-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-514		

TITLE:     Consumer-Directed Health Plans: Small but Growing 
Enrollment Fueled by Rising Cost of Health Care Coverage

DATE:   04/28/2006 
				                                                                         
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GAO-06-514

     

     * Results in Brief
     * Background
          * The Private Health Insurance Market
          * Consumer-Directed Health Plans
               * HRAs and HRA-Based Plans
               * HSAs and HSA-Eligible Plans
               * Decision-Support Tools
               * Health Care Claims Processing
     * CDHPs Constitute a Small but Growing Share of the Private He
          * Available Surveys Suggest That a Small but Growing Share of
          * An Increasing Number of Health Insurance Carriers Are Offeri
          * A Small but Growing Share of Employers Offer CDHPs, and the
     * Most Employers Contributed to Health Accounts, and the Share
          * For HRA-Based Plans, Employer Contributions Varied, and Most
          * Not All HSA-Eligible Plan Enrollees Opened and Contributed t
     * Desire to Restrain Rising Cost of Health Care Coverage Is Pr
          * Employers Offer CDHPs Primarily to Help Lower Cost of Health
          * Individuals Enroll in CDHPs to Lower Their Health Insurance
     * Federal and State Requirements, Inadequate Consumer Tools, a
          * Industry Officials Suggest Certain Federal Tax Laws and Guid
          * Health Insurance Trade Association Reports That Some States
          * Delayed Account Transactions May Hinder Appeal of CDHPs
          * Inadequate Decision-Support Tools May Hinder Appeal of CDHPs
          * Other Factors May Limit the Appeal of CDHPs
     * Concluding Observations
     * External Comments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to the Chairman, Committee on the Budget, House of Representatives

United States Government Accountability Office

GAO

April 2006

CONSUMER-DIRECTED HEALTH PLANS

Small but Growing Enrollment Fueled by Rising Cost of Health Care Coverage

Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans Consumer-Directed Health Plans
Consumer-Directed Health Plans

GAO-06-514

Contents

Letter 1

Results in Brief 4
Background 6
CDHPs Constitute a Small but Growing Share of the Private Health Insurance
Market 11
Most Employers Contributed to Health Accounts, and the Share of Account
Funds Spent by Enrollees Varied Widely 15
Desire to Restrain Rising Cost of Health Care Coverage Is Primary Factor
Driving Growth of CDHPs 18
Federal and State Requirements, Inadequate Consumer Tools, and Other
Factors Could Limit the Appeal of CDHPs 21
Concluding Observations 29
External Comments 30
Appendix I Summary of Information Included in Decision-Support Tools
Offered by CDHP Health Insurance Carriers 31
Related GAO Products 33

Tables

Table 1: Comparison of HRA-Based and HSA-Eligible Plans and Account
Features for 2006 10
Table 2: Factors Driving Employers to Offer CDHPs 20
Table 3: Challenges Faced by Employers Implementing a CDHP 28
Table 4: Information Included in the Decision-Support Tools of Five
Multistate CDHP Insurance Carriers 31

Figure

Figure 1: Average Share of HRA Funds Spent by Enrollees, 2004 16

Abbreviations

AHIP America's Health Insurance Plans CDHP consumer-directed health plan
HDHP high-deductible health plan HRA health reimbursement arrangement HSA
health savings account HMO health maintenance organization IRS Internal
Revenue Service MSA medical savings account PPO preferred provider
organization

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separately.

United States Government Accountability Office

Washington, DC 20548

April 28, 2006

The Honorable Jim Nussle Chairman Committee on the Budget House of
Representatives

Dear Mr. Chairman:

Since 2000, premiums in the group health insurance market, which covers
the majority of Americans, have risen nearly five times faster than the
overall rate of inflation and the rate of increase in workers' wages,
leading to debate about ways to reduce the growing cost of health care
coverage. Employers and insurance carriers are showing increasing interest
in consumer-directed health plans (CDHP), which combine a high-deductible
health plan (HDHP) with a tax-advantaged health reimbursement arrangement
(HRA) or health savings account (HSA) that enrollees can use to pay for a
portion of their health expenses.1 HRA accounts are owned by the employer,
and only the employer may contribute to them. HSAs are owned by the
enrollee; may be contributed to by both employer and enrollee; and unlike
HRAs, may be taken by the enrollee to a new employer.

Proponents of CDHPs contend that CDHPs can help restrain the growth in
health care costs. They maintain that because CDHP enrollees may use
account funds rolled over from one year to pay for health care in
subsequent years, enrollees have an incentive to seek lower-cost health
care services and to limit their discretionary spending on health care by
obtaining care only when necessary. The higher deductibles associated with
the HRA-based and HSA-eligible plans2 typically result in lower health
insurance premiums because the enrollee bears a greater share of the
initial cost of care.3 Although not required to do so, insurance carriers
typically provide CDHP enrollees with decision-support tools, such as
Web-based information on costs of services and quality of providers, to
help them become more actively involved in making health care purchasing
decisions.

1Throughout this report we refer to two types of CDHPs-HRA-based plans and
HSA-eligible plans-used in conjunction with their associated health
accounts. The Internal Revenue Service affirmed that employer
contributions to employee HRAs are to be excluded from gross income for
income tax purposes. Rev. Rul. 02-41, 2002-2 C.B. 75; Notice 02-45, 2002-2
C.B. 93. Tax advantages for HSAs associated with HSA-eligible HDHPs were
established under the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, Pub. L. No. 108-173, S:1201, 117 stat. 2066,
2469. HSAs are usually administered separately by a financial institution.
Medical savings accounts (MSA) are another type of tax-advantaged CDHP
that must be used in conjunction with an HDHP. MSAs were authorized by the
Health Insurance Portability and Accountability Act of 1996, Pub. L. No.
104-191, S: 301, 110 stat. 1936, 2037; however, the number of MSAs opened
is relatively small and no new accounts could be opened after December 31,
2005.

Critics, however, question whether CDHPs will help restrain the growth in
health care coverage costs, and whether they will do so by changing
consumer behavior or merely by attracting healthier individuals who use
fewer health care services. If CDHPs do attract a larger share of
healthier individuals, premiums for traditional plans could rise faster
than they otherwise would because of a disproportionate share of
less-healthy enrollees with higher health care expenses remaining in those
plans. Critics also worry that employers will use CDHPs to shift the cost
of health coverage to employees, either by failing to reduce employee
premium contributions or by insufficiently funding their employees'
accounts.

Because the CDHP is a relatively new concept in the design of health care
plans, there is interest in determining the extent to which insurance
carriers and employers are offering such plans, how the accounts are
funded and used, and the factors that may contribute to the growth or
limit the appeal of these plans.4 You requested that we explore these and
other issues related to CDHPs. We examined the following questions:

           1. How prevalent are CDHPs?
           2. How are the associated health accounts funded and used?
           3. What factors may contribute to the growth of CDHP enrollment?
           4. What factors may limit the appeal of CDHPs?

2HDHPs that are designed to be associated with an HSA are called
HSA-eligible plans. The enrollee is not obligated to open or contribute to
an HSA.

3Many health plans require enrollees to pay out of pocket for a portion of
their health care costs up to a specified limit, known as the deductible.
Once the deductible has been met, the plan pays most of the remaining
costs.

4We recently reported on the early experiences with CDHPs offered to
federal employees. See GAO, Federal Employees Health Benefits Program:
First-Year Experience with High-Deductible Health Plans and Health Savings
Accounts, GAO-06-271 (Washington, D.C.: Jan. 31, 2006), and Federal
Employees Health Benefits Program: Early Experience with a
Consumer-Directed Health Plan, GAO-06-143 (Washington, D.C.: Nov. 21,
2005).

To determine the prevalence of CDHPs, we summarized existing literature
and industry surveys regarding the extent to which employers offer and
individuals enroll in CDHPs, and the extent to which insurance carriers
and financial institutions offer the plans and their associated accounts.

To determine how the associated accounts are funded and used, we
interviewed representatives of five of the largest CDHP insurers, six of
the largest financial institutions that administer HSAs, CDHP experts, and
industry officials. We obtained HRA funding and use data from three of the
insurers we contacted, obtained HSA account funding and use data from one
of the financial institutions we contacted, and obtained tax data on HSA
contributions and deductions from the Internal Revenue Service (IRS).5 IRS
data may not be nationally representative of HSA account holders because
the data do not capture individuals who opened HSAs and made no individual
contributions, even if their employers contributed, or those who did not
claim an HSA deduction. We did not independently verify the account data
we received from insurers and financial institutions; however, we
performed certain quality checks, such as determining consistency between
data elements provided and discussing data reliability and limitations
with the private entities providing the data, and determined that the data
were sufficiently reliable for our purposes. We also discussed the use of
HSAs during eight focus groups with 75 HSA-eligible plan and traditional
plan enrollees at three large employers in the public, energy utility, and
insurance sectors.

