HEALTH PLANS/POLICY: Consumer directed health plans

I saw a talk yesterday by Mike Parkinson, Chief Medical Officer of Lumenos–one of the leaders in the emerging CDHP movement. Lumenos has around 54 clients with around 100,000 covered lives in its products sold to self-insured employers. Another commenter at the same conference predicted up to 40m Americans (or nearly 25% of the commercial market) would end up in CDHPs.

Parkinson’s opinion is that consumers are connecting the flat line in their salaries with the increases in their health costs, and so are ready to take control of what they’re paying.

How does it work? The average employee health cost for their groups is around $6500 per capita. If an employee signs up for the Lumenos CDHP option they first carve out and cover preventative services. The employer puts somewhere from $2-6,000 per family goes into an HRA (or now an HSA) tax-free for spending on every day health needs (e.g. doc visits and drugs). Then there’s a bridge (or a donut hole) of out-of-pocket costs that the employee must pay before the catastrophic policy cuts in. The bridge tends to be roughly half of what goes into the HSA/HRA.

Lumenos has a fairly sophisticated web interface that gives comparative prices for drugs office visits and procedures. Their results, which apparently include a standard share of sick people based on risk profiles gathered from Health Risk Assessments. So far they are seeing:–12.5% cost reduction compared to prior years–14% increase in preventative visits–18% of reduction overall visits–15% reduction in spending on pharmacy costs–90-95% generic substitution

Even more remarkably, Parkinson said it also caused a big reduction in hospital admissions and hospital days, although he backed away from the 25% reduction in admissions number that he showed. Parkinson stressed over and over that the chronically ill are the ones who need these plans most. In fact they incent people to take health risk assessments, and the consumer can possibly cover their whole "break" by accepting working with a health coach, who’s job is to push the consumer into behaving better, eating better, taking all their meds, etc, etc.

So assuming this is true, what does this mean to a self-insured employer. I did a few back of the envelope calculations. Lets assume that a 1,000-employee company spends $6,000 per employee on health care. 80% of that $6,000,000 goes on 20% of the people. So that’s $24,000 each on those people and $1,500 each on the rest. If the company gives $1,500 each to the employees’ HSA it should more or less balance out. If they give $2,000, then potentially the employer is risking putting $400,000 at risk of "leaving" their pool and being rolled over by the individuals into next years HSA. But, and this appears to be the kicker, if the CDHP can reduce spending inflation by a big amount–i.e. it would have been 14% up but was only 4% instead, then $600,000 is "saved" which effectively pays this back.

Does this mean that the math behind CDHP only works if it really cuts health care costs. It appears so to me. But maybe it will work.

If it doesn’t contain costs, then there are some obvious next steps

1) Employers will reduce the amount put into the HSAs, potentially down to close to zero and put the onus on employees to put their rather than "their company’s" money into it2) Increasing the "bridge" amount that has to be paid after the HSA amount expires before the catastrophic coverage kicks in.

So if the CDHP really takes off, it had better work, or else it will REALLY turbo-charge cost shifting and maybe even get employers out of the business of insurance totally.

Or maybe I still just don’t understand it!

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