarket dynamics. In health care, this is a huge, long-term change.”

Whether consumer-driven plans can create this change is an open question. Butthe proliferation of vendors pushing these plans and companies willing to testthem is breathtaking. And the Herculean task of making them work clearly lieswith human resources executives. Meanwhile, some companies are achieving goodresults from them.

Humana heals itself
    If any company has the knowledge and experience to force a radical reversalin cost escalation, it’s Humana, an industry leader in cost-control methods. Assavings from managed-care plans disappeared in 2000, Humana faced double-digithealth-benefit cost increases for its own 14,000 employees. “As an employer, wewere experiencing the same cost increases as other companies,” Hathcock says.

Humana’s new consumer-driven plan offers two options. The first provides a$500 allowance, with a $1,000 deductible for expenses beyond the first $500,followed by 80 percent insurance coverage and a $2,000 maximum out-of-pocketlimit. The second option provides the same $500 allowance, with a $2,000deductible, followed by 100 percent coverage. Employees may select one of thetwo consumer-driven options, or continue to use modified versions of Humana’straditional HMO or PPO offerings, but with much higher employee premiumsattached to the traditional plans.

When Humana rolled out the two consumer-driven options for its Louisvilleemployees, only 6 percent selected the new plan. “We weren’t disappointedbecause the new options represented a completely different benefit model,”Triplett says. “We learned that we needed to provide better tools for employeesto calculate their savings.” The human resources team modified the tools,revised the communication package, and then rolled out the new plan to Humanaemployees across the country. Enrollment jumped to 18 percent, triple theoriginal rate in Louisville.

“We never intended to drive employees out of the rich plans,” Triplett says. “Someemployees need rich plans and pay more for them. The idea was to offer employeesreal choice.” Humana helps employees choose the right plan with a package ofonline education and information tools, including an interactive program thatasks enrollees questions about their health-care and budget needs, and thenranks the plan offerings according to the responses.

Humana’s HMO participants have high utilization rates and continue to do so,but across the three PPOs and the two new consumer-driven options, the companysaw changes in behavior that helped reduce overall costs. For example, moreemployees opt for outpatient care and fewer see specialists. “We’ve learned thatyou can change behavior,” Triplett says. Employee surveys conducted after thefirst year indicate high levels of satisfaction with the health-care options.

Companies go beyond dabbling
    White believes that enrollments in consumer-driven plans will more thandouble in 2003, as enrollments in existing plans rise and as more companiesadopt the plans. “Most employers with these plans are dabbling in them andseeing 5 to 10 percent of their employees select them,” he says. “But many ofthese employers are leaving the door open for these plans to become totalreplacements. If the consumer-driven concept plays out successfully, it couldbecome a common plan design.”

Xerox Corporation, based in Stamford, Connecticut, is not dabbling. Thecompany launched a consumer-driven plan in 2002 as an option for all of its40,900 U.S. employees. The plan uses company-funded health-care accounts with ahigh-deductible PPO. “The idea for consumer-driven health care had beendiscussed for several years,” says Larry Becker, director of benefits. “Itoriginated within the human resources department. We had many discussions withsenior management as both the cost and complexity of health care increased.”Discussions were held among human resources, tax, and legal experts to craft aplan.

Xerox will continue to provide traditional plans while it monitors theperformance of its new consumer-driven option. “Much needs to be learned aboutthese plans before, and if, they are to become the primary health insuranceoption,” Becker says. “As experience with the consumer-driven plan develops, wewill look at election patterns, the cost of the plan, and the use of thehealth-care account.”

At CompuCom Systems, Inc., an IT services provider based in Dallas, 27percent of the 3,800 employees have selected the company’s new consumer-drivenhealth plan. “The HR department looked for a way to slow down double-digithealth-benefit cost increases through new plans that address the issue,” saysCyndie Ewert, human resources director. “In presenting this to executivemanagement, we addressed issues of great concern, such as operating expenses,head count, and associates’ concerns about receiving more information andchoices when making health-care decisions.”

CompuCom contributes $1,000 to accounts for employee-only coverage, $1,400for employees with one dependent, and $2,000 for employees with more than onedependent. Out-of-pocket maximums protect employees from the financialconsequences of catastrophic events. The company continues to offer PPO and POSplans. “We have eliminated most HMO plans, as they were the most costly andprojected the biggest increases,” Ewert says.

CompuCom is actively monitoring the effectiveness of the consumer-drivenplan. “HR will keep a close eye on employee behavior changes,” Ewert says. “Asassociates become more aware of the costs of health care, do they modify theirbehavior, such as purchasing generic medications instead of regular brands? Dothey wait to see a doctor, as opposed to visiting an emergency room when it isnot truly necessary? Also, we will measure our associates’ level of satisfactionand the plan’s ability to meet their needs.”

Long-term prognosis
    Whether these consumer-driven plans are successful, White says, hinges onthree key elements: introducing additional financial tension to encourageemployees to think about treatments and costs; providing education to changebehaviors; and issuing timely information that helps employees understand costsand treatments. “This final element is the most important of the three, but alsothe hardest to do,” he says. “HR must emphasize the information component tomake the plans work.”

Human resources executives must also “work through the laundry list typicallyused in any bid process,” White says. This includes looking at the cost of thespecific program under consideration, addressing access issues, andinvestigating the experience of vendors with respect to quality and informationissues. “Because these plans are in the early stages of development, the HRexecutive needs to ask vendors how they see their information flows and Websites evolving in the coming years,” he says. “Vendors should have substantialplans in place for improving the information flows and investing in thoseimprovements.”

Initial savings may come from plan design, but long-term savings come fromimproved information flows, which drive changes in behavior. “The changes ininformation flows and behaviors tend to be cumulative, so the real payoff fromthese plans may be down the road,” White says. Employers with a relativelystable workforce may be in the best position to make the investment in planchanges and to reap the rewards.

“Changing behaviors and the way the market works is a very exciting idea, butit is not clear that the personal account type of consumer-driven plan is theright one,” White says. “We won’t know until the experience of the initialadopters is clear. These plans may not be the panacea; the more generalprinciples may have a longer shelf life.” This year, employers that are testingthese plans will be able to determine whether their employees are beginning tobehave like true consumers. If more employees are comparing treatments,providers, and prices, employers will know they’re headed in the rightdirection.

Workforce, February 2003, pp. 36-40 — Subscribe Now!