Ron Goldstein is president of CaliforniaChoice, a CHOICE Administrators program and consumer choice exchange model for small group health care benefits. Ron can be contacted at rgoldstein@choiceadmin.com or 800-542-4218.

When does a ripple of an idea become a current of change? In the case of health insurance, it is when that ripple joins with other tides of similar intent and, fueled by external marketplace forces, sweeps away yesterday's ways of thinking and doing business.

Such is happening right before our eyes, as three meaningful ideas have come together over the past decade to make health insurance purchasing more manageable for the business owner and more responsive to the employee. As insurance brokers have watched these ripples grow in force, more and more are recognizing that this phenomenon has created new opportunities to discover and new potentials to explore.

The first of these three ideas was the concept of defined-contribution. Long accepted in the business world as it applied to retirement planning and other forms of insurance, it wasn't until the late 1990s that small to mid-size employers started to realize that the same concept would play well in the health care arena. By simply defining how much they could afford to spend on health benefits for their workforce, employers found this to be a good strategy to achieve cost control and budget predictability. And by marrying the defined contribution approach with a consumer choice exchange model (more on that later), employers were able to offer their employees, for the first time, the opportunity to select a health plan that perfectly matched their individual needs and pocketbook.

Building from this base and in direct response to market demand, a second idea emerged over the past couple of years: consumer-directed care. This concept utilizes lower-cost, high-deductible plans tailored to those individuals who wish to take greater control over their health care decisions and dollars. With insurance premiums rising at an alarming rate, this new model was seen as a way for employers to offer workers still another choice in their health insurance coverage, which, if properly exercised, could result in significant advantages for everyone.

As of late, a third ripple has contributed to the currents of change: Health Savings Accounts. HSAs were one of the most significant elements in the Medicare Reform Act that took effect on January 1 as they provide a tax-free way for individuals to pay for many of their medical expenses. HSA participants (and/or their employers) may contribute tax-deductible funds with an annual maximum of up to $2,600 for individuals and $5,150 for families. Unused funds rollover each year, and tax-free withdrawals can be used for co-pays, hospital stays, prescription drugs, eyeglasses, x-rays and more.

The confluence of these three concepts — defined contribution, consumer-directed care and HSAs — has the potential to dramatically redefine the small and midsize health insurance markets. This is significantly important because business owners in these groups are charged with controlling spiraling health care costs at a time when it accounts for 16% of our nation's gross national product (the largest allotment in the 227-year history of our republic). After all, in the United States there are 7.2 million firms with 2–500 employees, as compared to less than 11,000 large businesses.

Today, more and more of these small and midsize employers are embracing the "new-world" realities. Through the help of their insurance broker, these employers are beginning to fully appreciate how defined-contribution, consumer-directed care and HSAs can work in unison to save them money and empower their workforce as never before.

Here's how all that happens.
An employer decides to switch from its defined-benefit insurance program to defined-contribution as a way to manage its employee benefit expenditures amidst an era of double-digit rate increases. To help make this a "win" for employees as well, the employer works with a consumer choice exchange model to offer the employees a choice of competing health plans and benefit levels, all provided by and administered through a single source. Ideally these choices include multiple HMO and PPO options with a range of costs, provider networks and plan options.

If an employee wants a plan that costs more than the employer's contribution, they simply pay the difference on their own. Our experience has shown that 64% of employees do indeed buy up to a higher level of benefits or additional dependent coverage — proving that most employees are willing to pay a fair share of their health insurance coverage so long as they are empowered to select the plan that they want. In an era of individual empowerment and high consumer expectations, this becomes the most "friendly" of all possible designs because each employee purchases coverage based on their individual circumstances.

Ideally, one of the plan options offered through the consumer choice exchange model is consumer-directed care. While not right for everyone and not intended to be a full replacement product for the entire workforce, this option is specifically designed for those individuals wishing to take greater control in managing their health care decisions and dollars. This high-deductible and low-cost PPO product protects against major or catastrophic illness while providing enrollees the motivation and tools they need to better navigate the health care system and self-direct their own medical care.