To determine the factors that may contribute to the growth or limit the
appeal of CDHPs, we conducted interviews with

           o  officials at the Department of the Treasury and IRS;
           o  industry officials representing health insurance carriers,
           America's Health Insurance Plans (AHIP), Blue Cross Blue Shield
           Association, HSA Insider, and a nationwide health insurance
           broker;
           o  representatives of employers offering CDHPs;
           o  representatives of financial institutions administering HSAs;
           o  provider association officials, such as the American Hospital
           Association and the American Medical Association; and
           o  CDHP experts, including the American Academy of Actuaries,
           benefit consultants, and health policy analysts.

           We also obtained information from five large employers in the
           retail, health care, financial services, technology, and beverage
           industries that offer HRA-based plans and obtained information
           from the focus groups of HSA-eligible plan enrollees. We evaluated
           the decision-support tools on provider quality and prices for
           medical services that five large multistate CDHP insurers made
           available to their enrollees. We reviewed federal statutory
           requirements and guidance related to CDHPs. To validate
           information provided by a health insurance trade association on
           the effects of state requirements on the appeal of HSA-eligible
           plans, we reviewed selected state insurance and tax laws related
           to CDHPs. We summarized existing literature and surveys by benefit
           consultants on factors influencing the growth of CDHPs and factors
           that could limit their appeal. We conducted our work from November
           2004 through April 2006 in accordance with generally accepted
           government auditing standards.

           CDHPs constitute a small but growing share of the private health
           insurance market. Publicly available survey data indicate that the
           number of enrollees and dependents with CDHP coverage increased
           from about 3 million in January 2005 to between about 5 million
           and 6 million in January 2006-still a small share of the 177
           million enrollees and dependents with private health insurance
           coverage. Many health insurance carriers offer CDHPs to employers
           and individuals, and the number of employers offering them to
           their employees increased from about 1 percent in 2004 to 4
           percent in 2005. Large employers were more likely than smaller
           employers to offer a CDHP, and large employers were more likely to
           offer HRA-based plans, whereas small employers were more likely to
           offer HSA-eligible plans. When employers offered a CDHP as one of
           two or more health plan options, the percentage of employees
           enrolled in the CDHP was generally lower than the percentage
           enrolled in the traditional plan. Most individuals enrolled in an
           HSA-eligible plan in 2004 and 2005 purchased the plan directly
           from a health insurance carrier rather than obtaining it through
           their employers.

           Most employers made a contribution to their employees' health
           accounts, and the share of account funds spent by enrollees
           varied. Employers are required to contribute to the HRA accounts
           associated with HRA-based plans, and data from three multistate
           insurance carriers indicate that the most common employer HRA
           contribution in 2004 ranged from about $500 to $750 for single
           coverage and $1,500 to $2,000 for two or more persons, or family
           coverage. Insurance carrier data we obtained also indicate that
           almost three-quarters of HRA-based enrollees with single coverage
           and more than 95 percent with family coverage spent some or all of
           their HRA funds in 2004. For HSAs offered by employers, a national
           survey of employer benefits reported that about two-thirds of
           employers made a contribution to their employees' accounts, and
           the average employer HSA contribution in 2005 was $553 for single
           coverage and $1,185 for family coverage. Industry officials noted
           that not all HSA-eligible plan enrollees opened and contributed to
           an HSA, estimating that up to half did not. Data from IRS indicate
           that among tax filers who claimed a deduction for an HSA in 2004,
           the average amount was $2,100 and increased with income. While
           data from one large financial institution indicate that most HSA
           account holders withdrew a portion of their account funds in 2005,
           representatives from three of the six financial institutions we
           contacted indicated that some account holders chose to use other,
           out-of-pocket sources to pay for medical care, rather than
           withdraw the funds from their HSAs.

           The rising cost of health care coverage is the primary factor
           contributing to the growth in employers offering and individuals
           enrolling in CDHPs. According to CDHP experts, industry officials,
           and employers we interviewed, other factors that lead employers to
           offer CDHPs include a desire to promote cost-consciousness among
           employees, expand employees' choice and control of health coverage
           options, and provide a tax benefit for employees. Experts reported
           that employers would be more likely to offer a CDHP if the cost of
           health care coverage continues rising significantly or if CDHPs
           demonstrate the ability to reduce these costs. With regard to
           factors that lead individuals to enroll in CDHPs, experts and
           enrollees in HSA-eligible plans cited enrollees' desire to lower
           their health insurance premiums, accumulate tax-advantaged
           savings, and gain greater control over their health care
           decisions. Experts also reported that individuals were more likely
           to enroll in a CDHP offered by an employer if the employer offered
           a generous CDHP package and effectively communicated with and
           educated its employees about the plan.

           Experts and industry officials identified a number of factors that
           could limit the appeal of CDHPs. Representatives from a health
           insurance trade association and a policy research organization
           that promotes HSAs suggested that certain federal requirements for
           HSAs and HSA-eligible plans-such as those precluding coverage for
           most prescription drugs before the deductible is met and
           establishing maximum HSA contribution limits-could limit the
           appeal of CDHPs to certain segments of the population. A health
           insurance trade association also cited insurance or income tax
           requirements in eight states that do not reflect federal statutory
           provisions for HSAs in that they limit the extent to which HDHPs
           may be coupled with HSAs or because they do not allow state income
           tax deductions for HSA contributions. The association noted that
           states have recently revised their insurance requirements and tax
           laws to be more consistent with federal requirements. Experts and
           provider association officials cited additional factors, including
           the inability of the patient or provider to know at the time
           service is delivered the amount to be deducted from the patient's
           CDHP account, and decision-support tools that do not provide
           enrollees with sufficiently detailed information about the quality
           of health care providers and the cost of health care services.
           Experts and industry officials also cited the fact that CDHP
           products were priced too high by insurance carriers, a "wait and
           see" attitude by some employers, and questions about the
           suitability of these plans for certain segments of the
           population-such as the aged or the sick-as being among other
           factors that may limit the wider appeal of these plans.

           We provided excerpts of a draft of this report to IRS and other
           organizations that provided us data, and we incorporated technical
           comments as appropriate.

           The majority of Americans receive their health coverage through
           the private health insurance market. Over the past several years,
           insurance carriers selling coverage in this market have added
           CDHPs to their portfolio of insurance products. The most common
           types of CDHPs are HRA-based and HSA-eligible plans used in
           conjunction with the associated health account.

           Private health insurance plans are offered in two primary
           markets-the individual and the group markets. The individual
           market includes health plans sold by insurance carriers to
           individuals who do not receive coverage through an employer or
           other group. About 17 million individuals and their dependents
           received health coverage through the individual market in 2004.6
           The group market includes health plans offered by employers to
           employees, either by purchasing the coverage from an insurance
           carrier or by funding their own health plans, and health plans
           offered by other groups, such as professional associations. About
           159 million individuals and their dependents received health
           coverage through the group market in 2004.7 Most employers
           subsidize a share of the cost of their employees' health coverage
           purchased in the group market, whereas individuals purchasing
           coverage in the individual market typically must pay the full
           cost.

           Private health plans are subject to various state and federal
           requirements, depending on the market in which they are offered
           and the manner in which they are funded. Health plans purchased
           from health insurance carriers, either by an individual in the
           individual market or by an employer in the group market, are
           subject to state insurance requirements. In contrast, health plans
           that are self-funded by employers in the group market are
           generally not subject to state insurance requirements, but rather
           to federal requirements that apply to employer-sponsored
           benefits.8 Larger employers are more likely to self-fund their
           health plans, whereas small employers are more likely to purchase
           coverage from insurance carriers.9

           Although insurance carriers and employers offer several variants
           of CDHPs in the private health insurance market, these plans
           generally include three basic components-a health plan with a high
           deductible; an associated tax-advantaged account to pay for
           medical expenses under the deductible; and decision-support tools
           to help enrollees evaluate health care treatment options,
           providers, and costs.10 In addition to including these three basic
           components, the health care billing process is different for CDHPs
           than for traditional health plans. The two most prominent CDHP
           models are HRA-based plans and HSA-eligible plans, used in
           conjunction with their associated savings accounts.11

           An HRA is an employer-established arrangement designed to
           reimburse employees for qualified medical expenses that occur
           prior to meeting the deductible.12 When enrollees in an HRA-based
           plan receive medical care, the costs are paid from a
           tax-advantaged HRA account. Once the HRA funds are exhausted,
           enrollees are typically responsible for paying for a certain
           amount-known as a bridge amount-out of pocket before reaching
           their deductible. Although employers are not required to couple an
           HRA with a high-deductible health plan, in practice the two are
           typically combined. HRA-based plans are only offered by employers
           to employees in the group market, and only employers may
           contribute to the HRA accounts. Account balances can accrue from
           year to year, and the accounts are typically not portable-that is,
           employees do not own the accounts and cannot retain unspent funds
           when they change jobs.13 HRAs are administered by the employer or
           an insurance carrier. IRS affirmed in 2002 that employer
           contributions to HRAs are to be excluded from gross income for tax
           purposes.14

