John M. Shiver
Kevin T. Ponton

At a Glance

With consumer-directed health plans growing in popularity, healthcare organizations should be planning:

  • How to respond to demands for point-of-service payment   
  • How to address competition posed by convenient care centers with attractive pricing advantages   
  • How to offer convenient, high-quality, competitively priced care for those who have a choice   

The consumer-directed healthcare movement is designed not to create a new market, but to move the present market to a less expensive model.

Whether or not consumer-directed health care addresses high costs, quality-of-care issues, and other problems in our healthcare system, the fact remains that this movement represents a profound change in how consumers soon may be paying for their health care.

Consumer-directed health care has gained momentum since the passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which provided for the creation of health savings accounts.

Under provisions in the MMA, individuals may create pre-tax HSAs that can be used for a variety of health-related expenditures. When coupled with a high-deductible health plan, these accounts can be used to cover the deductible portion of the plan. Money deposited in an HSA can be used only for healthcare expenditures. However, many of the services consumers will be able to purchase with an HSA have historically not been covered by traditional insurance plans, such as vision correction surgery, cosmetic surgery, and health club membership.

With an HSA, a high-deductible health insurance policy becomes more attractive-and the economics are compelling. For example, a self-employed individual or small business would pay about $900 per month for a preferred provider organization policy with a $500 deductible and no copayment after deductible. For a similar benefit but with a high ($2,000) deductible, the same policy would cost about $450 per month.

The number of people enrolled in HSAs tied to high-deductible health plans more than doubled to 1,031,000 over the six months between September 2004 and March 2005, according to America's Health Insurance Plans' Center for Policy and Research. And the number of people with HSAs will grow to more than 6.3 million by 2008, according to Forrester Research. This trend will place individuals with consumer-directed health plans into one of the largest healthcare purchasing blocks after Medicare, and it introduces price competition into the healthcare economic model. The CDHP movement is growing and will bring price competition to the consumer level.

In addition to price, convenience and choice are compelling drivers in the CDHP model, which emphasizes control and convenience for the consumer. The groundwork for CDHP acceptance has been laid with online banking, tax filing, retail, travel and entertainment booking, and even "distance learning" for professional development and academic credit.

HSA holders will make their purchases differently, also. No longer will it be necessary to bill insurance companies only to find out that the patient has not yet met his or her deductible. HSA participants will carry some form of debit or debit/credit card that the provider can use for electronic funds transfer at point of service, thereby reducing the cost of billing and carrying accounts receivable. On the downside, if the client does not have enough funds in the HSA, the provider has to find another way to be paid.

Provider Response to Consumer-Directed Health Care 

How will healthcare providers react to consumer-directed health care? Those who drafted the legislation believe the market will force providers to change the way they do business. But what kinds of changes will we see? For one, providers may be more likely to go it alone.

Imagine, for example, that you are sitting in a diner, having lunch with a friend who is a primary care physician. Suddenly, his small laptop computer flashes a red light. He opens the computer, reads for a minute, types a response and sends an e-mail via a satellite link. He then clicks to a web site, types a couple of numbers, closes the computer, and apologizes for the interruption.

What you have witnessed is the primary care office visit of the consumer age. This physician practices a new kind of medicine. With a few mouse clicks, he has responded to a patient's e-mail describing a medical complaint. He prescribed a medication, sent the prescription to a pharmacy of the patient's choice, advised the patient regarding therapy, billed the patient and received payment-all in less than five minutes, without office overhead and without actually seeing the patient.

This physician practices without a formal office. He participates with no insurance companies, employs no one, and charges patients about what he would have received from an insurance company. Patients are provided sufficient documentation to submit claims for payment. By eliminating the cost of a staff of nurses, aides, and administrative support, this physician has reduced expenses by about 40 percent. His practice overhead now consists of malpractice insurance, an answering service, a small office and exam room, and, of course, a top-of-the-line laptop with satellite service. And his revenue remains unchanged.

Not every patient encounter is as simple as this one. The physician in the example reserves "cyber visits" for patients with whom he is very familiar, whom he is generally following for a chronic condition, and who are articulate in describing their symptoms. Prescribing treatment over the Internet requires a great deal of trust between the physician and patient. However, as this physician readily admits, he has always had that type of relationship with his patients, even when practicing in a more traditional setting.

We've seen one example of how a primary care physician has reacted to consumer-directed health care. What impact, if any, will it have on the remainder of the healthcare delivery system? As consumers become more discerning about purchasing healthcare services-and sensitive to the costs-a decline in healthcare consumption may occur. Alternatively, it may open up other markets not traditionally covered by health insurance, such as alternative medicine, holistic practices, meditation, and new services perhaps not yet discovered. Most likely it will do both.

How Healthcare Organizations Can Prepare for CDHPs 

By anticipating the market, healthcare providers will have an opportunity to gain market share and client loyalty. Now is the time to ensure that policies, procedures, and methodologies create an experience attractive to consumers with HSAs. This will not be a simple process; it will necessitate changing systems and business practices, and it may require changing a healthcare organization's culture. Senior management needs to evaluate the potential impact of CDHPs, create relevant policies and procedures, educate the organization, and design a consumer-directed culture.

