Just about the time the acronym HMO became firmly embedded in the national vocabulary " youll find it on page 858 of the 1996 edition of The American Heritage Dictionary " along came another batch of alphabet soup: CDHP, HSA, HRA, FSA, MSA, and a few others. While these are still gibberish to most of us, they are the rapidly advancing future of health care coverage (Of the many definitions and glossaries available, among the clearest and least partisan is that provided by the Deloitte Center for Health Solutions, part of Deloitte & Touche USA.). They refer to plans, or elements of and variations on plans, aimed at meeting four goals articulated by President Bush in his January 31, 2006 State of the Union address:

Increasing the portability of health insurance;

Making health insurance more affordable;

Broadening the use of electronic health care records;

Addressing escalating medical costs.

The fundamental syllogism that underlies the concept of the Consumer-Driven Health Plan is not new: if employees pay more and employers less of the cost of health care, business will greatly benefit; if consumers pay more of the share of their health care costs, they will demand less health care service and choose more wisely; that, in turn, will create competitive pressure on the health care market and thus lower the cost. What is new is the accelerating rate of adoption of these plans and, not surprisingly, the questions and criticism of both their fairness and their efficacy.

Adoption of CDHPs

CDHPs were created as part of the 2003 legislative overhaul of Medicare, though they did not become available to many until the fall of 2005. In the simplest terms " and, arguably given the complexity of the issues, simplistically " the various kinds of accounts (health savings, health reimbursement, flexible spending, medical savings) are different mechanisms for accomplishing the goals of the CDHPs, all of which call for a low premium and high deductibles. The decision about what specific medical treatments and services are covered is typically left to the employer.

Though the numbers vary somewhat, possibly owing to a lack of consistent clarity about the distinction between CDHPs and HSAs in the reporting, more than two million people have signed up for CDHPs so far, according to a January 2006 New York Times article. The article further notes that, while this is still a very small percent of the 180 million Americans who have health insurance, many believe that the numbers show a very fast adoption rate for what is a complicated new consumer program. Moreover, many analysts expect the adoption of CDHPs to grow rapidly. Using the acceptance of HMOs in the 1980s as a benchmark, experts like Forrester Research, a market research firm, predict that by the beginning of 2008, nearly 22 million people will be enrolled in CDHPs, which would represent about 12 percent of the insured.

Other reports cut the numbers in slightly different ways. Bearing Point, consultants in management and technology, issued a February 2006 white paper in which they assert that the pace of adoption of CDHPs is faster than the early days of IRAs and HMOs. At the present rate, by 2012 some 70 million Americans are expected to be participating in at least one of three financial plans " HSAs, FSAs, or HRAs " for a total of 40 million established accounts.

UnitedHealth Group, which is the largest provider of HSAs, insures 24 million people under one or another of its policies. Of these, a total of only 1.5 million, or about 6.45 percent, are enrolled in CDHPs, 650,000 with HSAs, another 846,000 with HRAs, the funds which revert to the employer if and when a worker leaves. Not surprisingly, opinion surveys, as opposed to numerical data, tend to interpret their results somewhat more glowingly. A survey of employers released by the Deloitte Center for Health Solutions in January 2006 quoted Tommy G. Thompson, the centers chairman, as saying, Employers are increasingly turning to consumer-driven health plans to reduce costs and help workers and their families make better health care decisions. According to the survey, 40 percent of employers believe that CDHPs provide the most effective approach for managing costs and maintaining quality care. Moreover, the center found that the cost of CDHPs grew at a significantly lower rate in 2005 than did other kinds of plans.

Health Savings Accounts

In part because of the emphasis placed on Health Savings Accounts this year by the Bush Administration, which is seeking to increase the ceiling on contributions, the HSAs are drawing considerable, and equally laudatory and critical, attention. Once again, the data are fairly consistent, but the interpretations vary according to the analysts perspective.

HSAs allow workers to set aside pre-tax income to pay for certain health care expenses: deductibles, diagnostic services not covered by the plan, premiums, some nursing care, and the like. The deductibles are high and vary according to the plan; the New York Times puts them at a minimum of $1,050 per year for individuals and $2,100 for families. Once the deductible has been expended, medical costs are covered under the catastrophic insurance policy whose purchase is a requirement for participation in the HSA. Premiums are correspondingly low: James A. Swick, founder and president of California Health Insurance Plans, estimates that a 19- to 29-year-old with an HSA might expect a monthly premium of just $77, but a deductible of up to $3,500. That same individual is permitted to contribute up to $2,700 annually to an HSA " $5,450 for a family.