           An HSA is also a tax-advantaged account established for paying
           qualified medical expenses, but it is the employee rather than the
           employer who owns the account. Individuals are eligible to open
           and fund an HSA when they have a high-deductible HSA-eligible plan
           and no other health coverage, with limited exceptions.15 In order
           to be considered an HSA-eligible plan, a health plan must meet
           certain criteria, including a minimum deductible amount-$1,050 for
           single coverage and $2,100 for family coverage in 2006-and a
           maximum limit on out-of-pocket spending-$5,250 for single coverage
           and $10,500 for family coverage in 2006. Preventive care services
           may be exempted from the deductible requirement; however, coverage
           of most other services, including prescription drugs, is subject
           to the deductible.16 Health insurance carriers offer HSA-eligible
           plans to employers in the group market and to individuals in the
           individual market. HSA-eligible plan enrollees are not required to
           open or contribute to an associated HSA. A financial institution,
           such as a bank or insurance company, typically administers the
           HSA. An employer may partner with a financial institution to offer
           an HSA alongside the HSA-eligible plan offered to employees, or it
           may defer to employees to open the account. Both employers and
           individuals may contribute to HSAs, and individuals may claim a
           deduction on their federal income taxes for the HSA contribution
           regardless of whether they itemize deductions or claim the
           standard deduction. Account balances can accrue without limit, and
           the accounts are fully portable. Contributions, withdrawals, and
           interest earned on the accounts are not federally taxed if used
           for health care; however, enrollees may use accrued balances for
           purposes other than medical care subject to a tax penalty and, for
           retirement income, subject to income tax. Tax advantages for HSAs
           were authorized in December 2003 by the Medicare Prescription
           Drug, Improvement, and Modernization Act of 2003. Table 1 compares
           key features of the two CDHP plan types.

5Two other financial institutions we contacted were able to provide
limited HSA account funding and use data, but we determined that the data
they provided were not sufficiently reliable for our purposes.

                                Results in Brief

                                   Background

The Private Health Insurance Market

6Employee Benefit Research Institute, "Sources of Health Insurance and
Characteristics of the Uninsured: Analysis of the March 2005 Current
Population Survey," Issue Brief No. 287 (Washington D.C.: November 2005).

Consumer-Directed Health Plans

7Employee Benefit Research Institute, "Sources of Health Insurance and
Characteristics of the Uninsured: Analysis of the March 2005 Current
Population Survey."

8Federal law establishes several requirements for private health plans
that apply to both fully insured and self-funded coverage, such as certain
fiduciary and reporting requirements, as well as standards for
continuation and portability of coverage and coverage of certain
conditions and procedures.

9States typically define small employers as those with fewer than 50
employees for purposes of establishing regulations that apply to health
plans offered in the small-group market.

10Average CDHP deductibles are about $1,900 for single coverage and about
$3,900 for family coverage, compared to an average of about $320 and $680,
respectively, for the most common type of traditional plan. See Henry J.
Kaiser Family Foundation and Health Research and Educational Trust (HRET),
Employer Health Benefits 2005: Summary of Findings (Menlo Park, Calif.:
2005).

  HRAs and HRA-Based Plans

11MSAs, another type of tax-advantaged CDHP, must be used in conjunction
with an HDHP; however, the minimum deductible levels are higher and the
allowable contribution amounts lower than for HSAs, and eligibility is
restricted to individuals working for employers with 50 or fewer employees
and self-employed individuals.

12Qualified medical expenses include expenses intended to prevent or
alleviate a mental or physical condition, including vision and dental
services. Qualified medical expenses may also include certain insurance
premium costs, long-term care insurance, and the costs of transportation
to obtain medical care.

13HRAs are generally set up as notational arrangements-employers do not
actually deposit funds into the accounts for their employees. Instead,
employers reimburse employees for their medical expenses as they occur.
Unused HRA contribution amounts allotted during the year are made
available to the employee for use in future years. Both HRA-based plans
and HRA account balances are subject to continuation of coverage
provisions under the Consolidated Omnibus Budget Reconciliation Act of
1985, which requires employers to continue to offer coverage to
individuals, with certain exceptions, who otherwise would have lost
employer-based health coverage, for a specified length of time. See Pub.
L. No. 99-272, Title X, 100 Stat. 82, 222 (1986).

14IRS Rev. Rul. 02-41, 2002-2 C.B. 75; IRS Notice 02-45, 2002-2 C.B. 93.

  HSAs and HSA-Eligible Plans

15Limited coverage (including specific injury or accident, disability,
dental care, or vision care) in addition to the HSA-eligible plan is
permissible.

16The IRS definition of preventive care includes periodic health
evaluations, tests and diagnostic procedures ordered in connection with
routine examinations, routine prenatal and well-child care, immunizations,
tobacco cessation programs, obesity weight-loss programs, and various
screening services.

Table 1: Comparison of HRA-Based and HSA-Eligible Plans and Account
Features for 2006

                       HRA-based plans             HSA-eligible plans         
High-deductible plan features
Deductible          No requirements, but most   Minimum of $1,050 for      
requirements        employers pair HRAs with    single and $2,100 for      
                       high-deductible plans       family coverage; to be     
                                                   adjusted for inflation in  
                                                   future years               
Maximum             IRS does not specify a      Maximum of $5,250 for      
out-of-pocket       maximum out-of-pocket limit single and $10,500 for     
limitsa                                         family coverage; to be     
                                                   adjusted for inflation in  
                                                   future years               
Account features    
Portability         No requirements, but most   Accounts are fully         
                       employers do not make       portable, so individuals   
                       accounts portable           retain the accounts if     
                                                   they leave their employers 
Ownership           Employer owned              Individual owned           
Who may contribute  Employers only              Employers, individuals,    
                                                   and family members         
Annual contribution No requirements; employers  Contributions allowed up   
limits              typically determine         to 100 percent of          
                       contribution amounts        deductible, but not more   
                                                   than $2,700 for single or  
                                                   $5,450 for family          
                                                   coverage; to be adjusted   
                                                   for inflation in future    
                                                   years                      
Unspent funds       May roll over from year to  May roll over from year to 
                       year; some employers limit  year without limit         
                       the maximum amount that may 
                       accumulate                  
Definition of       As specified by IRSb        As specified by IRS;b      
qualified medical                               however, payment for       
expenses                                        health insurance premiums  
                                                   is restricted to long-term 
                                                   care coverage, certain     
                                                   continuation coverage,     
                                                   coverage while receiving   
                                                   unemployment benefits, and 
                                                   coverage after age 65      
                                                   (except Medigap)c          
Tax treatment       Withdrawals for qualified   Withdrawals for qualified  
                       medical expenses are exempt medical expenses and       
                       from federal income taxes;  earned interest are exempt 
                       employer contributions to   from federal income taxes; 
                       account are excluded from   employer contributions are 
                       gross income by employers   excluded from gross income 
                       and are not treated as      and employee contributions 
                       taxable income to employees are deductible from        
                                                   federal income taxes       
Nonmedical          Not allowed-all withdrawals Subject to income tax;     
withdrawals         must be for documented      additional 10 percent      
                       medical expenses            penalty assessed for       
                                                   nonmedical withdrawals     
                                                   before age 65              

Source: GAO analysis of The Medicare Prescription Drug, Improvement, and
Modernization Act of 2003; IRS Rev. Rul. 2002-41; IRS Notice 2002-45; and
additional IRS guidance on HSAs.

aPremiums and services not covered by the insurance plan do not count
toward the out-of-pocket maximum.

bQualified medical expenses include expenses intended to prevent or
alleviate a mental or physical condition, including vision and dental
services. Qualified medical expenses may also include certain insurance
premium costs, long-term care insurance, and the costs of transportation
to obtain medical care.

cMedigap is private supplemental insurance available to Medicare
enrollees. It helps to pay for some of Medicare's deductibles, copayments,
and coinsurance amounts, as well as some benefits Medicare does not cover.

  Decision-Support Tools

Decision-support tools, including information on the price and quality of
health care services and providers, can help CDHP enrollees become more
actively involved in making health care purchasing decisions. These tools
may be provided by health insurance carriers to all health insurance plan
enrollees, but are likely to be more important to CDHP enrollees, who have
a greater financial incentive to make informed trade-offs between the
quality and costs of health care providers and services. Experts suggest
that in order to make informed provider choices, enrollees need data to
assess the quality of different providers. These data may include the
volume of procedures performed, the outcomes of those procedures, and
indicators demonstrating whether providers followed certain recommended
treatment guidelines. In order to assess the price competitiveness of
different providers, experts also suggest that enrollees need reliable and
specific information about the cost of services. CDHP insurance carriers
may also provide online access to health accounts for enrollees to manage
their health care spending.