Physicians will likely be the first to feel the impact of the CDHP movement. They will be determining how they are going to respond, and will likely want to know what other providers are doing to address the concerns of patients who are shopping based on price. Some may choose to change their business models; others may wait and see. Either way, hospitals should share their position and strategic approach with their physicians.

There are several important issues that hospitals and healthcare organizations should be considering.

How will the organization respond to demands for point-of-service payment? Can the provider accurately quote prices and accommodate electronic funds transfer? People with HSAs will generally be issued a debit card tied to their high-deductible health plan, so providers will need to be prepared to accept payment via these debit cards at the point of service.

How can healthcare organizations address competition posed by convenient care centers with attractive pricing advantages? In October, a new company, Revolution Health Group, announced that it had completed the acquisition of six startup health companies in its drive to build a comprehensive consumer-driven health company. The group plans to acquire companies that will allow consumers to access health care in convenient retail locations and have online access to their personal health records and information about physicians, hospitals, medical conditions, and health finances. In addition, CVS, Rite Aid, and Wal-Mart have all begun offering convenient medical care in their stores. The introduction of these new entry points into the healthcare delivery system creates a threat to traditional referral patterns. Hospitals and physicians need to develop a strategy for addressing these new providers and their role within the system.

Will physicians and other providers compete with hospitals, or will hospitals recognize the potential threat and move to partner with their medical staff? Price competition will push providers to seek out less expensive delivery systems. As the traditional first point of contact with the healthcare system, physicians will be the most threatened by the introduction of lower-priced providers. Some physicians are already changing their practices to address this threat. Many patients seen in emergency departments are nonurgent, and may consider using alternative sources of care. This not only takes business away from the emergency department, but it also interrupts patient-hospital relationships. Hospitals need to consider how to offer convenient, high-quality, competitively priced care for those who have a choice.

Are there savings to be gained in not having to bill insurance companies? HSA holders will be using credit/debit cards that could greatly simplify the billing and collection process and reduce related costs. Is the hospital prepared to take advantage of this by having point-of-service electronic funds transfer? When a patient uses a debit card to pay for services, the transaction is completely transparent to the provider. It also eliminates the need to bill a third party. To the degree providers attract this "cash and carry" business, they have the opportunity to reduce billing and collection expenses.

How can the hospital take advantage of this new market growth opportunity? The introduction of a new level of competition presents challenges for the entire market. Smaller, nimbler, and less expensive providers are positioning to be the lead players in the CDHP market. Physicians and hospitals have an opportunity to work proactively to maintain their own market share. Together they can create new delivery models that are attractive to consumers.

A New Imperative 

For the most part, the health insurance industry and the government believe the consumer-directed healthcare movement is here to stay and will influence the delivery of health care. No one knows for sure what impact HSAs and CDHPs will have on the provider market. If there is a significant shift to consumer-directed care, providers need to be prepared to stay with the market and not let smaller, less expensive competitors steal market share. This will mean thinking differently, being creative, and preparing to re-invent services. It is not too early to begin addressing the fundamental changes that price-based healthcare shopping will have on the current business model.

John M. (Jay) Shiver is senior consultant, Stroudwater Associates, Atlanta (

Kevin T. Ponton is senior managing analyst, investment management department, The Dreyfus Corporation, New York (

More Insurers to Offer Consumer-Directed Plans: Survey 

More of the nation's commercial health insurers intend to offer consumer-driven health products within the next year, according to a survey by consulting and actuarial firm Milliman, Seattle. Survey respondents said they expect these products to bring in 5.2 percent of their total commercial premium revenue in 2006, up from 2.5 percent this year.

New Company Hopes to Bring "Disruptive Change" to Health Care 

Launched in July, Revolution Health Group is the brainchild of Steve Case, co-founder of AOL. The private firm is aimed at buying up promising companies that offer a range of consumer-focused health services.

The goal is to build a consumer-driven health company where patients are "at the center of the health system, with more choices, more convenience, and more control over their healthcare," according to the company's press release.

Fast-forward to October: Just three months after its launch, the Washington, D.C.-based company announced that it is already ahead of schedule. It has acquired six start-up health companies, made an investment in a seventh company, and hired its senior management team. It plans to bring its first major offerings to consumers in 2006. Those offerings will be in three key areas-content, coverage, and care.

To bring content to consumers, the group will launch a consumer-friendly web site to help patients manage their health needs with news and information, aid them in finding doctors and scheduling appointments, and managing their healthcare spending.

To help individuals with health coverage needs, the company plans to offer consumers new, easy-to-understand healthcare coverage services. And to help consumers with access to care, Revolution has purchased a minority position in a provider of retail health screenings and immunizations delivered in retail outlets and at employer work sites. Revolution is also providing the capital to support the rollout of "RediClinics," retail-based healthcare centers that provide fast, affordable treatment for routine medical conditions.

Revolution Health Group's board of directors is chaired by Case, and its members include former Secretary of State Colin Powell; Carly Fiorina, former Hewlett-Packard CEO; Jim Barksdale, former Netscape CEO; Steve Wiggins, former Oxford Health Plans CEO; and Frank Raines, former Fannie Mae CEO.


Publication Date: Thursday, December 01, 2005

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