Once a year most employed families must choose which health insurance benefit plan best meets their health and financial needs. Most often these decisions are made on the basis of premium price, anticipated health care requirements, past experience, and network physicians and hospitals. In the last couple of years, in response to persistent double-digit premium inflation, new insurance products and spending accounts have been added to the mix of choices that are offered to families. The most popular of the new “consumer-driven” health options are high-deductible health plans (HDHPs) coupled with health savings accounts (HSAs). To many families, consumer-driven health plans (CDHPs) are attractive because premiums in HDHPs are typically lower than in preferred provider organization (PPO) or health maintenance organization (HMO) plans and money in tax-free HSAs can be accumulated over time. To many employers, they are attractive because more financial decision-making and risk can be shared with employees.
Here we weigh the coverage, cost, quality, and practice management trade-offs that may result when families select CDHPs. Using a case study of a real Midwest company's health insurance offering and a hypothetical family with 2 children, it is possible to understand both the lure and trap of these products, especially for low-income families and previously uninsured families, as well as for healthy families. Becoming informed about HDHPs and HSAs (and other CDHP options) is essential for families and pediatricians. Although in 2004 only 10% of employers offered an HDHP, a much higher proportion of employers (27%) are considering offering such coverage by 2006.1 At this point, most employers are offering HDHPs as one of several choices, not as the only option. Unfortunately, there are no reliable national estimates of the number of adults and children enrolled in HDHPs with HSAs.
According to the Internal Revenue Code, an HDHP is an insurance plan, typically a PPO plan, that has a deductible of at least $2000 per family and $1000 per individual along with annual out-of-pocket expenses (including deductibles, copayments, and coinsurance) that cannot exceed $10000 per family and $5000 per individual. Except for preventive care, an HDHP cannot reimburse covered benefits until the deductible for that year is met. This exception, referred to as a “safe harbor,” was created for preventive care services such that an HDHP may (but not must) pay for preventive care benefits without having exceeded the deductible. Preventive care is defined to include, but is not limited to, routine well-child care, immunizations, screening for pediatric conditions, vision- and hearing-disorders screening, and metabolic, nutritional, and endocrine conditions screening, mental health conditions and substance abuse screening, and infectious disease screening. Generally speaking, HDHPs are designed to cover catastrophic expenses and, as such, tend to offer less comprehensive benefits and have more stringent cost-sharing requirements than conventional health insurance products.
HSAs, which became available on January 1, 2004, with the Medicare Prescription Drug Improvement and Modernization Act, are tax-free investment accounts for qualified medical expenses2 and are available only to families and individuals in HDHPs. Annual contributions (deducted from the employee's paycheck) can be made of up to $5150 per family and $2600 per individual and will increase with inflation in future years. Families and individuals own and control the money in their HSAs, although employers may contribute, and unused funds are automatically rolled over year after year.
CASE STUDY OF COMPANY “HEALTHY” AND ITS CDHP
Company Healthy, an actual company renamed for the purpose of this article, offers its Midwest employees the choice of a conventional PPO plan and an HDHP with an HSA. Table 1 compares the coverage and costs under these 2 plans. (Note that prescription drugs have to be purchased through a separate rider and, as such, are not factored into the comparison.)
Table 1 shows the advantages of the “PPO Xtra” HDHP product with its no-cost premium and $400 employer HSA contribution and the advantages of the PPO product with its lack of deductible, more generous annual out-of-pocket maximum protection, broader benefit coverage, and lower cost sharing. Despite the distinct cost and coverage advantages and disadvantages of each type of plan, research reveals that families often make their insurance-purchase decision primarily on the basis of premium price, and in this case, Company Healthy clearly priced its product to attract employees.3 Families often do not factor into their insurance decisions the implications that a significant deductible, coinsurance rather than copayments, and a high out-of-pocket maximum will have on their financial ability to access covered benefits.
So how might a hypothetical family of 4, with 2 children (aged 1 and 4 years, with the older child having asthma) fare under each of these plans? Table 2 shows the difference. Although this is a typical family, the impact of an HDHP may be greater when the family has a child(ren) with special needs whose care is likely to exceed the maximum out-of-pocket expense. In addition to this difference, families with special-needs children need to consider what benefits are covered as well as their scope and duration. For example, limitations on home health care services and ancillary therapy services may be a more important consideration than the difference in the out-of-pocket maximum.