  Health Care Claims Processing

CDHP insurance carriers process and reimburse health care claims
differently than traditional insurance carriers. Unlike enrollees in
traditional health plans, enrollees in CDHPs are typically not required to
make a copayment or pay a coinsurance amount to providers at the time they
receive care. Instead, providers send the complete claims to the insurance
carriers, which process the claims and inform the providers of the correct
amounts to charge the enrollees. The providers then bill the enrollees,
who pay from their HRA account or HSA by check, by debit card, or by
authorizing the insurance carriers to allow the providers to directly
debit their account funds. If enrollees have exhausted all of the HRA or
HSA funds in their accounts, but have not yet met the deductible, the
enrollees must pay the full amounts owed the providers using out-of-pocket
funds. Once the deductible has been met, however, the insurance carriers
cover all or most of the costs of covered services.

CDHPs Constitute a Small but Growing Share of the Private Health Insurance
                                     Market

According to publicly available survey data, the number of enrollees and
dependents covered by HRA-based or HSA-eligible plans is small but
growing. In January 2006, total CDHP enrollment was almost evenly split
between HRA-based and HSA-eligible plans. An increasing number of health
insurance carriers are offering CDHPs, and a small but growing share of
employers are offering them to their employees. Large employers were more
likely to offer HRA-based plans, whereas small employers tended to offer
HSA-eligible plans.

Available Surveys Suggest That a Small but Growing Share of Privately Insured
Enrollees and Dependents Were Covered by a CDHP

Although no national database of CDHP enrollment exists, we estimate that
the number of enrollees and dependents covered by these plans increased
from about 3 million in January 2005 to between about 5 and 6 million in
January 2006, based on publicly available survey data.17 About 3 million
of the 5 to 6 million enrollees and dependents were covered by HRA-based
plans, and from 2 to 3 million by HSA-eligible plans. These estimates
represent a small share of the approximately 177 million enrollees and
dependents with private health insurance coverage.

The number of enrollees and dependents appears to be growing faster for
HSA-eligible than for HRA-based plans. According to a series of surveys
conducted by a health care information company, the number of enrollees
and dependents in HRA-based plans grew from about 2.5 million in January
2005 to 2.9 million in January 2006, and the number of enrollees and
dependents in HSA-eligible plans during this period increased from about
600,000 to about 2 million.18 A second series of insurance carrier surveys
provide a higher estimate for HSA-eligible plans.19 These
surveys-conducted by a health insurance trade association-estimate that
the number of enrollees and dependents covered by an HSA-eligible plan
increased from about 438,000 in September 2004 to about 1 million in March
2005 and to about 3 million in January 2006. In 2004 and 2005, more than
half of these enrollees and dependents were covered by an HSA-eligible
plan purchased in the individual insurance market, rather than obtained
from an employer.20 None of these surveys indicate whether HSA-eligible
plan enrollees opened HSAs.

17See Inside Consumer-Directed Care, CDH Enrollment Increases to 4.9
Million; HSA-Qualified HDHPs Gain on HRA Plans (Washington, D.C.: 2006).
See also America's Health Insurance Plans, HSAs Triple in Ten Months: Over
3 Million Enrolled in High-Deductible/HSA Plans (Washington, D.C.: 2006),
and Summary: Number of HSA Plans Exceeded One Million in March 2005
(Washington, D.C.: 2005).

18Inside Consumer-Directed Care, CDH Enrollment Increases to 4.9 Million.

19America's Health Insurance Plans, HSAs Triple in Ten Months, and
Summary: Number of HSA Plans Exceeded One Million in March 2005.

20Preliminary data for 2006 suggest that the number of HSA-eligible plan
enrollees in the group market is growing faster than in the individual
market.

An Increasing Number of Health Insurance Carriers Are Offering CDHPs

The number of health insurance carriers offering CDHPs in the individual
and group insurance markets is increasing. A survey of health insurance
trade association members reported that 99 offered HSA-eligible plans in
March 2005, up from 29 in September 2004.21 In addition, the plans are
being offered widely in the United States. Another health insurance trade
association survey reported that members offered HSA-eligible plans in the
individual market in 40 states, in the small-group market in 44 states,
and in the large-group market in 46 states in 2005.22 Further, a survey of
group health insurance carriers in 2005 reported that 93 percent of survey
respondents expected to offer an HRA-based or HSA-eligible plan within the
next year.23

A Small but Growing Share of Employers Offer CDHPs, and the Type Offered Varies
by Employer Size

Although many insurance carriers have made CDHPs widely available to
employers, only a small percentage of employers offer CDHPs to their
employees. This percentage is growing, however. According to national
employer benefit surveys, about 1 percent of all employers that offered
health benefits offered a CDHP in 2004, and about 4 percent offered one in
2005.24 Large employers were more likely than smaller employers to offer a
CDHP. According to a 2005 benefit survey, 22 percent of employers with
20,000 or more employees offered a CDHP, compared to 2 percent of
employers with less than 500 employees.25 One recent employer benefit
survey indicated that the number of employers offering CDHPs would likely
increase in 2006. It found that 22 to 25 percent of employers said they
were somewhat likely, and 2 to 4 percent said they were very likely, to
begin offering a CDHP in 2006.26

21America's Health Insurance Plans, Summary: Number of HSA Plans Exceeded
One Million in March 2005.

22BlueCross BlueShield Association, States Where BCBS Plans Offer HSA
Health Plans (Chicago: 2005).

23Milliman, 2005 Group Health Insurance Survey (Seattle: 2005).

24See Kaiser Family Foundation and Health Research and Educational Trust,
Employer Health Benefits 2005 Annual Survey (Menlo Park, Calif.: 2005),
and Mercer Human Resource Consulting, National Survey of
Employer-Sponsored Health Plans: 2004 Survey Tables (New York: 2005).

25Mercer Human Resource Consulting, National Survey of Employer-Sponsored
Health Plans: 2005 Survey Tables (New York: 2006).

26Kaiser Family Foundation and Health Research and Educational Trust,
Employer Health Benefits 2005 Annual Survey.

Almost all employers that offer CDHPs also offer one or more traditional
health plans. According to a national employer benefit survey, only 1
percent of employers offering a CDHP in 2005 did not also offer one or
more traditional plans.27 However, benefit consultants and insurance
carrier representatives told us there is growing interest among employers
in fully replacing their traditional plans with CDHPs. For example, one
employer we spoke with offered an HSA-eligible plan, an HRA-based plan,
and a traditional plan as options for employees in 2005, but only offered
the CDHPs in 2006. The findings of employer benefit surveys, as well as
industry officials and benefit consultants we spoke with, indicated that
large employers were more likely to offer a CDHP as one of several plan
options, whereas some small employers that offered HSA-eligible plans
offered them as their only option.

When employers offered a CDHP as one of two or more options, enrollment in
the CDHP was generally lower than in the traditional plans. For example,
data from three large multistate insurance carriers indicated that the
average 2004 enrollment rates in their HRA-based plans when those plans
were offered alongside one or more traditional plans was 17 percent.
According to a national health benefits survey, among employers with 1,000
or more workers that offered an HSA-eligible plan, 3 percent of employees
were enrolled in the HSA-eligible plan in 2005.28

Employer characteristics typically determine the type of CDHP offered.
According to industry representatives and benefit consultants, HRA-based
plans are typically offered by large employers that self-fund their health
coverage. Large employers are more likely to offer an HRA-based plan
because they have more flexibility in designing the plan benefits, they
can specify how the funds are to be used, and they can retain unused
account balances. Small employers are more likely to purchase rather than
self-fund their health insurance plans and are less likely to offer an
HRA-based than an HSA-eligible plan.

27Mercer, National Survey of Employer-Sponsored Health Plans: 2005 Survey
Tables.

28Gary Claxton, et al., "What High-Deductible Plans Look Like: Findings
from a National Survey of Employers, 2005," Health Affairs, September 14,
2005. This estimate includes employers that offered the HSA-eligible plan
as one of a number of plan options and those that offered it as their only
option. However, employers with 1,000 or more employees typically offer a
choice of health plans.

 Most Employers Contributed to Health Accounts, and the Share of Account Funds
                        Spent by Enrollees Varied Widely

Most employers made a contribution to their employees' health accounts,
and there was wide variation in the share of account funds spent by
enrollees. Employers are required to contribute to the HRA accounts
associated with HRA-based plans, and the contribution amounts varied.
Almost three-quarters of HRA-based plan enrollees with single coverage and
more than 95 percent with family coverage spent a portion of their HRA
funds in 2004, and the year-end balances varied. Industry officials noted
that not all HSA-eligible plan enrollees actually opened an associated
HSA, and estimated that about 50 percent to 60 percent did so. According
to survey data, about two-thirds of employers offering HSA-eligible plans
made a contribution to employees' HSAs, and the average employer HSA
contribution in 2005 was about $553 for single and $1,185 for family
coverage. Data obtained from IRS indicate that tax filers who claimed a
deduction for an HSA claimed an average amount of $2,100 in 2004. Early
experience with HSAs suggests that some individuals are using their
account funds to pay for medical care, whereas others are choosing to pay
for care with other, out-of-pocket sources, rather than withdrawing the
funds from their HSAs.

