Innovation in employer health coverage: the Consumer Driven Health Plan (CDHP) at Logan Aluminum.

Hatfield, Robert D.

CASE DESCRIPTION

The primary subject matter of this case concerns a particular emerging innovation in employee health care coverage called Consumer Driven Health Plans (CDHP). Secondary issues examined include issues related to healthcare costs increases in the U.S. and other developed nations. The reactions to these healthcare costs increases are categorized, defined, and illustrated. It becomes clear from the case that they may be no easy answer to rising healthcare costs. Further, issues related to employee involvement and the strategic fit between CDHP and involved employees is explored.

The case has a difficulty level of three, appropriate for junior level or above. The case is designed to be taught in one class hour after at least one hour has been spent surveying existing approaches being used by employers to provide health care insurance coverage such as HMOs. PPOs, and POS plans. The case is expected to require one hour of preparation by students.

CASE SYNOPSIS

Healthcare costs are soaring in the U.S. and in other developed nations. The model used in the U.S. is that the government provides healthcare insurance for the poor and for senior citizens, while employers traditionally provide healthcare coverage for employees. Employers and government have tried approaches to containing the costs of healthcare insurance while still providing coverage. The government created the "health maintenance organizations" (HMOs) and the marketplace created "point-of-service" (POS) and "preferred provider organization" (PPO) plan designs. Managed care approaches were introduced into virtually all plans in an attempt to control runaway costs in recent years. Some feel that the a "free ride" approach causes consumers of healthcare to have no financial stake in the costs of health services which, in turn, makes such costs hard to control.

Consumer driven health plans (CDHPs) have emerged as plans designed to get the consumer to take a normal consumer interest in the cost and quality of healthcare service. CDHPs must have two elements: some type of medical spending account and high deductible healthcare coverage insurance. Logan Aluminum manufacturing company provides a graphic illustration of the positive elements of a CDHP with lots of additional plan elements, such a wellness, financial incentives, and free health services. Since Logan has implemented the CDHP healthcare costs have not seen the huge increases seen in the U.S. The fact that Logan uses participative management and team approaches in other areas of its operation is seen as helping to get participation and teamwork on solving the healthcare cost problems.

INSTRUCTORS' NOTES

RECOMMENDATIONS FOR TEACHING APPROACHES

The special aspect of this case is that it presents a novel approach to a well-known problem involving healthcare costs. It also brings realistic details to help the student understand the abstract concepts and acronyms associated with these issues.

The primary goal is for the student to understand what is considered a consumer driven healthcare plan (CDHP). The secondary goal is for the student to be able to place this innovation within the mix of other standard healthcare plans. Further, it is useful for the student to see the broader policy, social, and political implications. The fit between being consumer driven and being an empowered employee is also an interesting relationship that is illustrated by the Logan case.

The standard case approach will accomplish these goals. Assign the case as homework, and then have the student teams answer the questions. Open class discussion based upon the answers of the teams. Finally, update the case with the information on results found in the epilogue found here in the instructors' notes.

If the course includes a unit on types of healthcare plans (e.g. POS, HMO, and PPO) then this case would be a good way to demonstrate how innovation can modify these "standard" approaches. If the course only approaches the topic of healthcare plans offered by employers in a broad way, then this case will provide just enough information about the plan types to allow learning and discussion.

There are a number of short videos provided by publishers and/or available commercially. I recently used a 10 minute clip titled "Crisis in Healthcare" that would provide a good set-up for this case. Spring boarding off of a video on healthcare is a good way to bring in students of varying learning styles.

There are a number of topics in this case that would be worthy of a short (or long) research paper. The articles in the References section provide an example of the amount of academic and other information available. While students may not be able to write a long research paper on CDHP they certainly can write a multitude of topics surrounding healthcare issues in the U.S. and around the world.

In a course stressing international dimensions of organizations students could choose countries or regions of the world and research how healthcare insurance and/or coverage is handled in the chosen countries or regions.

I have brought guest speakers into class to discuss these issues. I have used guest speakers from the universities own HRM department and from the private sector.

This case will allow you to spend as little as an hour or as much time as a unit might take in your course. It will work for junior level students on up through graduate classes. It has traction in business, sociology, political science, psychology, medical fields, public sector, and other content and industry domains.

QUESTIONS FOR TEACHING THE CASE

1. Why are healthcare costs increasing faster than inflation in the U.S. and other developed nations?

The case points out that prescription drug costs are rising sharply in the U.S., Canada, and in European nations such as Italy. Advances in the effectiveness of pharmacology, competition between pharmaceutical companies leading to heavy advertising, and research and development costs are all part of the high costs of drugs. Students may think of other reasons.

