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D A T A W A T C H
C O N S U M E R - D R I V E N  C A R E
W E B  E X C L U S I V E   

21 April 2004  
  

Employers’ Contradictory Views About 
Consumer-Driven Health Care: 
Results From A National Survey

Despite reservations among employers,
enrollment in health reimbursement arrangements is poised to grow strongly.

By Jon R. Gabel, Heidi Whitmore, Thomas Rice, and Anthony T. Lo Sasso

ABSTRACT:

Based on a random national sample of 1,856 employers, this paper examines employers’ knowledge, perceptions, and present and future plan offerings for consumer-driven health care plans. Employers of all sizes are more familiar with consumer-driven health care than with organizations that promote quality of care. Many employers remain skeptical about its ability to control costs and improve quality, while a majority believe that health reimbursement arrangements (HRAs) are likely to attract healthier workers. Interest in HRAs is greatest among the largest U.S. employers. The percentage of covered workers who can choose an HRA plan should grow dramatically during the next two years.


For the past three years major newspapers, professional journals, and business magazines have pronounced that a new era of health benefits, termed “consumer-driven health care,” is beginning, as the curtain falls on the last generation of health benefits, managed care. With the cost of employer-sponsored health benefits rising at double-digit rates, employers are seeking new strategies to control costs.¹ Despite widespread interest and discussion, the term consumer-driven health care itself is a source of confusion to many.

The term refers to plan design. It generally entails greater choice of health plans and providers—and greater financial risk—for employees. A critical element of consumer-driven health care is exposing consumers to the actual prices of medical care services. Web-based medical information tools are considered essential in making employees more informed and active consumers.²

Here we briefly describe three types of consumer-driven health care plans.³ In the first group, health reimbursement arrangements (HRAs), a spending account is established for employees to draw upon for health care purchases. When the account is depleted, the employee must pay for services out of pocket until the deductible is met, at which point the HRA plan becomes a traditional major medical plan. At the employer’s discretion, unspent funds can be carried over to the next year. Typically, HRA plans’ deductibles exceed $1,000. They are not portable from employer to employer and cannot be used for nonmedical expenses. Employees may not contribute to the spending account.

A second class of plans, termed “personalized” or “design-your-own” plans, allows employees to design their own networks and benefit packages. Using a Web-based tool, employees select individual physicians and hospitals along with their benefit package. These choices determine the cost of each person’s plan. Employers contribute a fixed amount for the cost of the plans, and employees bear the financial risk for their choice of providers and benefit packages. Only a few U.S. employers now offer a “design-your-own” plan.

A third class of plans, “customized-package plans,” allows employees using Web-based tools to choose from a predetermined selection of network offerings (for example, broad, medium, and narrow networks) and benefit packages (for example, rich, medium, or thin). From this hypothetical set of offerings described above, employees choose one of nine options. Employers contribute a fixed amount, and employees are at financial risk for their selection of plans. Health plans offer customized plans primarily in the small and midsize employer market, and typically only one carrier’s products are available to the firm’s workers.⁴

Consumer-driven health care is evolving during a period when employers are imposing greater cost sharing on employees, not just in consumer-driven plans, but also in traditional plans such as preferred provider organizations (PPOs). As a consequence of the managed care backlash, employers have turned to cost sharing as the major mechanism for controlling the cost of health care. Since 2000, PPO deductibles and employees’ contributions for all firms have risen by roughly 50 percent (Exhibit 1). In small firms, PPO deductibles have nearly doubled since 2000, and employees’ contributions have increased roughly 50 percent for single and family coverage since 2000 as well.

Pioneer consumer-driven health plans came to market only recently; few employers offered any of the three models prior to January 2001. Consequently, research on consumer-driven health care has largely been qualitative to date. This paper presents findings from a national survey of public and private employers with three or more workers about the state of consumer-driven health care. Our objective is to report employers’ knowledge, perceptions, offerings, and plans for the future. To our knowledge, this is the first such national survey that uses a randomly selected sample and hence permits extrapolation to the national level.