To date the individuals who have been most attracted to the concept have been professionals (attorneys, physicians, etc.) or those working in the high-tech field. That's because these individuals are Web-savvy, better-educated and more inclined to do the research necessary to really make this program work, thus reap the benefits that come with being more personally engaged in the health care decision-making process.

According to a study released in March by the National Business Group on Health and Watson Wyatt Worldwide, enrollment in consumer-directed health plans will continue to grow in 2004, increasing from 169,000 in 2003 to 478,000 this year. "With no apparent end to rising health care benefit costs on the horizon, employers have been aggressively looking at new ways of controlling costs," said Ted Chien, global director of group benefits and health care consulting at Watson Wyatt. "Consumer-directed health plans appear to be drawing the most attention, as many employers believe they must increase individual accountability in order to put the brakes on rising costs."

The last ingredient in this new world of health insurance is the HSA. This savings account is an essential element in the consumer-directed product as it helps create the financial incentives as well as the means for the employee to be a more prudent purchaser of health care. According to Chien, HSAs may indeed be the "added ingredient that makes consumer-directed plans right for more organizations." He believes that with the creation of HSAs, "employers should take the time now to determine whether a consumer-directed health plan is right for their organization."

HSAs have the potential to significantly reduce health care expenditures because people spending their own money will likely think twice before running to the doctor for treatment of a mild fever if they have to lay out $95 for the visit and $45 for a prescription as opposed to just $10 HMO co-pays. That's a lot different from today's HMOs, which essentially shield the consumer from the true cost of health care and, in doing so, inadvertently encourage over-utilization or misutilization of medical resources.

Early indications are that this approach is working, as already the marketplace is seeing a reduction in cost and utilization as people become more involved in their health care decision-making process and are willing to be held accountable for the consequences of those decisions.

>Although costs are primarily driving increased interest in consumer-directed health plans and HSAs, employers cited various reasons for implementing such a program. Results from the National Business Group on Health Survey indicate that one out of four respondents cited "confidence that a consumer-directed health plan would reduce overall health plan costs" as their primary reason for offering a plan. Yet, interestingly, only slightly fewer (22%) said "increasing employees' price sensitivity to health care decisions" led them to implement a plan.

Buzz about combining all of these product designs is just starting to happen in the small-group market, and it's a good thing too because that is where the greatest potential lies. Small business owners have been hit especially hard over the past 24 months by double-digit rate increases in health insurance premiums. (A recent study prepared by the nonpartisan Center for Studying Health System Change projects that premiums will increase by more than 50% by 2006.) These employers are looking for and are receptive to new ideas that will allow them to provide affordable and meaningful health insurance for their workers.

It's no wonder that interest on many fronts is growing. President Bush, through the passage of the Medicare Reform Act, has made it a point to support the HSA product and that has generated a lot a heat in the marketplace. As a result, more groups are asking about HSAs and brokers and consultants have begun more aggressively presenting plans that include this benefit as a sensible and workable response to rising health insurance costs. In fact, it is not unreasonable to suggest that all PPO plans — and even some fee-for-service indemnity plans — will eventually introduce an HSA product. Managed care companies that are exclusively HMO-based will not be able to implement an HSA because the size of the deductible required is inconsistent with the philosophy and structure of an HMO.

One barrier holding back even greater growth is the limited number of places that are currently funding HSA accounts. Until more banks or other institutions (such as credit unions building a funding mechanism for their members) jump into the fray, the program will be hard-pressed to maximize its potential. Fortunately, we are beginning to see an inkling of activity in this area, rising hopes for a not-too-distant future where consumer choice exchange models, complete with consumer-directed care options, are an accepted — and expected — part of health plan options offered to American workers.