WHEELING & DEALING
Healthcare Consumerism
By Jean-Marc Levy

First published in HRO Today (June 2003)
 

Are consumer-directed health plans the 401(k) plans of the health benefits industry?

Do you remember a world in which there was no such thing as a 401 (k) plan? Even if you’re over forty, it is probably difficult to think of a time when a 401 (k) was not part of a standard benefit package. Yet, section 401(k) of the Internal Revenue Code only went into effect in 1980. In just over 20 years, a completely new segment of the employee benefits industry grew to encompass over 430,000 plans, covering 47 million active participants, with approximately $2 trillion in assets under management.

With such a phenomenal track record, it is understandable that financial and strategic investors alike would try to get in early on the next “big thing” in employee benefit innovation, and investors have been paying close attention to consumer-directed health plans (CDHPs), one of the hottest new products in the benefits world.

Unlike the managed-care plans to which most of us have become accustomed, CDHPs seek to put more control back into the hands of consumers, and to encourage them to take an active role in their healthcare spending decisions by giving them some discretion over how they spend their healthcare dollars. These plans typically involve setting up a fund (which can be subsidized partially by an employer) out of which covered employees can then pay for the higher deductible and out-of-pocket expenses associated with an underlying health-plan offering fewer restrictions than a typical managed-care plan. The theory, of course, is that CDHPs will pave the way towards the Holy Grail of lower employer healthcare costs and affordable higher-quality care for consumers.

CDHPs received a major boost in June 2002 when the IRS released its Notice 2002-45 on Consumer Directed Health Plans, providing guidance about how these plans will be treated under the tax code. Most notably, the notice clarified that unspent amounts in CDHP accounts could be rolled-over for future years without adverse consequences. Consumers who control their own healthcare spending can therefore be rewarded with the accumulation of an asset that can help them meet future healthcare needs.

Since the IRS release, adoption of CDHPs by employers and employees alike has been brisk, and not surprisingly, these early signs of adoption have big money players already circling. They see many similarities between past drivers of growth for 401 (k) plans – namely a joint desire from employers to lower retirement benefits costs and from employees for more control over their retirement assets – and the drivers of future growth for CDHPs. As a result, in an economic environment where capital continues to elude many young and growing businesses, several companies targeting the CDHP segment have managed to secure private capital from blue-chip venture capital and private equity firms.

One such business, HealthMarket, recently raised $12 million in a third-round of financing, adding business development company Allied Capital and insurer Madison National Life to a roster of investors that already includes heavyweights General Atlantic Partners and Whitney & Co.

Connecticut-based HealthMarket is emerging as a significant player in the field, particularly in the 2- to 200-employee segment of U.S. businesses. Through its insurance subsidiary, American Travelers Assurance Company, HealthMarket can offer fully-insured benefit plans to these small and mid-sized businesses, and derives its revenues from health insurance premiums and administrative fees. This business model differs from the administrative fee-based model of many early CDHP providers who chose to focus on the large employer market in which companies typically elect to self-insure. To date, HealthMarket has invested over $80 million to build its product capacity, operating systems and technology platform, and to fund the capital requirements of its insurance subsidiary.

It is too early to gauge the true impact of CDHPs on employer and employees healthcare costs, but the most recent National Survey of Employer-Sponsored Health Plans from benefit-consultant Mercer indicates that employees reported “surprisingly high levels” of satisfaction with their new consumer-directed health plans.

While it is still unclear whether consumer-directed health plans will ever be as commonplace as 401 (k) plans, CDHPs should be added to your acronym vocabulary.