The total estimated medical expenditures for this hypothetical family of 4 (taking into account premium and visit fees, deductibles, HSA amounts, and cost-sharing requirements) is $1382 in the HDHP (PPO Xtra) and $2486 in the PPO. The main factor accounting for this price difference is the premium, which is fully paid for by the employer in the HDHP. Out-of-pocket service costs in the form of copayments and coinsurance, however, are significantly lower in the PPO. Clearly, the healthier the family, the more financial advantages accrue under this HDHP compared with the PPO. Should this family have a child (or a parent) with more significant chronic conditions or persistent acute conditions, the differential between these 2 plans would be more significant, likely favoring the PPO. The following discussion on coverage, cost, quality, and practice administration associated with HDHPs attempts to highlight the potential risks associated with these new products.
Coverage in HDHPs is usually less comprehensive than PPO or HMO coverage, which is why they are often referred to as “catastrophic plans.” Take the example of Company Healthy's PPO Xtra: coverage for prescription drugs is not included and mental health visits are covered but limited. With respect to physician and hospital services, benefits are similar but not cost sharing; provider networks may be different, as well. The remaining benefits are similar, but cost sharing differs substantially. Coverage of preventive care and immunization benefits may be more difficult to assess because HDHP benefit contracts often provide limited information about the periodicity and content of covered well-child services. They may, for instance, simply reference coverage of preventive care that adheres to the US Preventive Services Task Force. This may sound impressive to families, but these standards are not consistent in content or periodicity with the American Academy of Pediatrics' recommended preventive care standards.3 Another coverage concern with preventive care and immunizations under HDHPs is that employers are not required to forego deductible requirements, although many seem to be electing this option.
It is important to note that in the 19 states with mandates for preventive care (referred to as CHIRP mandates [Child Health Improvement Reform Plan laws]), HDHPs are required to cover preventive care but not necessarily before the deductible is met (depending on state law). Exemptions from these state CHIRP mandates include self-funded firms and insurers in states that allow the sale of “bare-bones” plans. Since 1999, at least 12 states have passed legislation allowing insurers to sell bare-bones policies that do not adhere to mandated state benefit requirements, and since 2004 several more states have introduced similar legislation.4 Half of the 12 states, however, allow only for small businesses or those in the individual market to purchase such policies. Other states allow sale of bare-bones policies to a larger market on a demonstration basis.
Families insured through HDHPs undoubtedly will face greater exposure to financial risk, with higher deductibles and annual out-of-pocket maximums and also higher cost-sharing requirements for certain services. Imagine a family earning $35000 and expending $4000 or more of their own money (either from their HSA or directly out of pocket) each year before insurance reimburses them for any care except preventive care. Predictably, lower-income families will forego all but significant acute or emergent care, which in the long run may lead to higher costs. In fact, national data reveal that <5% of families with incomes <200% of the federal poverty level expend more than $4000 for medical care (S.f.T., unpublished data [special analysis of pooled 1996–2002 Medical Expenditure Panel Survey data conducted for this article, American Academy of Pediatrics], September 15, 2005). Another volatile group is families whose children have special health care needs, who can expect to face higher out-of-pocket costs in HDHPs than in conventional insurance products and have less catastrophic protection in the form of annual and lifetime maximums.
Financial benefits of HDHPs can accrue to healthy families who use health services sparingly. In fact, there is some literature suggesting that individuals with low annual health care expenditures will also have lower expenditures under HDHPs than under managed care plans.5 If families only use preventive care for their children, which is likely to be exempt from deductible requirements, and consume very few other services, they will likely be able to save money in their HSAs. Of course, should these same families encounter a serious acute or ongoing chronic condition, the financial advantages of HDHPs will disappear.
Families also may find that per-service health care charges are higher when the insurance “middleman” is removed and they are paying providers directly, which is what they will be doing until their high deductibles are met. That is, families will not be able to negotiate or obtain discounted charges from providers that are currently available through most conventional health plans. In addition, families will have to keep careful records of their HSA expenditures, in some cases through checkbooks and credit cards and in other cases through a “shoebox.” Another significant financial risk is the impact of healthier families choosing HDHPs, leaving conventional HMO and PPO plans with a sicker population and higher premium prices.
Probably the most significant risks under HDHPs are quality risks. Families, especially those with low incomes, who have high deductibles are likely to delay or avoid seeking care, including preventive care. Previous research has shown that the greater the level of cost sharing, the lower the level of service utilization.6–8 In addition, continuity of care and compliance with recommended referrals to specialists, treatments, laboratory tests, and radiographs may be affected adversely. In addition, in-network provider panels in HDHPs that include pediatric subspecialists and hospitals specializing in the care of children may be more expensive than those that include primarily adult specialists and community hospitals.