For HRA-Based Plans, Employer Contributions Varied, and Most Enrollees Spent a
Portion of Account Funds

The amount of money employers contributed to their employees' HRA accounts
varied across employers, both for single and for family coverage. Based on
HRA account data provided by three multistate insurance carriers, the most
common annual employer HRA contribution in 2004 ranged from about $500 to
$750 for single coverage and from about $1,500 to $2,000 for family
coverage. For single coverage, a small number of employers contributed
less than $500, and a very few contributed more than $2,000. For family
coverage, a small number of employers contributed less than $1,000, and a
very few contributed more than $3,500.

Bridge amounts-which employees must pay out of pocket after they exhaust
their HRA funds but before they meet their deductible-varied widely for
employees whose employers purchased plans from these three insurance
carriers. Some employees with either single or family coverage had a
bridge amount of $0. Others were responsible for paying up to $6,750 with
single coverage or up to $8,150 with family coverage before reaching their
deductible. According to our analysis of a recent national employer
benefit survey, the average bridge amount in 2005 was about $1,078 for
single and $2,130 for family coverage.29

In 2004, most enrollees in HRA-based plans spent a portion of their
account funds. HRA-based plan enrollees with single coverage were less
likely to spend their HRA funds than enrollees with family coverage.
Specifically, data provided by the three multistate insurance carriers
indicate that almost three-quarters of HRA-based plan enrollees with
single coverage and more than 95 percent with family coverage spent some
or all of their HRA funds in 2004 (see fig. 1). The average amount of
unspent HRA funds at the end of 2004 was $470 for single coverage and $401
for family coverage.

Figure 1: Average Share of HRA Funds Spent by Enrollees, 2004

29We calculated the average bridge amounts by subtracting the reported
average employer HRA contribution from the reported average deductible for
an HRA-based plan. In this survey, family coverage is defined as coverage
of four individuals. See Kaiser Family Foundation and Health Research and
Educational Trust, Employer Health Benefits 2005 Annual Survey.

According to industry officials, not all HSA-eligible plan enrollees
opened and contributed to the associated HSA. National data sources are
limited, but officials we spoke with estimated that the share of all
HSA-eligible plan enrollees that had opened and contributed to an HSA was
about 50 percent to 60 percent. Supporting this estimate, based on
publicly available survey data and data obtained from IRS, about 55
percent of HSA-eligible plan enrollees claimed an HSA deduction or
reported an HSA contribution in 2004. Moreover, one insurance carrier
representative reported that about 60 percent of the carrier's
HSA-eligible enrollees who obtained coverage through an employer opened
and contributed to an HSA. Regarding employer contributions, data from a
national employer benefits survey indicate that about two-thirds of
employers that offer HSAs made a contribution to their employees' accounts
in 2005. Some health policy analysts have expressed concern that some
individuals who enroll in an HSA-eligible plan but do not open or
contribute to the account will be unable to afford the high deductibles
out of pocket.

Not All HSA-Eligible Plan Enrollees Opened and Contributed to an Account

Nationally representative data sources on employer and enrollee
contributions to HSAs are limited. Data from one national employer benefit
survey indicate that in 2005 the average employer HSA contribution was
$553 for single and $1,185 for family coverage.30 Data from IRS show that
among tax filers who claimed a deduction for an HSA contribution in 2004,
the average amount was about $2,100.31 The average deduction amount
generally increased with income level.

CDHP experts and industry officials stated that some account holders are
primarily using HSAs as a tax-advantaged savings vehicle. Representatives
from three of the six financial institutions we contacted characterized
HSA account holders as falling into one of two groups-spenders or savers.
Spenders use their account funds to pay for medical expenses, whereas
savers, who, according to financial institution representatives, tend to
be more highly compensated individuals, pay for care from other,
out-of-pocket sources, rather than withdraw funds from their HSA, in
effect using their HSAs as tax-advantaged savings. One financial
institution provided data showing that during the first three quarters of
2005, about 72 percent of its account holders withdrew funds from their
HSAs, including about 20 percent who exhausted their accounts. The average
amount rolled over by this financial institution's HSA account holders at
the end of 2004 was $950. We could not determine whether HSA-eligible plan
enrollees accumulated balances because they did not need to use their
accounts-because they paid for care from other, out-of-pocket sources or
did not need health care during the year-or because they reduced their
health care spending as a result of financial incentives associated with
the HSA.

30See Kaiser Family Foundation and Health Research and Educational Trust,
Employer Health Benefits 2005 Annual Survey.

31Data are based on a sample of 2004 tax returns and are reported on a
per-return basis, and thus could include contributions to more than one
HSA account in some instances. Moreover, the data do not distinguish
between deductions claimed for HSA contributions made by enrollees with
single or family coverage or for HSA-eligible coverage obtained in the
group or individual markets.

Desire to Restrain Rising Cost of Health Care Coverage Is Primary Factor Driving
                                Growth of CDHPs

The primary factor responsible for the growth of CDHPs is the rising cost
of health care coverage. CDHP experts and employers we interviewed
reported that employers offered the plans to lower their cost of health
care coverage and their employees' premiums, as well as for other
perceived benefits. Individuals enrolled in CDHPs through an employer or
the individual market primarily to lower their health insurance premiums,
accumulate tax-advantaged savings, and gain greater control over their
health care purchasing decisions, according to CDHP experts and
participants in our focus groups. CDHP experts also reported that
individuals were more likely to enroll in a CDHP offered by an employer
when the employer offered a generous contribution to the CDHP premium and
associated savings account, offered more comprehensive benefits, and
effectively educated its employees about the plans.

Employers Offer CDHPs Primarily to Help Lower Cost of Health Care Coverage

Industry officials and other experts we spoke with told us that the
primary reason employers offer CDHPs is to help lower their cost of health
care coverage.32 These officials reported that some employers believe one
way to restrain the growth in the cost of health care coverage is to
promote cost-consciousness on the part of their employees by making them
aware of the true cost of health care services. According to these
officials, by offering the ability to roll over unspent account balances
and take account balances from one employer to another, some believe that
CDHPs provide incentives for enrollees to select the best treatment option
at the lowest available price. Employers also want to offer their
employees a tax benefit that can create the opportunity to save for future
medical expenses, including saving for medical costs in retirement.
Industry officials and experts also noted that employers offer CDHPs in
response to dissatisfaction among employees with tight utilization
controls under managed care plans, such as health maintenance
organizations (HMO).33 In addition, according to these officials,
employers would be more likely to offer a CDHP in the future if health
care premiums continue rising significantly or if CDHPs demonstrate the
ability to reduce the rising cost of health care coverage.

32In the group health insurance market the cost of health care coverage-or
premium-is typically shared by the employer and employee. Employees may
incur additional costs in the form of a deductible, copayment, or
coinsurance when they visit a medical provider.

Publicly available employer surveys cite factors that encouraged employers
to offer CDHPs to their employees. In four surveys we reviewed, employers
responded that they offered CDHPs to reduce the cost of health care
coverage and provide employees with greater plan flexibility and a tax
benefit.34 Our interviews with five employers that offer CDHPs showed that
the key reasons for offering a CDHP were to reduce company spending on
health care coverage, to promote cost-consciousness among employees, to
lower the cost of health insurance coverage to employees, and to attract
and retain employees. (See table 2.)

33Some managed care plans require a referral from a primary care provider
before enrollees can see a specialist.

34See Aon Consulting/ISCEBS Survey Shows Consumer-Driven Health Plans
Becoming More Popular (Chicago: March 2005); Mercer Human Resource
Consulting, National Survey of Employer-Sponsored Health (New York: 2005);
Watson Wyatt, Managing Health Care Benefit Costs in a New Era: 10th Annual
National Business Group on Health/Watson Wyatt Survey Report (Washington,
D.C.: 2005); and Hewitt Associates, Health Care Expectations: Future
Strategy and Direction (Lincolnshire, Ill.: February 2005).

Table 2: Factors Driving Employers to Offer CDHPs

                                                             Employer
                                                      #1   #2   #3   #4   #5  
Factors related to employer                                           
Reduce company spending on health care                 SQRT SQRT SQRT SQRT 
Promote cost-consciousness among employees        SQRT SQRT SQRT SQRT SQRT 
Factors related to employees                                          
Provide employees with lower-cost health          SQRT SQRT      SQRT 
insurance coverage                                                    
Increase employee share of health care premiums   SQRT                SQRT 
in the future                                                         
Encourage savings for postretirement medical care      SQRT           
Respond to employee dissatisfaction with features SQRT SQRT           
of managed care, such as utilization reviews or                       
the use of gatekeepers                                                
Respond to employee dissatisfaction with managed  SQRT                
care's limited provider networksa                                     
Attract and retain employees                      SQRT SQRT SQRT SQRT 

Source: GAO interviews with employers offering CDHPs.

aCertain managed care plans, such as HMOs, require patients to receive
care from certain providers with which they have prenegotiated payment
rates.