Data And Methods

Data source. Data for this study are from a supplement to the Henry J. Kaiser Family Foundation/Health Research and Educational Trust (Kaiser/HRET) 2003 Survey of Employer-Sponsored Health Benefits. This supplement entailed fifteen questions about firms’ offerings, future plans, and views on consumer-driven health care. National Research LLC conducted telephone interviews during January–May 2003 with employee benefit managers from 1,856 randomly selected public and private firms with three or more workers. Kaiser/HRET selected its sample from a listing of U.S. employers compiled by Dun and Bradstreet. The sample is stratified by firm size (number of workers) and industry. The overall response rate was 50 percent, identical to those of the 2001 and 2002 Kaiser/HRET surveys. This study also uses data from the 2000 survey, which entailed a sample of 1,939 firms and a response rate of 45 percent.

Study methods. Because firms in the sample are chosen randomly, statistical weights can be used to extrapolate results to national as well as firm size, regional, and industry figures. We calculated weights by determining the basic weight, applying a nonresponse adjustment, and then applying a post-stratification adjustment. The nature of the sample and the weighting procedure allow us to convert statements at the firm level to statements at the employee level. All figures in this paper are worker-based.⁵

Findings

Familiarity with the term “consumer-driven health care” was extensive in 2003. Approximately 66 percent of employees work for a firm where the employee benefit manager is either “very” or “somewhat” familiar with the term. Among large firms (200 or more employees), 82 percent of employees work for firms where the employee benefit manager is “very” or “somewhat” familiar with the term consumer-driven health care, compared with just 35 percent of employees in small firms (3–199 employees) (Exhibit 2). In spite of its relative novelty, in 2003 employers were more familiar with this concept than with important organizations in the quality arena, such as the National Committee for Quality Assurance (NCQA), the Health Plan Employer Data and Information Set (HEDIS), and the Leapfrog Group. The NCQA was the most familiar to firms, followed by HEDIS and the Leapfrog Group. This gradient is echoed across firm sizes, and larger firms registered greater recognition across the board.⁶

Among consumer-driven plan types, employers were most familiar with high-deductible HRA plans (Exhibit 2). Nearly all benefit managers of jumbo firms (5,000 or more employees) were familiar with HRAs. In contrast, there was much less familiarity with “design-your-own” plans and customized-package plans. This disparity may reflect the difficulty in describing the latter two plan types in the survey questionnaire.

Enrollment in HRA and customized plans was virtually nonexistent in 2000. Enrollment figures for 2003 indicate that consumer-driven plans have grown considerably, although the percentage of employees in firms that actually offered various types of these plans remained relatively modest. Ten percent of employees work for firms that offer a high-deductible health plan, defined as having a deductible of more than $1,000, and 2 percent of covered workers are employed in firms that offer a high-deductible plan coupled with an HRA (Exhibit 3). These HRA plans were about twice as common in large firms as in small firms. Among firms not currently offering an HRA, nearly half (45 percent) of employees work for a firm that has been approached by a broker or health plan about offering this type of coverage. For firms not offering customized plans, the percentage was approximately 18 percent.

Employers reported mixed feelings about HRA plans’ effect on costs, quality, biased selection, and other areas.⁷ Only 10 percent of employees work for a firm where the employee benefit manager “strongly agrees” that HRAs will result in lower health care use and spending, although another 59 percent “somewhat agree” (Exhibit 4). A large majority strongly or somewhat agreed that HRAs will attract healthier employees, which would result in adverse selection into the firms’ other health plan offerings. Fewer benefit managers believed that HRA plans will lead to more intelligent medical care purchases by employees and that HRA plans will improve the quality of care. Similarly low percentages agreed that HRA plans will be popular with employees, buttressing the claim that the term “consumer-driven health care” may be somewhat of a misnomer.

When asked about the effectiveness of various strategies to control the cost of health insurance, employers expressed little confidence in any strategy—disease management programs, higher employee cost sharing, consumer-driven health plans, and tighter managed care restrictions and networks (Exhibit 5). Employers were most likely to cite disease management as a very effective cost containment strategy. Employers representing only 7 percent of covered workers rated consumer-driven health plans as very effective, and 14 percent did so for higher employee cost sharing. Only 5 percent rated tighter managed care restrictions and networks as very effective.