Families that are concerned about future medical expenses may seek to preserve money in their HSAs. For example, they may decide not to immunize their children because the perceived risks of contracting infectious diseases are low. Alternatively, they may use their HSAs for elective services not otherwise covered in conventional health insurance plans or turn to lower-cost alternative treatment options (eg, over-the-counter drugs versus prescription drugs). Clearly, families will be called on to make many more decisions, relying on Internet-based support systems and other online information to guide them and also turning to the pediatricians and other physicians for advice and guidance on the cost/quality trade-offs.
Moving from the perspective of families to those of physicians, a growing number of pediatricians are reporting that their patients have HDHPs and HSAs and these families expect to manage their payments differently than under conventional health plans. Physicians in some participating HDHPs have been notified not to collect copays at the time of service but rather to wait until an explanation of benefits is received before billing patients for deductible and coinsurance amounts. This obviously adds more administrative and collections burden to the practice, significantly retards cash flow, and creates an unfortunate tension between the family and the practice. Also, credit or debit cards or HSA checking accounts are being used to pay for care, and practices may incur financial risk depending on the balance of available HSA funds. Other practice-administration issues relate to how seamless reimbursement will be when families have exceeded their deductible and insurance finally “kicks in.”
Although health care providers have more freedom to price and market their services differently in HDHPs than in conventional insurance plans, with this independence comes a substantial responsibility to inform families about service charges, the value of specific services, and other customer service activities. Legal and ethical concerns may be raised about tiered pricing in which individuals pay higher prices than do the health plans. It is also likely that there may be an increased demand for telephone and e-mail assistance, because families, predictably, are going to be more cautious about making in-person visits.
Although CDHPs may represent an important insurance option for single adults and high-income families, they pose serious potential risks for many, if not most, families, especially those whose children have special needs. We have outlined some of the most obvious coverage, financial, quality, and practice-administration risks. It is clear that pediatricians and other health care providers will need to become more aware of the mix of HDHPs (with their varied benefit designs, different cost-sharing requirements, and tiered provider networks) and attempt to work with families each year when insurance decisions are made.
There are countless considerations that families will need to take into account. For example, what is the gap between their HSA and their HDHP? Will spending on preventive care be counted against the HSA, and will the full cost of preventive care be covered through their HDHP? What if unanticipated health problems develop; will needed services be covered? What is the differential between coinsurance and copayments? What pediatric providers are in the network, what providers are out of the network, and what are the cost differentials between the 2? What are the maximum out-of-pocket costs that families are responsible for in 1 year, and what is the maximum lifetime benefit? Will the plan cover all services that doctors say are medically necessary? These are just a few of the most obvious questions that should be considered when comparing HDHPs and conventional health insurance plans.
HDHPs and other CDHPs represent a serious challenge to both families and physicians alike. Our current health insurance system with mostly first-dollar coverage seems to be transitioning to last-dollar coverage in HDHPs. Under the new consumer-driven designs, primary care (and possibly preventive care) would essentially not be covered until a very high deductible is met. What will this mean for our efforts to create a single standard of high-quality preventive, primary, specialty, and hospital care for all children regardless of their financial status? Families will be deciding whether each visit is worth paying for with their own money and where they can get the cheapest care. Will preventive care visits and immunization rates decline? Will children with special needs receive less preventive care and develop more complications with their illnesses? Although better than no coverage at all, CDHPs, as they are currently designed, represent a serious departure from the basic tenets of health insurance, namely, shared risk, comprehensive coverage, and financial protection.
- Accepted September 19, 2005.
- Address correspondence to Margaret McManus, MHS, Maternal and Child Health Policy Research Center, 750 17th St NW, Suite 1100, Washington, DC 20006. E-mail:
The authors have indicated they have no financial relationships relevant to this article to disclose.
- ↵The Kaiser Family Foundation and the Health Research and Educational Trust. Employer Health Benefits: 2004 Annual Survey. Menlo Park, CA: Kaiser Family Foundation; and Chicago, IL: Health Research and Educational Trust; 2004
- ↵Internal Revenue Service. Publication 502 (2005), medical and dental expenses. Available at: www.irs.gov/pub/irs-pdf/p502.pdf Accessed February 27, 2006
- ↵American Academy of Pediatrics, Committee on Practice and Ambulatory Medicine. Recommendations for preventive pediatric health care. Pediatrics.1995;96 :373– 374
- ↵Walter D. State “Bare Bones” Health Insurance Policy Legislation. Elk Grove Village, IL: American Academy of Pediatrics; 2004
- ↵Buchmueller TC, Feldstein PJ. Consumer's sensitivity to health plan premiums: evidence from a natural experiment in California. Health Aff (Millwood).1996;15 :143– 151
- ↵McNeill D. Do consumer-directed health benefits favor the young and healthy? Health Aff (Millwood).2004;23 (1):186–193
- Copyright © 2006 by the American Academy of Pediatrics