However, healthcare costs also include the costs associated with doctors, hospitals, medical hardware and other diagnostic tools, improvement in technologies, legal and insurance coverages for healthcare professionals, billing and records, and complying with regulations. Patients in developed nations continue to demand and expect higher and higher levels of healthcare.

2. What are the types of healthcare insurance approaches used currently in the U.S. and how are they different?

This is sometimes referred to as the "alphabet soup" of healthcare insurance plans. Students need to understand the playing field to recognize the innovation revealed in this case of CDHP.

The oldest active plan is the point-of-service plan (POS). This is much like the comprehensive coverage students may have in their car insurance plan. The out-of-pocket expenses to the patient are a deductible, a co-payment (often 20%). POS plans allow the covered person to use any provider or doctor as long as the fee is "reasonable and customary" (which means some of those who charge the most for their services are a problem for the patient since the insurance will not pay abnormally high prices) and is an approved medical procedure (which can be a problem when a therapy or procedure is "experimental"). An attractive aspect of POS plans is that they allow the patient to pick his/her own "point of service"--that is, they can pick whatever doctor or provider they wish.

This is in contrast to the health maintenance organization (HMO). HMOs have come under attack in the past few years because of publicized cases where managed care professionals at the HMO failed to "authorize" or pay for certain procedures. However, it is sometimes enlightening for the student to realize that this "bad-boy" insurance approach is the only one that is directly from the government. The HMO act of 1972 set this plan up to manage the high costs of healthcare. HMOs must encourage preventative and diagnostic care (like "well baby" and annual check-ups) that POS plans used to refuse to cover. It is notable that it will not pay a provider who is outside a predefined list of "in-network" providers. The rare exception is that it may pay for a specialist when no such specialist is provided within the network.

The preferred provider organizations (PPO) really developed as a reaction to a) the HMOs inability to pay "out-of-network" providers and b) the mergers among large healthcare providers and insurance companies. The main distinction of a PPO is that it only "prefers" its own "in-network" providers by paying more to them (often 80%). It still will pay, unlike an HMO, to providers "out-of-network". Since it doesn't "prefer" them, it generally pays less (perhaps 50%). Since PPOs and POSs aren't under specific insurance regulation the plan details of these two types of plans can vary. For instance, many POS plans now pay for "well baby" visits where the baby has not symptoms of illness.

3. Whose responsibility is it to provide healthcare?

This is a question that is hotly debated in political and other circles. The U.S. model is that the federal government provides coverage to those 65 and above in age (Medicare) and states provide coverage to those below a certain line of poverty (Medicaid). Some estimate that the government's share of coverage amounts to about one-third of all Americans once you combine Medicare, Medicaid, and the insurance that U.S. governments provide to their employees.

The rest of the nation relies primarily upon private employers for their group healthcare coverage. Small percentages buy individual coverage or join a group or association to facilitate group coverage (thereby spreading the risk).

There are different explanation reasons offered to explain why the U.S. ended up with the employer model rather than the governmental model. One reason is an aversion to "socialistic" solutions. The historical underpinnings of the U.S. suggest a distrust of large central governments and associated totalitarian measures. "Socialized medicine" has served as a pejorative slur used to limit the entrance of the government into healthcare. Employer healthcare programs precede the movement to more socialistic or governmental approaches. This means that employers were using healthcare coverage as a recruiting and retention tool before the nation had an appetite for federal social welfare programs (like those in the "Great Society" in the 1960's). The free-market approach in the U.S. may also explain the employer model. Innovations (like the one in this case) and adjustments occur faster and more often in the free market. If one employer has superior insurance coverage a competing employer may copy or "up the ante" by offering a better compensation package.

Students should be able to argue that spreading the risk across the whole nation and exercising pricing pressure might work in the U.S. This case mentions the case of Canada where things are not as rosy as they once were in that government-model program. There are problems in Europe as well. At least in abstract, spreading the risk and exercising controls at the level of the nation seems appealing if the goal is simply that everyone should be covered.

Lively debate can be prompted here--Canadian model vs. U.S. model. Listing the pros and cons of each would be an interesting approach to take.

4. What is a consumer driven health plan (CDHP) and why does in include the word "consumer"?

The case states that a CDHP needs only two features: a) a medical spending account of some type, and b) a high-deductible insurance plan. In the Logan case, each family is allotted $800 worth of healthcare expenses. This means that the employee can spend up to $800 on healthcare without being out-of-pocket. Students should realize that this was not originally cash, but rather an "account" from which Logan paid directly to healthcare providers. Employers using CDHPs will normally handle and fund these medical spending accounts themselves. The CDHP employer will contact a medical insurance company to write a policy only for the high-deductible plan aspect. For instance, Logan uses a company to insure its employees for healthcare after a $2,000 deductible is satisfied (or Logan might self-insure this aspect).