Following three consecutive years of double-digit inflation, conditions are ripe for an alternative to today’s mainstream health plan offerings. Survey data suggest that offerings of HRA plans will increase dramatically. In 2003 benefit managers representing 10 percent of employees stated that they were “very likely” to consider offering an HRA-type plan in the next two years, and benefit managers representing 21 percent of covered workers were “somewhat likely” (Exhibit 6). Among jumbo firms, 16 percent were very likely to consider offering an HRA plan in the next two years (data not shown). Slightly more than one-tenth of firms were very or somewhat likely to consider offering a “design-your-own” or a customized plan in the next two years (Exhibit 6).

Discussion

In 2003 U.S. employers were more familiar with the terms “consumer-driven health care” and “HRAs” than with several important names in the quality arena: the Leapfrog Group, the NCQA, and HEDIS. This lack of familiarity is startling, because the NCQA and HEDIS have roughly a ten-year history, and the Leapfrog Group has the nation’s largest employers as its sponsors and publicity agents, while consumer-driven health care is relatively new on the U.S. health care scene.

Employers retain considerable skepticism about HRAs’ ability to control costs and improve consumers’ decision making and quality of care. Very few employers thought that HRAs would be highly popular with employees. Nonetheless, our survey findings indicate that HRA enrollment may take off in the next two years. Approximately 2 percent of workers can now choose an HRA plan. Within the next two years, 10 percent of employee benefit managers are very likely to consider offering an HRA plan, and another 21 percent are somewhat likely.

These figures may understate the percentage of employers considering offering an HRA and other forms of consumer-driven health care. For the past two decades the largest U.S. employers have been catalysts of change. Firms employing 5,000 or more workers were far more familiar with HRAs, twice as likely to offer an HRA at the time of the survey, and more than twice as likely to indicate that they would consider adding an HRA in the next two years. Managed care began with the largest firms and “diffused” to midsize and then small firms, and consumer-driven health care is likely to follow a similar path. A best-case scenario for HRAs would have roughly 30 percent of employees able to choose an HRA plan in the next two years. This figure would equal the percentage of employees that can choose a point-of-service (POS) plan and would be double the number that can choose an indemnity plan.⁸ If 30 percent of employees could choose an HRA plan within the next two years, and approximately 15 percent of workers choose an HRA when offered, then HRA enrollment will reach approximately 7.2 million workers in two years.⁹ By way of historical comparison, PPO enrollment grew from 1.3 million in 1984 to 5.75 million in 1985, then to 16.5 million in 1986.¹⁰

Other considerations suggest why the previous discussion is a best-case scenario. Among employers that are very or somewhat likely to consider offering an HRA plan, more than 80 percent believe that an HRA will control utilization and lower overall future costs. However, only 3 percent of these same firms believe that HRA plans are highly likely to be popular with employees, and another 38 percent rate them somewhat likely to be popular. Research has found that when new health care products diffuse through the health care system, those products are regarded as effective by purchasers prior to diffusing.¹¹

Employers appear to be less familiar with or enthusiastic about tiered networks and customized package plans than HRA plans. This may reflect the difficulty defining these products. Tiered networks and customized package plans covered more employees than HRA plans did in 2003. We would expect the greatest enrollment of customized plans and tiered networks to occur among the smallest firms, the majority of which were unfamiliar with either product in 2003.

Employers’ willingness to offer HRA products may reflect the fact that consumer-driven health care is “the only new game in town.” Employee benefit managers see it as having greater potential to control cost than narrow provider networks or simple cost sharing, but less potential than disease management. The irony is in the absence of a strong literature at the moment indicating that disease management programs save money (although they do improve quality of care).¹²

Will the growth of HRAs and other forms of consumer-driven health care be good for employers and employees? The first evaluations of its impact appear ambiguous. Researchers report contradictory results from evaluations of pioneer employers at Humana and employers purchasing Definity plans.¹³ They found substantial favorable risk selection for the HRA plan at Humana but ambiguous findings for early employers that chose Definity, and sizable cost savings from the HRA plan for Humana but no such savings for Definity.

A new development adds greater uncertainty to the direction of consumer-driven health care. On 8 December 2003 President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, which authorizes the use of health savings accounts (HSAs). HSAs allow employees or their employers to contribute on a pretax basis to an account—if the person selects a high-deductible plan. Contributions may not exceed $2,500 per year for a single person or $5,000 for a family, nor may they exceed the size of the deductible. HSAs are portable from employer to employer and are not subject to any taxation as the account grows and when it is used. Hence, HSAs have substantial tax subsidies that are not conferred for other health plans. Could HSAs replace HRAs in the large- and small-group market, and could the tax advantages of HSAs spur further growth? All this is to suggest that because employers hold contradictory views, the immediate future of consumer-driven health care is uncertain, from the magnitude of enrollment growth to the ultimate form of consumer-driven health care plans.

