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Curtain up:
CDHP Scorecard - Stage set for HSAs to shine among consumer-driven health plans
Tom Anderson

Employee Benefit News
April 1, 2005

Employers may well make the health savings account a benefits star this year. President Bush has one. Vendors seem to be offering new HSA products by the day. And rising health trends are pushing companies to try tougher measures to stem costs.

The delay in guidance from the Treasury Department ended chances that HSAs would be a runaway hit this year, but with a fresh start for the 2006 plan year, the tax-advantaged account might take off.

Meanwhile, the overlooked actor on the CDH set—the health reimbursement arrangement—continues to gain ground with larger employers looking for a way to ease into consumerism without the radical change health savings accounts demand.

"HSAs have about a one- to two-year lag behind HRA adoption, but HSAs have more mainstream publicity from the (presidential) election and business press," says Stephen Parente, a University of Minnesota professor who has studied employer adoption of consumer-driven health plans.

Early start

Of the 438,000 HSAs sold between January and September last year, 79% were for individuals, while 18% were for small groups and 3% were for large groups, finds America's Health Insurance Plans' survey of insurers.

"Employers can draw the conclusion from our data on the individual market that there is a lot of interest carryover in HSAs," says AHIP spokesman Larry Akey. He confirms that late guidance by the IRS prevented more employers from sponsoring HSAs for their workers this year.

Mercer Human Resource Consulting analyzed the experience of 88 employers, most of them large ones, with consumer-driven health plans last year. While most employers with consumer-driven health plans offered HRAs in 2004, 7% of those companies said they would convert from an HRA to an HSA next year, and 28% said they would offer both types of accounts.

The number of employers who sponsor HRAs outnumber those that offer HSAs, but that could change soon, observes Jay Coldwell, program director at Wausau Benefits who is responsible for growth and development of consumer-driven health care products.

HSAs have gained momentum because of simplicity, but there are widely varying enrollment results among employers, Coldwell notes. "HRAs are not getting as much new interest as HSAs," he says.

Different roles

"The two accounts are designed for different purposes," Ray Herschman, a consultant in Mercer's Cleveland office. "HRAs, which are totally employer-funded, give the employer more control over how the account may be used. HSAs can be funded by both employers and employees, and give employees more control."

The employers who said they were likely to offer a consumer-driven health plan by 2006 showed a slight preference for using an HSA, with 19% saying they were likely to offer an HSA compared with 15% who were likely to offer an HRA, Mercer reports.

The larger the employer, the more likely it was to offer a consumer-driven health plan, according to a Mercer 2004 survey of 3,020 employers. Four percent of companies with at least 500 employees had a consumer-driven health plan, and 12% of those with 20,000 or more did, compared with 1% of small firms with less than 500 employees.

However, AHIP's Akey says insurers are finding the opposite experience in HSAs—that smaller firms are more likely to adopt the accounts for next year than larger companies. It might take a couple of years for large employers to adopt HSAs because they take a longer time to make benefit decisions than small businesses, Akey notes.

The upshot, though, is that many insurers are expanding their HSA offerings. Aetna announced it is boosting its HSA programs for employers and individuals. Salt Lake City-based Zions Bank offered an Aetna HealthFund HSA to its employees for 2005. More than 30% of its 6,200 eligible employees chose it, in part because of an intensive educational effort that included on-site informational meetings and informative materials delivered to each employee, says Diana Andersen, corporate benefits director at Zions Bancorporation.

Communication needed

Success depends on how consumer-driven health plans are communicated, observes Sara Taylor, national leader for annual enrollment at Hewitt Associates. "Employers aren't going to see much enrollment in consumer-driven health plans, if it's only one option out of 15 plans," Taylor says. Having a choice between a consumer-driven plan and a traditional health plan is a better way to drive employee enrollment to HSAs and HRAs, she explains.

In the next two years, the majority of Fortune 500 companies will offer either an HSA or HRA to employees, predicts Doug Kronenberg, chief strategy officer at insurer Lumenos Inc. and chairman of the Consumer Driven Health Care Association.

In the short term, employers will split between HRAs and HSAs, but in the long term HSAs will be dominant, Kronenberg explains. Educating employers and employees about using an HSA is the main hurdle to widespread adoption. "Communication is the key. Employers can't go into HSAs half-heartedly," he says.

Cost savings?

Cost savings is an oft-cited justification for employers to adopt a consumer-driven approach, but data shows that adding such options doesn't ensure lower health trends.

Mercer found the average cost of a consumer-driven health plan per employee—$5,233—was nearly 17% lower than PPO coverage per employee at $6,095. But consumer-driven health plans had higher deductibles than PPOs. When compared with high-deductible PPO plans, PPOs had a lower average cost—$4,801—than consumer-driven health plans.

One misconception about consumer-driven health plans is that they always save money, Parente observes. "It all depends on design," he says.

Parente studied the health insurance claims and benefits data from a large self-insured employer with 20,000 employees worldwide that offered a consumer-driven health plan for the first time in 2000. He found that the median expenditure per employee in the consumer-driven health care plan was higher than the PPO expenditure by 2002. While consumer-driven health plan participants had lower drug costs than their PPO cohorts, hospital expenses were much higher in the consumer-driven health care plan.

Parente cautions that the research doesn't mean all consumer-driven health plans will have similar results. He notes the employer he studied had a generous HRA package. "We have other results that we are still working on that show HRAs can lower cost," he says. And "we do not have results on HSAs yet in terms of cost and use."

By 2007, employers should have a good idea of whether consumer-driven health care has changed the marketplace for the better, Parente notes. "HRA employers will have four to five years of experience, and those with HSAs will have at least two years of experience," he says, which should be enough data for employers to know if consumer-driven health plans work.