Employers may, if they wish, make contributions to their employees HSAs, though thus far the evidence suggests that most do not. It has been widely suggested that, because of the HSAs portability, many employers may fear that their money will walk out the door if an employee leaves. Others have noted that employer contributions may prove significant in recruiting and retaining well-qualified employees. But even without the direct tax benefits of their own contributions, employers stand to benefit from the CDHP/HSA arrangement.

The cost of CDHPs rose at a significantly slower rate in 2005 than that of other, traditional kinds of plans, according to a Deloitte Center for Health Solutions report released in January 2006 " just an average of 2.8 percent for CDHPs, as opposed to eight percent in total premiums for HMOs and 8.5 percent for POS plans. The Kaiser Family Foundation has found that a typical employer pays $3,284 for a single employee in a traditional plan, while the same employee in a CDHP would cost just $2,850. Moreover, employers who offer HSAs benefit from lower payroll taxes, according to the Wall Street Journal, which notes that, under certain HSA arrangements, employers are not subject to payroll tax on employee HSA contributions. Those savings are estimated to be as much as 10 percent, or enough at least to cover administrative costs.

Others are also poised to benefit from HSAs, among them financial institutions, for which such accounts are seen as a potential windfall. Bearing Point sees enormous opportunity for the financial services sector to capitalize on what it describes as a burgeoning $2.6 billion market.

The picture is somewhat less clear for the insurance industry. Patricia OBrien, MD, who heads up the health care industry practice for management consultants DiamondCluster International, said that HSAs and the like create challenges and opportunities that insurers ignore at their own risk. Among the problems she foresees arising from the Bush Administrations proposals are the requirement that insurers continue to provide coverage regardless of the health status of the insured; higher administrative costs resulting from the portability of CDHPs and HSAs; and the need for a significant investment in new technology.

She also suggested that, since consumers will be allowed to purchase insurance outside their home state likely would encourage a flurry of industry consolidation among insurers, in order to eliminate price-based competition and to create economies of scale.

She explained, [T]he barriers to competition that regional health insurers have enjoyed will fall as standardization emerges.

Whats In it For the Employee?

The message sounds good. If an employee enrolls in an HSA and contributes to it, he or she saves money on taxes, has the funds needed to pay health care costs not covered by the underlying insurance plan, and can make good choices. So far, its not clear that the argument is really working.

For one thing, the availability alone of an HSA is clearly not sufficient to effect real change in consumer behavior. According to the Kaiser Family Foundation, as of early February 2006, more than 70 percent of the adults it surveyed had never heard the term Health Savings Account. Even many of those who obviously have, as evidenced by their having enrolled, cannot be considered true participants: the non-partisan Foundation for Taxpayer and Consumer Rights reported in February 2006 that [m]ore than half of those already enrolled in these plans have no money in their Health Savings Accounts.

The New York Times article concurs: writing on January 26, Milt Freudenheim reports that many people have signed up for CDHPs and HSAs not because they are eager to direct their own medical spending, but because the plan looked cheap or they had no other insurance option. Freudenheim points out, further, that there will be no money building up for the next years out-of-pocket expenses " a big selling point for these health plans.

The fact that money contributed to HSAs is pre-tax has also been touted as a significant benefit to employees. According to the U.S. Treasury Department, a married couple with two children and an income of $40,000 in 2005 could have saved $630 in federal income taxes " some, though not all, states also offer a break on income taxes " if they made a contribution of $5,000 to an HSA.

It is reasonable to ask, however, whether such a family has $5,000 to spare. Without question, HSAs are very appealing to the young, single, healthy, and well-employed and, equally, to those with substantial incomes. On the other hand, critics almost universally decry HSAs as harmful to low-income and middle-class people, some going so far as to claim that HSAs are essentially a tax-shelter for the wealthy. Two Stanford University health policy experts " the health economist Victor Fuchs and Laurence Baker, associate professor of health research and policy " have said that HSAs are skewed toward healthy, high-income individuals. A well-off 35-year-old who visits the doctor once or twice a year stands to gain a nice sized savings account. The same, they add, cannot be said for the 59-year-old low-income individual with hypertension and emphysema.

