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By Bill Marvin

It’s hard to pick up any major publication today and not read about consumer directed healthcare (CDH) and how it’s emerging as the answer to the years of double-digit increases in healthcare premiums.

What is CDH?

In the early 90s the trend was HMOs and then PPOs. In fact, CDH has also been around since the 90s, but it was not widely adopted. In those days the CDH plans had names like Medical Savings Accounts (MSAs) and Flexible Spending Accounts (FSAs) and featured employer funded accounts that could be set aside for certain qualified medical expenses. The Medicare Modernization Act of 2003 paved the way for growth in CDH and various data sources show that it’s growing significantly (go to for some good data points). The Act established the HSA, or health savings account, which incorporates many features that were lacking in previous iterations of the same CDH concept. The key differences are: an HSA can be funded by an employer or an employee; remaining funds carry over from year to year instead of use-it-or-lose-it; and the account is portable and stays with an employee as he/she changes jobs. Additionally, the fact that the HSA effectively becomes an IRA after one reaches retirement age is also an attractive feature.

Many employers and payers were not ready to implement HSAs for the 2004 enrollment cycle, but many of them were studying it… especially the ones that were already offering FSAs and Health Reimbursement Arrangements (HRAs). By the end of 2004 there were approximately one million lives covered by HSAs and one million by FSAs and HRAs. Then, the large health plans (United, CIGNA, Aetna) entered the market and even forced their own employees to adopt a CDH plan (HSA, FSA or HRA), which generated 100,000 enrollments and began to give these health plans a critical view into claims experience data as well as insight into the operational challenges. By the end of 2005 there were approximately three million lives covered by HSAs and three million covered by FSAs and HRAs.

How does this impact you and your practice?

Today, I would bet that unless you are a plastic surgeon or in concierge medicine, your revenue is about 90% payer and 10% patient payments. Furthermore, while payers can be a real “pain-in-the-you-know-what”, most will agree that collecting from patients takes more time and resources than collecting from a payer. Think about all of the patient statements, phone calls, re-billing another insurance company and then bad debt write-offs. In fact, the CEO of a large health system with revenues in the billions told me that it costs his system 18% to collect a dollar from a patient and only 8% to collect a dollar from a payer. That means that after you add up all the personnel costs, paper, stamps, etc. it would cost the health system $18 million to collect $100 million in revenue from patients. So, what will happen as CDH plans with an average $2,000 deductible grow from six million lives in 2006 to a projected twelve million in 2007 and then accelerate to mass adoption over the next five years? The percentage of your revenue that you collect from patients is going to increase… and so will your costs and your accounts receivables.

Do payers care?

Believe it or not, payers do care. The large ones are acutely aware of this potential problem for you and they are trying to fix it. You are probably asking yourself, “why would they do that and why do they care?” Well first of all, it’s not their money! These dollars belong to patients and to employers and are managed under ASO contracts (administrative services only – i.e. employer take all the risk), which now make up over 50% of the lives covered by the four largest health plans in the country (WellPoint, United, Aetna and CIGNA). Secondly, payers know that they need you to be a happy participant in their network so that you will agree to see their CDH members under the discounts you currently offer them in your network contracts… and the last thing any payer wants is for those discounts to increase, or go away, or become more difficult to negotiate next year.

So what are the payers doing about it and are they doing a good job?

Next article, I will write about the four approaches that payers are taking across the country and layout the challenges for each and most importantly, what it means to you.

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