Consumer Driven Health Plans: Evidence and Policy Implications

1. Consumer Driven Health Plans:Empirical evidence of take-up, cost and utilization and HSA policy implications. Stephen T Parente, Roger Feldman, Jon B Christianson Presentation to the National Association of Business Economics (NABE), Washington, DC, March 13, 2006 Sponsored by the Robert Wood Johnson Foundation’s Health Care Financing & Organization Initiative (HCFO) and the U.S. Department of Health and Human Services

2. Presentation Overview • What is a Consumer Drive Health Plan (CDHP)? • Policy Questions • National CDHP Take-up • Cost & Utilization Comparisons Over Time • National HSA Simulation • Policy Implications

3. Health Toolsand Resources Health Coverage $$ Annual Deductible Definity HealthCareAdvantage Web- and Phone-Based Tools Preventive Care 100% Annual Deductible ‘Classic’ CDHP Model – Definity Health • Health Reimbursement Account (HRA) • Employer allocates HRA1 • Member directs HRA • Roll over at year-end • Apply toward deductible2 • Health Coverage • Preventive care covered 100% • Annual deductible • Expenses beyond the HRA HRA • Health Tools and Resources • Care management program • Internet enabled 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets.

4. Health Coverage $$ Annual Deductible Preventive Care 100% Annual Deductible CDHP Version 2.0: The Health Savings Account (HSA) HSAs legislated in MMA 2003. Pretty similar to Definity Health HRA Design except the consumers owns the account. HSA

5. Money b a CDHP Budget c Coinsurance Plan Budget Medical Care Low Use Medium Use High Use Conceptual Model of CDHP

6. Policy Questions to be Addressed • Do CDHPs (in the form of HRAs) have national appeal? • What are the longer-run cost & use consequences of CDHPs? • Where do they save money? • What is the impact on pharmacy services, where consumers can act in a ‘directed’ fashion? • Do HSAs have potential national appeal? • Are HSAs a viable approach to addressing the problem of the uninsured? FYI: We are just approaching the half-way point of our research.

7. Nearly National Appeal of HRAs: States where the study employers’ 1st year CDHP take-up was >5% Take-up >5% 0.1 - 5% 0%

8. Employer-based Analysis Overview • Analysis started in 2002 with six employers • Combined population drawn from 50 states • Total covered lives represented: ~250,000 • Collect primarily employer HR data and insurance claims data for all plans. • New HCFO grant will create a study panel with six total years of CDHP experience 2001-2006.

9. What is the impact of CDHPs on cost & use? • Study Design: • First results reported in 2004, August, Health Services Research. • Look at CDHP/PPO/POS cohorts within one large employer for employees over time to see ‘longer run’ impact of CDHP in 2001 - 2003. • Control for several factors to ADJUST cost & use estimates: • Health status/illness burden/health shocks (cancer, catastrophic accident) • Income • Family size and dependents • Age, gender

10. Study Setting • Large employer that offered HMO and PPO in 2000-2003 and introduced CDHP in 2001 • Variation in cost sharing by contract • Take-up of CDHP approximately 15% • Smaller account/deductible gap, 0% co-insurance on catastrophic • General caveat: ANY Employer’s experience can be quite different due to: • Alternatives offered • Plan design • Communications with employees • Sponsor’s objectives for the plan

11. New Results: Impact of CDHP and PPO on Cost Compared to POS All Annual Plan Effects Using POS Plan as baseline. NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience. NOTES: These are results from a restricted continuously enrolled sample of 26% of the total employee population and are not a reflection of the plans’ expenditures. Bolded numbers are significant at p<.05.

12. Impact of CDHP and PPO on Physician, Hospital and Pharmacy Cost Compared to POS All Annual Plan Effects Using POS Plan as baseline. NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience. NOTE: These are results from a restricted continuously enrolled sample of 26% of the total employee population and are not a reflection of the plans’ expenditures.

13. Is brand name pharmacy use different for CDHP enrollees? NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience.

14. Is there a difference in pharmacy use for CDHP patients with chronic conditions? NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience. NOTE: These are results from a restricted continuously enrolled sample of 27% of the total employee population and are not a reflection of the plans’ full prescription drug experience.

15. Overall Cost & Use Results Summary • CDHP plan did not have the lowest cost and utilization across all plans. • CDHP best (lowest) cost result was for pharmacy. • CDHP worse (highest) cost result was for hospital expenditures (inpatient & outpatient). – partially explained by pent-up demand for elective procedures & provider pricing differences across years.

16. Pharmacy Summary • Costs down initially – volume does not decrease at same time – suggests more frugal Rx use (e.g., greater use of mail order). • CDHP chronic condition cohort drug use is generally higher than other health plans, though rarely statistically significant. • Brand name drug use higher in CDHP, but overall cost is lower.

17. Using HRA Results to Explore HSA Policy Questions • What is the expected take-up rate of HSAs in the individual market? • What is the likely impact of the Administration’s HSA sproposals? • Take-up rate of HSAs with subsidies • Reduction in the number of uninsured • Cost of the subsidy • What is the impact of other possible subsidy designs?

18. Data Sources • 2002 health plan choice data from 3 large employers participating in a Robert Wood Johnson Foundation funded study on CDHPs • Employee premium, deductible, coinsurance, worker’s age, gender, wage income, single/family coverage • 2001 Medical Expenditure Panel Survey (MEPS) • Household Component • Linked Insurance Component • eHealthinsurance.com • Individual HSA plan information

19. Plan Choice Model Analytic Approach • Plan Choices: HMO, 3 PPOs (low, medium, high), 2 CDHPs with Health Reimbursement Accounts (low and high) • Utility-maximization assumption where Uhj = aj + Zj + Xhj + ehj • Estimate a conditional logit model of plan choice using the pooled, employer data • Explanatory variables • Plan attributes (Z) • Annual tax-adjusted employee premium ($1000s dollars) • Savings/reimbursement account size ($1000s dollars) • Donut hole: difference between annual deductible and account size ($1000s dollars) • Coinsurance rate (i.e., .10 = 10% coinsurance) • Interactions between employee and plan attributes (X) • Age, female, wage income, family contract • Plan-specific constants (aj )

20. Price elasticity estimates from the plan choice model

21. Policy Simulations • Baseline take-up of HSAs from the Medicare Modernization Act of 2003 • Simulation (1): Bush Administration’s 2004 proposal • Refundable tax credit up to 90% of premium; maximum of $1000/adult, $500/child (up to two) • Subsidy for singles with no dependents phased out at $30,000 adjusted gross income and $60,000 for families • Simulation (2): 2006 State of the Union Proposal • Simulation (3): Level the Playing Field • Simulation (4): Full subsidy of HSA premium

22. Baseline Impact of MMA 2003 NOTE: Population is 19-64, non public insurance

23. HSA Summary & Next Steps HSA Plan design matters – We find a greater take-up from a reduction in the donut hole than an increase in the account size. Administration proposals to tax advantage HSAs will increase their take-up and reduce the number of uninsured, at the margin. Look at HSA take-up versus retirement saving choice is a new frontier to examine.

24. Thank You!For more information on our research, please visit:www.ehealthplan.orgStephen T. Parente, Ph.D., M.P.H., M.S.Assistant Professor, Department of FinanceDeputy Director, Medical Industry Leadership InstituteCarlson School of ManagementUniversity of Minnesota321 19th Ave. South, Room 3-149Minneapolis, MN 55455612-624-1391 (v)sparente@csom.umn.eduhttp://www.tc.um.edu/~paren010