Employers can create whatever gap they wish between what the medical spending account will pay and what the high-deductible plan will pay. In the Logan example the gap for family coverage is between the $800 in the spending account and the $2,000 deductible insurance. Therefore the gap is $1,200 for Logan families. Sometimes these are called "bridge" plans because the employee has to bridge the difference between the two coverages. Plans can have small or large gaps and still be considered CDHPs.

It would be interesting to discover whether any student is currently under any type of plan that might be considered a CDHP.

"Consumer" refers to the type of behavior that the employer wants employees to engage in when dealing with healthcare. Consumers shop, are aware of prices, are aware of quality requirements, gather information, and then make the best decision they can make. In governmental models and in the POS, HMO, and PPO models, the only entity with a consumer interest seems to be the insurance companies. The patient seems to have no stake in the cost. The consumer-driven approach would re-attach the patient and employee to the decisions surrounding the cost and quality of healthcare. The idea is that if the consumer cared what things cost, and could compare the cost and quality of alternatives, then better decisions would be made. The hope is also that the real consumer, the patient, would put pressure on the healthcare providers to offer high quality but reasonably priced medical choices.

5. Students are left with a question at the end of the case. "Observers wonder if the benefits in the first year can be repeated in the second year, or whether the first year may have merely squeezed out some efficiencies that caused a temporary effect." What do you believe happened in the second year--did the savings continue or was the effect just a short-term effect? Why did the benefits continue or not continue at Logan in the second year?

The epilogue provides additional information that updates the case. It provides the details of the savings in the first year (which is mentioned briefly twice near the end of the case). Here's what the update in the epilogue reveals.

There was almost a 5% decrease in costs in year one (2003) at a time when the rest of the nation was experiencing at least a 13% increase.

Costs in year two were either stable or up only 1%. This is remarkable since the beginning of the case points out that increases in healthcare costs have been in double-digits for each of the past four years. This means that an increase in a give year of something like 5% would actually be a "savings". However, Logan actually reduced spending in year one and held it even in year two. This is a real savings of over 23+%.

The "why" question is complex. Advocates for consumer-driven programs focus upon the consumer. An engaged consumer exercising discretion and informed choice should be expected to make wiser choices. The most common illustration is switching to generic drugs rather than paying the higher prices of "brand" drugs. There are also different kinds of MRIs. The more pleasant ones ("open" machinery rather than closed "closed" tube style) cost more. Both do the job equally well. The informed choice would be selecting the alternative that a) meets the quality requirements necessary and b) provides the best price.

Another "consumer" or free market outcome can be that the market may adapt to meet this "informed choice" demand by a) making it easier to discover the quality of its services and b) making the price easier to obtain.

Opponents of CDHP say that employees are simply neglecting their health to keep from paying the "bridge" amount. Information in the epilogue indicates that there was no statistically significant change in visiting the doctor in year one (2003). Employees went to the doctor about the same amount. However, employees went to the emergency room less. Managed care and other cost control approaches have frequently focused upon the emergency room since it seems to be the most misused medical service. People routinely go to the emergency room, where costs are very high, when they could have simply visited their own doctor. If you have no stake in the costs, what do you care if the emergency room costs three times the cost of an average doctor's visit? At Logan, the numbers seem to indicate a more informed and wiser choice in relation to the use of the emergency room.

The whole area of wellness and the preventative care benefits at Logan surely have an impact. Logan partners/employees are focused upon their health, the costs associated with healthcare, and are being counseled on how to improve their health. Since the average age of Logan partners/employees is 43 we cannot assume that only the young and healthy work at Logan. However, some would argue that the big savings are really found in the wellness and the improving fitness of Logan partners/employees.

ASSIGNMENTS AND TEACHING METHODOLOGIES

1. The standard approach of reading the case, discussing the questions in a student group, and then sharing the analyses of the various groups will work very well. I have used this case in class and it can stimulate some interesting discussions.

2. DEBATES:

An alternative is to have the students read the case, then divide the class into a "pro-CDHP" team and an "anti-CDHP" team and have a debate. This is a good way to get the pros and cons out into class discussion. Introducing the epilogue information would be a good way to take the debate up "another notch".

