1. Insights into to the 2003 Federal Health Savings Account Law from Minnesota’s Consumer Driven Health Plans (CDHPs) Stephen T. Parente, Ph.D. Assistant Professor Carlson School of Management University of Minnesota Testimony before the Minnesota State Senate February 3, 2004 For more information: sparente@csom.umn.edu

2. Presentation Overview  What are Health Savings Accounts?  How are they related to the Consumer Driven Health Plans (CDHPs) in use by the University of Minnesota and Medtronic employees?  What are the findings from Minnesota employees?  Who is choosing them?  What is the cost and use impact?  What is the downside to this law?  What is the possible upside to the law?

3. Health Savings Accounts  Introduced in the 2003 Medicare Reform Law  What it enables: U.S. citizen can create a ‘qualified’ HSA account. Qualification is Must have ‘catastrophic health insurance’ with minimum deductible of $2,000. Max is $10,000 for a family contract. Individuals or employers can make annual pre-tax contribution to an HSA, separate from the insurance policy, of 100% of the deductible (max of $5,150).

4. Why Would Anyone Want such a Wacky Thing? Compare & Contrast Old Way for Family to Buy Coverage:  Buy family policy from BCBS  Policy cost: $8,460  Plan has $500 deductible  Deductible applied per person  Deductible capped at $1,000  Cost if healthy: $8,460  Cost if 1 person sick: $8,960  Cost if 2+ people sick: $9,460 The New HSA Way:  Buy BCBS ‘qualified’ plan from BCBS.  Qualified plans costs: $3,936  Plan has $2,500 deductible  Deductible applied per person  Deductible capped at $5,000  Cost of healthy: $3,936  Cost if 1 person sick: $6,436  Cost if 2+ people sick: $8,936

5. How Wound This Work and Who Would Buy It? Medical Savings Accounts (MSAs) as Ancestors  HSAs are really another form of Medical Savings Accounts.  Since ’96 Medical Savings Accounts have been tax-advantaged.  Very little enrollment because of restrictions to only small firms. Consumer Driven Health Plans as Self-insured Employer Analog:  Since 2000, CDHPs have taken off.  Major insurers offer version of CDHPs.  Structured similar/identical to HSAs.

6. Issues Driving CDHP Creation  Patients  Dissatisfaction with provider access  Patient incentives are to consume  Limited choices of benefits and providers  Combative relationship with managed care companies  Providers  Loss of autonomy  Erosion of physician/patient relationship  Misalignment of physician reimbursement and incentives  Employers  Plan costs are increasing  Employees are not happy  Increase of employer administration burdens

7. Early CDHPs in Operation –Definity Concept developed in 1998, Funded in April, 2000 Minnesota based Clear first mover & dot-bomb survivor 300,000+ subscribers in 2004, from 0 in 2000. –Lumenos Started in 2000 Based in Virgina Havard B-School inspired (Regina Herzlinger) –Destinty Operating as Medical Savings Account model In operation for 10 years in South Africa

8. Definity Health as CDHP Model Definity Health Care Advantage Web- and Phone- Based Tools Health Tools and Resources Care management program Extensive easy-to-use information and services Health Coverage Preventive care covered 100% Annual deductible Expenses beyond the PCA Nationwide provider access No referrals required Personal Care Account (PCA) Employer allocates PCA 1 Member directs PCA Section 213(d) “scope” Roll over at year-end Apply toward deductible 2 Annual Deductible Preventive Care 100% Health Coverage Annual Deductible 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets. PCA $$

9. HSA Mechanics Health Coverage Purchased by ‘Qualified’ Plans Annual deductible Expenses beyond the HSA No managed care provisions Nationwide provider access No referrals required Health Care Account (HSA) Consumer/Employer allocates HSA Consumer directs HSA Owned by consumer and portable Roll over at year-end Many deposited pre-tax Consumer can withdrawal with penalty Can apply toward deductible Annual Deductible Health Coverage Annual Deductible HSA $$

10. New RWJ-Funded Research Key Research Questions 1.Is there an ‘adverse selection’ problem? Traditionally, adverse selection is defined as the situation when healthy individuals choose Definity leaving the sick in a traditional plan that will soon implode its premiums because of disproportionate share of sick individuals in the insurance pool. 2.What is the impact on cost and utilization? Definity has been chosen as a response to rising premium prices in an attempt to make the consumer ‘drive the market’ be examining price variations and constraining their personal consumption, if possible.