The authors thank the Commonwealth Fund for its generous financial support.

NOTES

1. J. Gabel et al., “Health Benefits in 2003: Premiums Reach Thirteen-Year High as Employers Adopt New Forms of Cost Sharing,” Health Affairs 22, no. 5 (2003): 117–126.
2. There is considerable skepticism among critics of consumer-driven health care that employees will use patient information to guide their behavior, even with the right tools and information. The major shortcoming of current information is quality rating of physicians—particularly disease- and procedure-specific information.
3. Readers seeking a more complete description of each of the plan types may refer to J. Gabel, A. LoSasso, and T. Rice, “Consumer-Driven Health Plans: Are They More than Talk Now?” Health Affairs, 20 November 2002, content.healthaffairs.org/cgi/content/abstract/hlthaff.w2.395 (19 March 2004).
4. An HRA could be one of the plans offered in a customized package.
5. Firms with 3–9 workers comprise nearly 60 percent of firms but just 5 percent of covered workers. Firms with 5,000 or more workers constitute about 40 percent of covered workers but less than 1 percent of firms. Consequently, figures calculated from employer-based weights would not reflect worker coverage, but rather, development among “Mom and Pop” firms. Hence, we use employee-based weights. Henry J. Kaiser Family Foundation/Health Research and Educational Trust, Employer Health Benefits: 2003 Annual Survey (Menlo Park, Calif.: Kaiser Family Foundation, September 2003), 4.
6. The questions about the Leapfrog Group, the NCQA, and HEDIS were part of the larger KFF/HRET survey to determine the role of these quality organizations in employers’ purchasing decisions. The Leapfrog Group is a coalition of 140 public and private organizations representing thirty-four million Americans dedicated to improving patient safety in U.S. hospitals. The NCQA is an accrediting organization for health maintenance organization, point-of-service, and preferred provider organization plans whose mission is to improve quality of care. HEDIS is a set of standardized performance measures produced by the NCQA that measures the quality of care and patient satisfaction at each participating health plan.
7. The Kaiser/HRET survey did not ask most firms about the potential impact of “design-your-own” plans, since they are so uncommon. While the survey did ask firms that offer customized plans a handful of questions on their views, the results are not presented here because the sample sizes are very small.
8. Kaiser/HRET, Employer Health Benefits, 63.
9. This estimate assumes 2.1 people per employee contract, a benchmark often used by health plans.
10. T. Rice, J. Gabel, and G. de Lissovoy, “PPOs: The Employer Perspective,” Journal of Health Politics, Policy and Law 14, no. 2 (1989): 367.
11. E.M. Rogers, Diffusion of Innovations, 4th ed. (New York: Free Press, 1995).
12. S. Foote, “Population-Based Disease Management under Fee-for-Service Medicare,” Health Affairs, 30 July 2003, content.healthaffairs.org/cgi/content/abstract/hlthaff.w3.342 (19 March 2004).
13. Health Services Research plans to publish a special edition about consumer-driven health care in summer 2004 that features these early evaluations. See S. Parente, R. Feldman, and J. Christianson, “Employee Choice of Consumer Driven Health Insurance in a Multi-Plan, Multi-Product Setting”; L. Tollen and M. Ross, “A Consumerism Case Study: Humana Inc.”; and A. Lo Sasso et al., “Tales from the New Frontier: Pioneers’ Experiences with Consumer-Driven Health Care.”

Jon Gabel (jgabel{at}aha.org) is vice president, Health Systems Studies, at the Health Research and Educational Trust (HRET) in Washington, D.C. Heidi Whitmore is deputy director, Health Systems Studies, at HRET. Thomas Rice is a professor in the Department of Health Services, School of Public Health, University of California, Los Angeles. Anthony Lo Sasso is a research associate professor at the Institute for Health Services Research and Policy Studies, Northwestern University, in Evanston, Illinois.

DOI: 10.1377/hlthaff.W4.210
©2004 Project HOPE–The People-to-People Health Foundation, Inc.