Individuals Enroll in CDHPs to Lower Their Health Insurance Premiums and
Accumulate Account Balances

A broker that sells CDHPs on behalf of insurance carriers nationwide
reported that in the individual health insurance market, individuals
seeking to lower their premiums, accrue tax-free savings for health care
expenses, and gain greater control over their health care decision making
are increasingly purchasing HSA-eligible plans. An official representing
the broker noted that some individuals-particularly low users of health
care services-view HSA-eligible plans as an affordable way to protect
against a catastrophic health care expense, while providing greater
control and savings account features. Participants in our focus group who
were enrolled in employer-sponsored CDHPs also cited the desire to lower
their monthly outlay for premiums, build up savings to pay for retirement
or other nonmedical care expenses, and exercise greater control over
health care decisions as the reasons for selecting an HSA.

Industry officials and CDHP experts reported that the key factors in
determining whether employees enroll in a CDHP when offered are the level
of employer contributions, both toward the CDHP premiums and toward the
associated savings accounts, and the communication and education efforts
undertaken by employers. The officials noted that the appeal of CDHPs was
increased where the employer offered a larger contribution to the CDHP
premium and associated savings account and more comprehensive benefits. A
survey of employers indicated that employees were more receptive to CDHPs
when the employees believed that the employer was not switching to a CDHP
solely to shift rising costs onto them, but also to encourage them to take
more control of their long-term health care needs.35 One employer in the
survey achieved high levels of employee engagement and satisfaction with
its CDHP offering by using its employees as advocates to explain the new
benefit design and the rationale for the benefit change to both employees
and their spouses, and comparing its plan to CDHPs offered by other
companies. The company also offered its employees financial incentives,
wellness programs, and training for online decision-support tools that
allowed employees to compare the cost and quality of different treatment
and provider options.

  Federal and State Requirements, Inadequate Consumer Tools, and Other Factors
                        Could Limit the Appeal of CDHPs

Industry officials and CDHP experts we interviewed cited several factors
that could limit the appeal of CDHPs, including a lack of flexibility in
the federal statutory provisions and guidance establishing HSAs and
HSA-eligible plans and insurance or income tax requirements in eight
states that do not reflect federal statutory provisions for HSAs.
Officials of provider associations and experts suggested additional
factors, including the inability of the patient or provider to know at the
time service is delivered the amount to be deducted from the patient's
CDHP account, and the inadequacy of decision-support tools provided by
insurance carriers to help enrollees assess the cost and quality of
providers and treatment options. Industry officials and CDHP experts cited
other factors that could affect wider adoption of these plans, such as
insurance carriers pricing CDHPs too high and a "wait and see" attitude by
some employers.

35McKinsey & Company, Consumer-Directed Health Plan Report - Early
Evidence Is Promising (Pittsburgh: June 2005).

Industry Officials Suggest Certain Federal Tax Laws and Guidance May Limit
Changes to HSAs and HSA-Eligible Plans That Could Increase Their Appeal

A health insurance trade association and health policy analysts that
advocate HSAs reported that certain federal tax laws and regulations may
limit changes to the accounts or plans that could increase their appeal to
employers or individuals. For example, these groups cited IRS guidance
stipulating that HSA-eligible plans may not provide coverage for most
prescription medication before the annual deductible is met as potentially
limiting the appeal of these plans.36 In contrast, traditional plans
typically allow enrollees to receive coverage for prescription drugs
before the deductible is met-a benefit that is very common among
employers. In addition, annual contributions to an HSA for 2006 are capped
at $2,700 for single and $5,450 for family coverage.37 An industry
official noted that higher contribution limits could reduce the gap
between the allowable HSA contribution and the annual plan deductible,
thereby encouraging more individuals to enroll in these plans. However,
increasing the contribution amounts would result in additional revenue
loss to the federal Treasury because of the tax-exempt status of the
accounts.

IRS guidance precludes certain changes to CDHPs that health policy
analysts and experts believe could increase the appeal of CDHPs to certain
high-risk groups that typically incur higher medical expenses. For
example, some experts have suggested allowing financial incentives for
employees with chronic illnesses or for employees who participate in
wellness programs. With certain limited exceptions, IRS guidance penalizes
employers that vary the amount of the account contributions they make to
comparable classes of employees, based on factors such as employee
participation in a disease management program, by imposing a tax equal to
35 percent of the amount of the employer contributions.

An industry official also noted that IRS guidance can limit the
flexibility of HSAs for individuals who enroll in an HSA-eligible plan
later in the calendar year. If an HSA-eligible plan is purchased after the
first of the year, IRS guidance states that the allowable contribution
must be prorated based on the number of months left in the year, even
though the enrollee is subject to the full annual deductible. This could
create a potential shortfall between the prorated contribution
amount-available to offset the annual deductible-and the annual
deductible.

36The guidance cited is based on an Internal Revenue Code provision that
precludes coverage for primary care services before the annual deductible
is met. 26 U.S.C. S: 223 (c) (2). This restriction would pertain to most
prescription drugs.

37The President's 2007 budget would seek to increase the maximum HSA
contribution for all individuals up to the out-of-pocket spending limit
for an HSA-eligible plan, which for 2006 is $5,250 for single coverage and
$10,500 for family coverage. These out-of-pocket amounts are indexed
annually for inflation. See Office of Management and Budget, Budget of the
United States Government, Fiscal Year 2007.
http://www.whitehouse.gov/omb/budget/fy2007/ (downloaded Feb. 21, 2006).

Health Insurance Trade Association Reports That Some States Maintain Insurance
or Income Tax Requirements That Do Not Reflect Federal HSA Statutory Provisions

According to a health insurance trade association, three states currently
impose requirements that limit the extent to which HDHPs may be coupled
with HSAs. HMO requirements in three states prevent them from offering
HDHPs coupled with HSAs. These three states-Illinois, Missouri, and New
York-all specify maximum combinations of deductibles and copayments,
allowable charges, or out-of-pocket costs that HMOs may charge to
enrollees, thereby preventing them from offering HDHPs consistent with
federal statutory provisions.38 New York also imposes another requirement
on all individual health insurance plans, requiring them to provide
coverage of certain standardized benefits, which include major medical,
comprehensive, or comparable benefits.39 Under the Internal Revenue Code
and applicable guidance, HDHPs coupled with HSAs may not provide coverage
for primary care or other services intended to treat an existing illness,
injury, or condition before the annual deductible is met.40

The association also indicated that five states currently offer lower
incentives to HSAs because they do not allow state personal income tax
deductions for HSA contributions. These states are Alabama, California,
New Jersey, Pennsylvania, and Wisconsin. According to the association, the
remaining states have incorporated federal tax treatment of HSA
contributions into their own laws by referring to the relevant federal
provision, have revised their own tax laws to parallel federal law, or do
not impose a personal income tax.41

38Ill. Admin. Code tit. 50, S: 5421.110 (2006); Mo. Code Regs. Ann. tit.
20, S: 400-7.100 (2006); N.Y. Ins. S:4321(b) (McKinney 2006). These
restrictions pertain only to HMOs.

39See New York Insurance Department Circular Letter No. 4 (2004).

40However, first dollar coverage is permitted for preventive care. 26
U.S.C. S: 223(c)(2); IRS Technical Guidance, Notice 2004-23. IRS will
temporarily treat health plans as meeting these minimum annual deductible
requirements to be coupled with HSAs when the sole reason for not doing so
is compliance with certain state-mandated benefits. See IRS Technical
Guidance, Notices 2004-43, 2005-83.

41Although New Hampshire and Tennessee do impose tax on certain personal
income, neither state taxes salaries or wages.

Delayed Account Transactions May Hinder Appeal of CDHPs

CDHP experts and provider association officials reported that the appeal
of CDHPs may be limited by the inability of the patient and provider to
know at the time of service the amount to be deducted from the CDHP
account. Enrollees typically do not pay for services from their HRAs or
HSAs when they receive care from a provider because the amount to be
withdrawn from their account is not yet known.42 Instead, an enrollee
authorizes the insurance carrier to debit his or her account after the
claims adjudication process is complete. Alternatively, the enrollee may
elect to write a check to the provider to settle the outstanding charge
after the claim is adjudicated by the CDHP insurance carrier. CDHP experts
and provider association officials noted that the current system is
confusing for providers and patients. The association official cited an
example whereby a provider submits a claim to the insurance carrier after
the CDHP patient has been treated. The claim is adjudicated by the
insurance carrier, which sends the provider an explanation of benefits
detailing what the insurance carrier will pay and what the patient must
pay out of his or her HSA. Based on this explanation-sometimes received up
to 6 weeks after the service was delivered-the provider bills the patient
directly and is left wondering when payment will be received. During this
period, the patient, who may incur other health care expenses, is left
uncertain of the amount that will be withdrawn from the HSA, and therefore
cannot determine the remaining balance.