There are other concerns as well. Many, including physicians like Dr. Jack Lewin, CEO of the California Medical Association, and California Insurance Commissioner John Garamendi are concerned that, as Lewin puts it, middle- and low-income families wont spend the money in their HSAs to treat chronic diseases because they want to save the money. That would likely necessitate more costly care at a later date. Other patients may fail to save enough to cover future medical costs. And some will not save at all.

Even enthusiasts of HSAs express reservations, especially concerning the complexity of the plans and the nature of their advantages. The American Academy of Actuaries in a January 2004 monograph on The Impact of Consumer-Driven Health Plans on Health Care Costs, cautions that putting so much decision-making in the hands of laypeople can be quite confusing to the employee and must be supplemented by an effective communication and education plan.

Focusing similarly on the decision-making process, Bearing Point notes that the premise behind CDHPs and HSAs is that patients will shop for health care and make rational decisions based on price and quality. The problem, their white paper explains, is that while usually price information is the easiest to obtain, this is not true of health care. The price for health care services is determined by a complex mix of treatment codes that can vary from one plan to another. Because of this, providers often are unable to tell patients at the point of care what their charges will be.

Writing in the Wall Street Journal Online on February 2 2006, Sarah Rubenstein responds to the more typical questions readers might have about the appropriateness of HSAs for themselves. She acknowledges that just managing ones HSA can be a hassle. Not only have many consumers had difficulty understanding how the accounts work, but they have been frustrated by glitches and what they perceive as a lack of expertise on the part of the insurers and banks that run the coverage and the accounts.

Does Consumerism Work?

Bearing Point puts it bluntly: if employers and employees are going to embrace plans that put choice in employee hands, they will need standard, reliable, and understandable information on provider quality and prices. Without it, consumers will have to struggle through a bewildering mix of new and traditional health plans from both new and familiar vendors. Such issues can be resolved and no doubt will be, as all the parties involved become more familiar with CDHPs and HSAs and more accustomed to engaging in decision-making. Insurers, financial institutions, and providers will eventually develop the standards necessary for effective and efficient interface; consumers will learn the new vocabulary, as they have with HMOs, 401(k)s, even computers and the Internet.

The larger questions remains: will inserting consumerism into health benefit programs, as Deloitte Consulting puts it, eventually, if not sooner, resolve the acknowledged crisis in the countrys health care system? On that score, the jury is still out " way out.

Deloitte Consultings 2005 survey report notes that [a]s consumer-driven plans move into the mainstream, employers are optimistic, though not yet completely convinced, that consumerism in health care is the long-term solution for rapidly increasing costs.

The American Academy of Actuaries grants that the key question concerning CDHPs remains whether they will really help stem the tide of double-digit premium increases.

Many critics believe that medical costs are rising so fast that no consumer-driven plan will be able to keep up. The Foundation for Taxpayer and Consumer Rights notes that health care costs will reach 20 percent of the GDP by 2015, well beyond the means of the most effective HSA to control.

Others say bluntly that CDHPs and HSAs are nothing more than cost-shifting. Among those are Pat Schoeni, executive director of the National Coalition on Health Care, and Richard R. Evans, a health care analyst with Sanford C. Bernstein, who is quoted in the February 3 2006 edition of the Wall Street Journal as saying, The risk is being transferred [from employer to employee] without the consumer really realizing it.

Forecasting, of any kind, is as tempting as it is perilous. Reacting to the Presidents State of the Union address, Dr. OBrien says, No one can accurately predict what lies ahead or just how much progress we will make in improving the quality and affordability of healthcare, though she believes firmly that very few, if any, insurersare prepared to compete in that new frontier.

Quite apart from the difficulty of predicting the future of health care, its attendant costs, and the responses of the insurance and financial services industries, there is the absolute impossibility of predicting human behavior. CDHPs, as the American Academy of Actuaries explains, aim to slow the growth in medical costs by providing participants with educational resources, decision-making tools, and financial incentives that will lead them to make more efficient health care decisions.

The key word, of course, is lead. In one respect, at least, consumers are like horses: you can lead them to water, but you cannot make them drink.