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

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

‘Classic’ CDHP Model – Definity Health Definity Health Care Advantage Web- and Phone- Based Tools Health Tools and Resources Care management program Internet enabled Health Coverage Preventive care covered 100% Annual deductible Expenses beyond the HRA Health Reimbursement Account (HRA) Employer allocates HRA 1 Member directs HRA 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. HRA $$

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

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

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.

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

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

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 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

Study Setting  Large employer that offered HMO and PPO in 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

New Results: Impact of CDHP and PPO on Cost Compared to POS 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. 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.

Impact of CDHP and PPO on Physician, Hospital and Pharmacy Cost Compared to POS 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. 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.

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.

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.

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.

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.

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?

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

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 U hj =  j +  Z j +  X hj + e hj  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 (  j )

Price elasticity estimates from the plan choice model

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

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

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.

Thank You! For more information on our research, please visit: Stephen T. Parente, Ph.D., M.P.H., M.S. Assistant Professor, Department of Finance Deputy Director, Medical Industry Leadership Institute Carlson School of Management University of Minnesota th Ave. South, Room Minneapolis, MN (v)