Small Employers Are Slow To Adopt CDHPs

March 17, 2008
| By Pete Daly |
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GRAND RAPIDS — Health benefit costs continue to rise twice as fast as inflation, so it comes as no surprise that more small employers are dropping health insurance. What may be surprising is that small employers are not as quick to adopt the new, relatively lower-cost, consumer-directed health plans, or CDHPs.

The 2007 National Survey of Employer-Sponsored Health Plans recently released by Mercer, a multi-national consulting firm that is part of Marsh & McLennan Cos. Inc., revealed that CDHPs are by far the medical plan with the lowest cost.

Mercer, which surveyed nearly 3,000 companies, found that just 7 percent of employers with fewer than 500 employees now offer CDHPs, but the plans are offered by 14 percent of all larger employers, and 41 percent of organizations with 20,000 or more employees.

A CDHP is a medical insurance plan in which employees use spending accounts — health reimbursement accounts or health savings accounts — to purchase routine health care services directly. Non-routine expenses, including serious illness and injury, are covered by traditional insurance after the employee meets a generally high deductible, which is typically around $1,100 for single employee coverage (more for family coverage).

If the CDHP is the HRA type, an employer contribution to the employee’s account is required, and employers can decide whether money left in the account at the end of the year rolls over. With an HSA, an employer contribution is optional, and employees have full control over all money in the account. 

Employee contributions from wages are made before taxes, and withdrawals from the HRA or HSA are not taxed, either.

In 2007, the percentage of employees enrolled in a CDHP (based on either an HSA or HRA) rose from 3 percent to 5 percent of all covered employees.

Greg Rhodes, principal of the Mercer office in Grand Rapids, told the Business Journal that “the enrollment in consumer-driven health plans is rising slowly and it’s coming from, we think, traditional plans that are on the decline.”

He added that the use of HMOs by employers has “basically leveled off, while (point-of-service) plans … are on the decline.” He said preferred-provider organizations “are kind of holding their own.”

CDHPs are typically offered as an option alongside other medical plan choices. Rhodes said one reason fewer small employers offer CDHPs is because large employers often offer a variety of health care coverage plans for the employees to choose from. Small employers, on the other hand, may not have enough employees to offer more than one plan.

CDHPs are not yet generally understood by employees as well as traditional plans, which is why many employees are inclined to stick with a traditional plan they understand.

Communication and education is the key to success with a CDHP, said Rhodes, who added that when employers learn the cost difference, they are interested in CDHPs — but then they quickly realize they would have some complicated explaining to do to employees.

A consumer-directed plan “is going to take a little more energy to put in place and have people understand it, and have it work appropriately. It’s not something you just put in place and walk away from.”

Rhodes said that large employers tend to have specialized communication resources to help employees understand a CDHP option, whereas smaller employers do not. On the plus side, CDHPs are a sophisticated child of the Internet, with employee access and information generally provided online.

Meanwhile, the report issued by Mercer regarding its survey states that “employer adoption of CDHPs slowed in 2007 and will be moderate in 2008, as well.”

Rhodes said, “The next big wave of adopters is still waiting to be convinced that the plans work before they commit.”

But the 2007 survey indicates that consumer-directed plans are indeed cost effective: CDHPs delivered substantially lower cost per employee than either PPOs or HMOs in 2007. CDHP cost averaged $5,970 per employee, compared to $7,120 for HMOs and $7,352 for PPOs.

Of the two types of CDHPs, HSA-based plans were less expensive than HRA-based plans ($5,679 compared to $6,224). Employer account contributions are a standard feature of HRAs but not of HSAs: More than a third of large HSA sponsors do not contribute. Among those that make an HSA contribution, the average contribution is about the same as the average HRA contribution: $626 and $621, respectively.

The Mercer report states that the obvious explanation for the difference in cost between CDHPs and the other medical plan types is the higher deductible. In HSA-based plans, a minimum individual deductible of $1,100 is required. But if CDHP cost is compared to just PPOs with deductibles of $1,000 or higher (which averaged $6,644 per employee), the gap in cost is still close to $700, which lends support to the theory that the account feature encourages more careful health spending. Employees with an account tend to want to make it last.

The other measure of CDHP performance is employee acceptance. When Mercer asked about reaction of employees enrolled in the plan, 61 percent of the large sponsors with an HSA-based CDHP said it was either “strongly positive” or “more positive than negative.” In addition, fewer than 10 percent believed that employees enrolled in these plans did not seek or receive appropriate levels of preventive care, care for chronic conditions, or care for sudden, acute conditions.

Finally, while data on change in enrollment over time is still sparse, among the 77 large employer sponsors that have had a CDHP in place for at least three years and give employees another choice of plan, the Mercer survey found that average enrollment rose from 21 percent in 2005 to 29 percent in 2007.

“With these encouraging results, it might seem surprising that employers aren’t moving faster to adopt CDHPs,” said Rhodes. “But they worry that a big change in such an important benefit could hurt attraction (of new employees) and retention. So even when they do add a CDHP, most make it an option, which dilutes potential savings.”

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