Devil is in the details of consumer-directed health plans

As more businesses offer their employees consumer-directed health-care benefits packages, it’s important to promote a better understanding of them — the legal and operational complexities involved in administering them, and the level of preparedness of the health payers to implement them.

The current versions of consumer-directed health care, or CDHC, are being developed within rules defined by the IRS as a result of changes in the tax law that were contained in the Medicare legislation passed almost a year ago. Since then, the health benefits industry has been working to develop products that meet employer needs within the structures defined by the IRS.

In considering this type of coverage, employers should carefully review all the facts. There are a host of issues that, if not addressed, can have implications for employers, their employees, health plans and providers. The devil is alive and well within the details of CDHC.

First, what is CDHC? CDHC is basically a way of delivering health-care coverage that has a lower premium and also puts the consumer in charge of first-dollar health care expenditures. Generally, there is a High Deductible Health Plan (HDHP) component and some combination of funds held in a Health Savings Account (HSA), Flexible Spending Account (FSA) and/or Health Reimbursement Arrangement (HRA) to fund a portion of the out-of-pocket costs.

For the most part, how each component functions is defined by guidelines that are gradually emerging from the IRS. More importantly for the employer, and what tends to be overlooked, is that many underlying functions such as those necessary for properly paying bills for health care must still be carried out, regardless of whether the bill is paid by the consumer, employer or by a health plan.

In application, these products are very complex because:

• They vary in structure and detail both across and even within health payers

• They contain numerous details that can and will be defined by employers and consumers, as well as approaches defined by payers

• They interact with other health plan elements and features

• They must be cross-checked to ensure compliance with IRS requirements, and at least in some cases will need to meet accreditation requirements of organizations like the Utilization Review Accreditation Commission.

Employers should be particularly careful about the design and implementation of the details of a CDHC plan since, in the end, the employer is still most often shouldering the lion’s share of the costs. While a large number of elements need to be addressed, a few examples can help define the nature of the challenge of addressing all of this correctly and effectively.

Consumer payment of claims

If the health service is below the plan deductible, payment for it is the responsibility of the consumer (except for certain preventive services). Virtually all provider (physician and hospital) billing systems list their charges for provided services on claims submitted to health payers.

Whenever a health plan has a contract with the provider, a contracted rate is paid instead of the listed charge. Nationally, the contracted amounts average about 40 percent of the listed charges. Consumers may wind up paying what is charged, not what is contracted, since they have no way of knowing the contracted rate. Thus the consumer may use up the health savings funds for fewer services than he or she would have if claims had been submitted and paid through the health plan.

There also are additional claims evaluation steps that a health plan applies when adjudicating claims that the typical consumer will not have the capability or information at hand to perform. The health plan also will further manage its costs through careful screening of each claim for errors, misstatements and even fraud.

If consumers are unable to use contract rates or fail to make proper determinations, the excess costs cause the deductible to be met more than twice as quickly and claims begin to be paid by the HDHP coverage that much earlier.

Conversely, the convenience of paying for services at the point of care by the use of a debit card directly linked to an HSA may prevent the health payer from knowing about such expenses and applying them appropriately to the deductible.

Although a deductible must be met (and presumably paid for out of the HSA), some first-dollar expenses will be covered by the health plan. The consumer must be aware of whether a service meets the requirements for these preventive benefits.

Meeting IRS requirements

The IRS has established rules regarding what accounts must be used first where both an FSA and HRA exist. The IRS also established additional rules that define whether each fund may be used to pay certain kinds of insurance premiums.

Consumers need to know these rules as well as current status of accounts, and must be able to read and understand an “Explanation of Benefits” report, the document that explains what was charged and what was paid and what balance remains — a skill that is possessed by few.

In addition, if debit or cash balance transactions are involved, transfers could take place without the consumer — or anyone else — asking any of the necessary questions to ensure that the accounts are being used properly. Improper expenditures can be costly to adjust, and on occasion funds can be nearly impossible to recover once an error has been made. If adjustments are not made, the consumer may be subject to IRS taxes and penalties. Improper HSA withdrawals carry the same 10 percent penalty of withdrawals from an IRA or 401k plan.

Other hurdles

Among other potential pitfalls are the fact that while deductibles are based on defined benefits, the funds in HSAs (as well as FSAs and HRAs) can be expended on any Sec. 213 eligible expense. This could dissipate the funds protecting the consumer from the deductible without counting towards the deductible.

Another is the expectation that consumers will make decisions based on accurate, current and usable cost and quality information. Yet such information is not reliably available within quite a few health plans. Even if such information becomes available, it may be inconsistent with the consumer’s requirement for care: Either the physician will refer a patient to a specific provider irrespective of such data, or, a patient simply will not consider stopping to review alternatives because of a condition the consumer considers to be serious or urgent.

Lastly, in theory some consumers will decide they do not need some services once they have to pay for at least part of the bill out of their own pockets. The reality may very well be that those decisions will result in more expensive treatment at some later date.

Those people actually “selecting” what care they wish to receive will contain some percentage of folks who defer care and then show up in the ER with worse circumstances than they should have had. A recent study by the RAND Corporation indicated that a very modest increase in pharmacy co-payments resulted in a reduction in the use of prescriptions that are used to control chronic conditions. A patient’s disincentive to receive necessary treatment early in the progression of a condition can result in more expensive treatment for a more advanced or acute condition. The net result led to overall higher healthcare costs.

There are many more similar issues that ultimately need to be considered, but by deciding to use a high-deductible health plan with any of the combination of savings accounts, employers take on the responsibility to understand the details of their use based on an informed assessment of the situation rather than hiding under the covers. Employers and health plans that fail to acknowledge and address the potential problems and weaknesses of the CDHC approach will be contributing to a new round of escalating costs.

Rod Moyer, active in health insurance issues for over 20 years, has been director of managed care for both the Pennsylvania Department of Health and New Jersey Insurance Department. He can be reached at 215-345-5729. Robert S. Eichler, co-author of the chapters on claims in the third and fourth editions of “The Managed Health Care Handbook,” is founder and principal of ChangeArtist, a consulting firm specializing in health care system strategy and technology implementation. He can be reached at 603-924-5706.