A few vendors have, or are developing, technologies that can
electronically determine the amount to be deducted from the patient's CDHP
account at the point of service and execute this transaction shortly
thereafter. For example, a major CDHP insurance carrier recently
introduced an integrated, real-time claims adjudication process that it
anticipates will simplify administrative tasks and help physicians obtain
payment for services from the patient more quickly. The insurance carrier
reported that instead of duplicative manual keying of claims and benefit
information, the new system submits the claim and returns the adjudicated
claim before the patient leaves the doctor's office. Similarly, a company
that handles commercial credit card transactions recently partnered with a
major nationwide health insurance carrier to launch a real-time debit card
for HSAs. According to the insurance carrier, the debit card can be used
at the physician's office or hospital, or to pay bills online. The card is
swiped by the patient at the point of service, allowing funds to be
withdrawn from the HSA automatically and a payment for the insurance
carrier's portion of the medical claim to be made directly to the provider
simultaneously. Financial institutions we interviewed have expressed a
desire to switch to these new technologies as they become available.

42To determine the amount that should be deducted from an enrollee's
account, the insurance carrier must adjudicate the claim by making
determinations as to whether the deductible has been met, whether the
service is a covered benefit, and whether any cost sharing applies.

Inadequate Decision-Support Tools May Hinder Appeal of CDHPs

According to CDHP experts and employers, the tools provided by insurance
carriers to assist consumers in assessing the price and quality of health
care providers and services do not provide sufficient information to allow
enrollees to fully assess the cost and quality trade-offs of health care
purchasing decisions.43 The decision-support tools we reviewed from five
of the largest CDHP insurance carriers included hospital- and
physician-specific quality data and provider cost information that was
limited. For example, five of the insurance carriers provided three or
more measures of hospital quality, such as outcomes data, procedure
volumes, and patient safety ratings; however, none provided similar
process or outcome measures to assess individual physician quality.44
Three insurance carriers provided information on medical board
certifications, and each carrier provided other information about
physicians, such as medical education and hospital affiliation. Three of
the insurance carriers provided average hospital payment rates and average
physician payment rates within a specified geographic area for selected
services, but none provided the actual payment rates that would be charged
to enrollees that the carrier had negotiated with specific hospitals or
physicians.45 All insurance carriers provided information that allowed
enrollees to track their account balances, and all provided some
information on health education. Appendix I summarizes the information
included on each CDHP insurance carrier's Web site.

Other recent assessments of CDHP decision-support tools found similar
limitations. For example, one study concluded that most CDHP
decision-support tools did not provide sufficiently detailed measures of
cost and quality to allow enrollees to identify higher value treatment
options.46 Another survey found that almost 90 percent of the insurance
carriers surveyed did not adjust their cost information and 67 percent did
not adjust their quality information to reflect severity of illness.47

43The decision-support tools we reviewed from five of the largest CDHP
insurance carriers included hospital- and physician-specific quality data
and provider cost information identified by experts as being important
when making health care purchasing decisions.

44Process measures indicate whether providers follow certain guidelines
for care, and include such measures as the share of patients for whom
recommended treatment guidelines were followed.

45One insurance carrier had begun a pilot project to publish
facility-specific, negotiated prices for selected medical services with
plans to expand this to additional markets in the next year.

CDHP experts and representatives of health care providers cited several
reasons that existing decision-support tools contain limited quality and
cost data. A provider association reported that the biggest challenge is
providing the cost and quality data in a way that consumers can understand
and interpret. The association also stated that there are potential legal
barriers to greater price transparency, such as antitrust laws and health
plan contracts, which may preclude the sharing of negotiated pricing.
Additionally, there are many complexities involved in making providers'
prices more transparent, as well as a lack of consensus on what would make
ideal quality measures.48 Furthermore, experts note that providers may
resist making quality information more transparent, allowing consumers to
shop for medical services based on price and quality, and the data needed
to build the cost and quality tools for patients are dispersed among
several publicly funded health programs, as well as private insurers and
self-funded employers.

Representatives of insurance carriers whose tools we reviewed told us that
they are currently limited in their ability to provide some of the
information experts identified as important. Multiple representatives
expressed concern over the lack of consensus across the industry on what
constitutes ideal quality measures and methodologies for developing
quality data. A representative noted that his company does not offer
patient satisfaction ratings for hospitals or physicians because of
concerns over the difficulty in achieving a meaningful rating that is
based on a high enough volume of respondents. Another representative told
us that physician-specific cost and quality data would be difficult to
collect and report until the physician community agreed that the value of
providing these kinds of information to consumers outweighed any
potentially negative personal ramifications. These representatives stated
that they were planning to offer actual negotiated physician costs in
selected markets in the coming years and that one insurance carrier has
plans to offer hospital process indicator data.

46See Meredith Rosenthal, Charleen Hsuan, and Arnold Milstein, A Report
Card on the Freshman Class of Consumer-Directed Health Plans, Health
Affairs, vol. 24, no. 6 (2005).

47Reden & Anders, Ltd, Consumer Directed Insurance Products: Survey
Results (Minneapolis: April 2005).

48These factors include the structure of the health plan and the rates of
medical complications or other comorbidities of the population treated by
the provider. See also McDermott, Will & Emery, Encouraging a Responsible
Approach to Consumer-Driven Health Care (October 2004).

Other Factors May Limit the Appeal of CDHPs

Other factors were cited by some CDHP experts and industry officials as
potentially affecting the wider adoption of CDHP plans. An industry
official said that CDHPs have been priced too high by insurance carriers,
and as a result, the difference in premiums between CDHPs and traditional
low-deductible preferred provider organization (PPO) plans has not been
enough to attract more attention from employers interested in reducing the
cost of health care coverage. For example, a national broker of health
insurance in the individual market reported that in 2005 its nationwide
average single-coverage monthly premium for HSA-eligible plans with
deductibles between $2,000 and $2,999 was $166, compared to $213 for
non-HSA plans with deductibles under $500. Surveys by benefit consultants
indicate that some employers have been hesitant to offer or promote CDHPs
or HSAs, instead taking a "wait and see" attitude. One survey reported
that almost one-third of employers not considering a CDHP think the
concept is too new and want to gauge other employers' experiences with
CDHPs before deciding to offer one themselves.49

Recent studies also raise questions about whether CDHPs can appeal to
certain segments of the population-such as the aged or the sick-who may
not have the inclination to select a CDHP or the desire to actively
participate in making complex health care decisions.50 These studies
caution that high users of medical services are more likely to prefer to
remain in traditional plans, and that some employers are concerned that
regardless of the amount of education they provide, spending accounts are
too complex for certain segments of their workforce. Three-quarters of
individuals polled by the Kaiser Family Foundation cited the fear of high
medical bills when asked about HDHPs.51 Focus group participants who are
enrolled in PPO plans cited lower and predictable out-of-pocket costs,
satisfaction with their current plan, and an unwillingness to manage their
own health care as the reasons for not enrolling in an HSA-eligible plan.
The focus group participants also noted that HSA-eligible plans were
confusing and complicated. For example, participants complained that the
HSA booklets were too confusing and convoluted and that the HSA-eligible
plan was more complicated and required more of the enrollee's time for
reviewing paperwork.

49See Aon Consulting/ISCEBS, Survey Shows Consumer-Driven Health Plans
Becoming More Popular, and Mellon Financial Corporation, Health
Reimbursement Arrangements/Health Savings Accounts: National Trends,
Survey Results Report (Pittsburgh: April 2005).

50American Academy of Actuaries, The Impact of Consumer-Driven Health
Plans on Health Care Costs: A Closer Look at Plans with Health
Reimbursement Arrangements (Washington, D.C.: January 2004); Center for
Studying Health System Change, Rhetoric vs. Reality: Employer Views on
Consumer-Driven Health Care (Washington, D.C.: July 2004); and Karen Davis
et al., How High Is Too High? Implications of High Deductible Health
Plans, The Commonwealth Fund, no. 816 (New York: April 2005).

Employers we interviewed cited challenges they faced as they implemented
their CDHPs. These included the administrative complexity of billing and
claims processing, limited or insufficient information on the quality and
cost of provider and treatment options, and employees' unfamiliarity with
and apprehension about CDHPs. (See table 3.)

Table 3: Challenges Faced by Employers Implementing a CDHP

                                                            Employers
Challenge                                          #1   #2   #3   #4   #5  
Employer-related challenges                                           
Administrative complexity of claims processing    SQRT      SQRT      
and billing procedures                                                
Inadequate resources allotted to educate               SQRT           
employees                                                             
Limited or insufficient availability of quality   SQRT                SQRT 
data for providers                                                    
Limited or insufficient availability of data on   SQRT                SQRT 
cost for providers or treatment options                               
Employee-related challenges                                           
Employees unfamiliar with consumer-directed       SQRT SQRT SQRT SQRT SQRT 
products                                                              
Employees apprehensive about consumer-directed    SQRT SQRT SQRT      SQRT 
approach                                                              

Source: GAO interviews with employers.