11. Research Design –2 Year study (11/1/2002 - 10/31/2004) –Six employers examined: University of Minnesota, MN Medtronic, National Ridgeview Medical Center, MN Hannaford Bros, New England Welch-Allyn, Upstate NY (tentative) Raytheon (New England or South Atlantic firm) –Data collected Claims data of all utilization for all health plan choices, pre (2001) and post (2002-2003) Definity. Employer info on flexible spending accounts and employee income Survey information on Definity choices in 2002 & 2003 from U of M.

12. Early Results #1: Who is Choosing a CDHP and is there Adverse Selection?

13. U of MN Health Plan Choices 1.Health Partners: Staff model HMO with direct capitation contracting at a limited number of group practices. 2.Patient Choice: A ‘Tiered-direct contracting’ descendent of Minnesota’s Buyers Health Care Action Group health benefit design experiment. 3.Definity Health: Consumer-driven Health Plan 4.Preferred One: Preferred Provider Organization

14. UPlan Options/Enrollment

15. Early UM Definity Experience Year 2002

16. Definity Age/Gender Distribution 2002 University of Minnesota

17. All Respondents Satisfaction with Plan

18. Health Plan Features Most Preferred

19. Results: Health Status and Other Employee Characteristics No evidence of CDHP adverse selection (after multivariate plan choice analysis). If anything, there is adverse selection to the PPO. Higher income employees chose Definity or Choice Plus, suggesting these plans may evolve as favorites of the ‘well-to-do’ Older employees chose PreferredOne or Choice Plus

20. Early Results #2: What are the Effects of CDHPs on Utilization and Cost?

21. Study Setting Health plan choices by employees: –HMO, 2000-2002 –PPO, 2000-2002 –CDHP, 2001-2002 Variation in cost sharing by contract Take-up of CDHP approximately 15%. General caveat: Each of the six employers’ experience can be quite different due to: –Alternatives offered –Plan design –Communications with employees –Sponsor’s objectives for the plan

22. What was the ADJUSTED impact on provider and patient payment? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full PMPM expenditures. Also note: 1) Patient expenditures from the Personal Care Account (PCA) are included in the employer payment category. 2) Consumer payment reflects deductibles, copayments, and coinsurance expenses.

23. What was the ADJUSTED impact on provider & patient payment by different services? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full PMPM expenditures.

24. Was ADJUSTED service use different for CDHPs? NOTE: These are results from a restricted continuously enrolled sample of 50% to 60% of the total employee population and are not a reflection of the plans’ full admissions and prescription drug experience.

25. What Share of CDHP Enrollees Had Money Left in Their Accounts? Continuously enrolled population

26. Conclusions (To Date) CDHPs adopter are not that different from other employees. Income is a driver in adoption, though not exclusively. CDHP is lower cost, but the trajectory is not great. Critical caveat: Benefit design will drive expenditure results. ‘Draconian’ benefit design for family contract: $1,0000 PCA, $4,000 Deductible, 20% co-insurance after deductible Current industry standard design for family contract: $2,000 PCA, $4,000 Deductible, 10% to 15% co-insurance after deductible Generous benefit design for family contract: $2,000 PCA, $3,000 Deductible, 0% co-insurance after deductible

27. Policy Opportunities What is the Upside to the Law? Innovative means to bring consumer choice into the medical marketplace as well as consumer awareness of the trade-offs of liberal medical insurance coverage policies. Creates foundations for infrastructure for personal, portable health care coverage. Hybrid variants could be crafted to serve low income, part time workers and possibly the uninsured through tax credits and vouchers.

28. Policy Conundrums What is the Downside to the Law? What if HSAs/CDHPs accelerate the consumer’s burden of health care spending ‘too’ quickly? Not much incentives for managed care’s proven assets (e.g., disease management) to play a role. get involved.

29. Federal versus State Issues that Need to be Considered  Does the HSA law supercede state health insurance commissioners? Partially – They legitimize the national market for such insurance similar to Medicare Medigap policies.  Can a qualified plan be offered to a Minnesota from an out-of-state insurer? No – State/federal larger question – Why not other than history?  Can an ERISA-exempt self-insurer employer role employees into their own account? Very loaded issue as it not clear how employers account for unused employee PCA dollars.  For these plans, what is there for a state health insurance commission/commissioner to do? Unknown – Seems like only approve the premium and not weigh in on design.  How are unfunded mandates treated? Should be the same as an individual policy and determined by the State.