A variation on the pros-cons debate is to assign a team to sell and defend the four different types of healthcare plans in the U.S.: POS, HMO, PPO, and CDHP. Teams could start by saying "The plan detail that makes this the best overall approach is ..." For instance the most attractive plan detail for POS is unlimited choice of healthcare providers; for HMO is the emphasis on preventative care often not found in other plans; for PPO is that it will pay out-of-network providers; for CDHP it seems to create savings and emphasizes choice.

A major debate is whether the U.S. should move from an employer-based healthcare insurance model to more of a government-based model. Require the teams to explain why the opposing model has flaws--why it does not work well (e.g. why are the government-based approaches having trouble or why is there a crisis, if there is, with the current employer-based approach?).

This could be turned on its ear if students had additional information about either the Canadian or European models that feature the government-based approach. Then the debate between models could be whether Canada or a European country should return to an employer-based model.

3. Homework assignments could include asking students to find out what healthcare they are under (if they are working) or what healthcare plan a family member might be under. As the student to categorize the plan within the "alphabet soup" of plan types: POS, HMO, PPO, and CDHP. Make sure the categorization is correct. It is worth noting that some plans are really a mix since only the HMO has legally required elements.

Another homework assignment is to have students find a copy of a healthcare insurance plan on the Internet, at their workplace, or from a family member. Reading all of the provisions gives the student insight on how complex any insurance plan can be.

4. Initiate the case by spring boarding off of a video or news snippet found online concerning healthcare costs.

5. Have students bring in news items over several class periods concerning problems relating to healthcare costs and insurance. Have each student give the news worthy aspect of the news item and relate that item to the case.

EPILOGUE

Year One: In 2003, the first year Logan used the CDHP model, company costs actually declined compared to 2002. There was a net cost reduction of 4.6 percent compared to 2002. These numbers are particularly impressive since it reverses the national trend of 13-14 percent of expected healthcare cost increases for 2003. These 2003 costs were about a million dollars less than expected had Logan not changed plan designs and continued the wellness focus.

In addition, prescription drug costs have been impacted by this plan that promotes "employee consumerism". In 2002, Logan had changed its prescription drug plan design to the extent it encouraged employees to choose either generic drugs or preferred brand drugs. Drug costs declined by nearly 6 percent in 2002 and by another 5 percent in 2003, the first year of the CDHP. Prescription drug savings amount to more than a half million dollars in 2002 and 2003, when inflation is considered. Logan attributes the savings to employees being wise consumers and talking more about prescriptions and therapies to their doctor. Anecdotal evidence from area doctors reveals that Logan employees and dependents are asking more questions about treatment options and drug alternatives than ever before. This is the consumer behavior hoped for in CDHPs.

Year Two: In 2004 overall costs were up slightly, but by less than one percent. Medical and drug costs were nearly flat in 2004 compared to 2003. This amounted to another significant savings for Logan, since the increases nationally for healthcare was in the double digits for most plan designs.

One objection that is frequently voiced by opponents of the consumer directed healthcare model is that people will avoid medical care and fail to get needed medical attention in an effort to conserve their health care spending account dollars. The 2003 results at Logan do not seem to support that argument. While doctor's office visits and emergency room visits were down slightly in 2003 compared to 2002, the change was not statistically significant. Hospital days of care stayed about the same in 2003 as 2002, but the average length of stay declined in 2003 compared to 2002. On the other hand, there was a significant change in the number of out patient surgeries. Out patient surgeries fell by a double-digit percentage. There was also a positive trend of not going to the emergency room for non-emergencies and visiting urgent care clinics or their family doctors. This behavior is more appropriate as well as a wise consumer financial decision.

Another result of the changes that made at Logan is the national attention it is receiving. In February, 2004, Logan testified before the Joint Economic Committee of the U.S. Congress. Logan has also been featured in several major newspapers, including USA Today and the Chicago Tribune. Several magazine articles and radio shows have discussed the innovations at Logan Aluminum. The attention has generated a lot of calls from employers who are considering changes to their plan design.

Are employers ready to attempt to design an integrated approach to containing healthcare costs using the CDHP model? When asked about the likelihood of offering a high-deductible plan with a savings arrangement within the next two years, firms employing 13 percent of the covered workforce indicated that the firm is "very likely" to offer an HRA-type plan in the next two years; firms employing 26 percent of covered workers reported that they are "somewhat likely" to do so (Gabel, 2004). This level of interest, particularly among the largest firms, suggests that these arrangements could grow considerably in the near future. The case of Logan Aluminum may provide some excellent insight into CDHP design and integration with wellness and incentives as well as aspects of HR and general management.

Robert D. Hatfield, Western Kentucky University