Similarly, employers responding to a benefit consultant survey said that
the key challenges they faced in implementing their CDHPs were providing
education and promoting understanding of the CDHP product, pricing the
CDHP product properly relative to other health plan options, contending
with the potential for the CDHP product to attract primarily healthier
employees,52 and selecting the right health insurance carrier and
financial institution to administer the plan and accounts.53

51Kaiser Family Foundation, Kaiser HealthPoll Report (Menlo Park, Calif.:
September/October 2004).

                            Concluding Observations

In recent years, federal and state governments have taken steps to
authorize and encourage the development of CDHPs, and insurance carriers
and employers have begun including the plans as an option within their
broader portfolios of health insurance offerings. While enrollment in the
plans is growing, CDHPs currently cover a relatively small share of the
privately insured population. In addition, a significant share of
individuals who enrolled in an HSA-eligible plan did not open and
contribute to an associated HSA to set aside funds to pay for health care
expenses under the higher deductibles. Nevertheless, the factors that have
stimulated the initial development and acceptance of these plans, such as
the rising cost of health care coverage and the desire to stimulate more
cost-consciousness among plan enrollees, are not likely to abate in the
near term.

Further enrollment growth in CDHPs will depend on several factors. The
likelihood that employers will increasingly offer CDHPs may be influenced
by how, or if, the plans demonstrate cost savings. On the one hand, the
plans may restrain costs by encouraging employees to become more informed,
cost-conscious purchasers of health care. This may depend in part on the
ability of health insurance carriers to improve and expand upon the cost
and quality information they make available to enrollees. On the other
hand, apparent CDHP cost savings may result primarily from a cost shift
from healthy to less healthy employees if healthier employees
disproportionately migrate to these plans, thus causing traditional plan
premiums to rise faster. The likelihood that individuals will increasingly
select a CDHP where given a choice may be influenced by the generosity of
the CDHP benefit package relative to other health plans offered by
employers and the experiences of early plan enrollees. Interest among
employees is likely to be greater if they perceive that the higher
deductibles are largely offset by employer contributions to employees'
accounts and lower monthly premiums, and if early enrollees report
positive experiences using the plans.

52Some employers try to mitigate this concern by designing benefits, plan
premiums, and account contributions to be as attractive as those offered
under more traditional plans.

53Mellon Financial Corporation, Health Reimbursement Arrangements/Health
Savings Accounts: National Trends, Survey Results Report (Pittsburgh:
April 2005).

                               External Comments

We provided to IRS, AHIP, and several other private-sector organizations
excerpts of a draft of this report pertaining to the data each had
provided us. We received technical comments from IRS and AHIP, which we
incorporated as appropriate. Other organizations that responded said they
approved of our presentation of the data they had provided to us.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution of it until 30 days
after its issue date. At that time, we will send copies of this report to
other interested parties. We will also make copies available to others
upon request. This report will also be available at no charge on GAO's Web
site at http://www.gao.gov.

If you or your staff have questions about this report, please contact me
at (202) 512-7119 or at [email protected] . Contact points for our Offices
of Congressional Relations and Public Affairs can be found on the last
page of this report. Randy DiRosa, Assistant Director; N. Rotimi
Adebonojo; Pamela N. Roberto; George Bogart; and Roseanne Price made major
contributions to this report.

Sincerely yours,

John E. Dicken Director, Health Care

Appendix I: Summary of Information Included in Decision-Support Tools
Offered by CDHP Health Insurance Carriers Appendix I: Summary of
Information Included in Decision-Support Tools Offered by CDHP Health
Insurance Carriers

Table 4: Information Included in the Decision-Support Tools of Five
Multistate CDHP Insurance Carriers

                       Insurance  Insurance  Insurance  Insurance  Insurance  
Tools               carrier #1 carrier #2 carrier #3 carrier #4 carrier #5 
Member account                                                  
access                                                          
Progress toward                                                 
deductible tracked                                              
by tool                                                         
HSA account balance                                             
Health education                                                
information                                                     
General preventive                                              
care                                                            
Common medical                                                  
procedures and                                                  
conditions                                                      
Treatment options                                               
for certain                                                     
conditions                                                      
Disease management                                       b      
programa                                                        
Health-risk                                                     
assessment toolc                                                
24-hour nurse                                                   
hotline                                                         
Hospital-specific                                               
quality data                                                    
Process indicatorsd                                                 e      
Outcomes dataf                                                      e      
Procedure volumes                                                   e      
Patient safety                                                      e      
ratingsg                                                        
Patient                                                         
satisfaction                                                    
ratings                                                         
Links to other Web                                              
sites that contain                                              
hospital quality                                                
data                                                            
Physician-specific                                              
quality data                                                    
Board                                                           
certifications                                                  
Process indicatorsd                                                 h      
Outcomes dataf                                                  
Patient volumes                                                     h      
Patient                                                         
satisfaction                                                    
ratings                                                         
Links to other Web                                              
sites that contain                                              
physician quality                                               
data                                                            
General                                                         
physician-specific                                              
information                                                     
Medical education                                               
information (e.g.,                                              
school, year of                                                 
graduation)                                                     
Hospital                                                        
affiliation                                                     
Personal                                                        
characteristics                                                 
Provider cost                                                   
information on plan                                             
Web site                                                        
Actual negotiated,                                                  i      
hospital-specific                                               
payment rates                                                   
Average hospital                                                    k      
payment ratesj                                                  
Actual negotiated,                                              
physician-specific                                              
payment rates                                                   
Average physician                                                   k      
payment ratesj                                                  
Actual                                                              l      
pharmacy-specific                                               
prescription drug                                               
prices                                                          
Average retail                                                      l      
prescription drug                                               
prices                                                          
Actual mail-order                                                   l      
pharmacy prices                                                 
Estimated                                                       
out-of-pocket                                                   
prescription drug                                               
costs                                                           

Source: GAO review of the decision-support tools provided by CDHP
insurance carriers.

Legend:

= Information provided

= Information not provided

aA disease management program is a voluntary program offered by insurance
carriers for those with certain high-risk conditions, such as diabetes,
asthma, and congestive heart failure. Patients generally have access to a
case manager who coordinates physician care and educational materials to
help them learn how to effectively manage their disease and improve their
quality of life.

bThis insurance carrier does not have a formal disease management program,
but it offers personalized information from a health coach on major
medical conditions, such as diabetes, asthma, and heart disease.

cA health risk assessment generally includes a questionnaire about
health-related behaviors and risk factors that generates a report that
provides guidelines on ways to reduce the risk of disease.

dProcess indicators measure whether providers follow certain guidelines
for care and include indicators such as the share of patients for whom
recommended treatment guidelines were followed.

eFor a limited list of procedures.

fOutcomes data are collected by hospitals and physicians to track patient
outcomes following a treatment or procedure, such as mortality rates,
complication rates, and average length of hospital stay.

gPatient safety ratings include data on compliance with safety practices,
such as meeting certain staff-to-patient ratios.

hInsurance carrier currently offers physician process indicators and
patient volumes for a small number of conditions in one pilot market but
plans to expand in the future.

iThe information provided is limited. Insurance carrier provides the
actual, hospital-specific, out-of-pocket costs (based on the plan's
coinsurance) for certain procedures. In cases where the out-of-pocket cost
exceeds the enrollee's maximum out-of-pocket spending limit, which is very
often the case, that spending limit is shown rather than the full cost.

jAverage payment rates were available for a limited list of services.

kInsurance carrier currently offers a range of hospital- and
physician-specific payment rates for selected procedures in one pilot
market and plans to expand in the future.

lInsurance carrier shows retail prescription drug prices for enrollees in
an HDHP.

Related GAO Products Related GAO Products

Federal Employees Health Benefits Program: First-Year Experience with
High-Deductible Health Plans and Health Savings Accounts. GAO-06-271 .
Washington, D.C.: January 31, 2006.

Federal Employees Health Benefits Program: Early Experience with a
Consumer-Directed Health Plan. GAO-06-143 . Washington, D.C.: November 21,
2005.

(290433)

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www.gao.gov/cgi-bin/getrpt? GAO-06-514 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact John E. Dicken at (202) 512-7119 or
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Highlights of GAO-06-514 , a report to the Chairman, Committee on the
Budget, House of Representatives

April 2006

CONSUMER-DIRECTED HEALTH PLANS

Small but Growing Enrollment Fueled by Rising Cost of Health Care Coverage

Insurance carriers, employers, and individuals are showing increasing
interest in consumer-directed health plans (CDHP). CDHPs typically combine
a high-deductible health plan with a health reimbursement arrangement
(HRA) or health savings account (HSA). HRAs and HSAs are tax-advantaged
accounts used to pay enrollees' health care expenses, and unused balances
may accrue for future use, potentially giving enrollees an incentive to
purchase health care more prudently. The plans also provide
decision-support tools to help enrollees become more actively involved in
making health care purchasing decisions. Because CDHPs are relatively new,
there is interest in the extent of enrollment and in other aspects of the
plans.

GAO was asked to review the prevalence of CDHPs, how the associated
accounts are funded and used, and the factors that may contribute to the
growth or limit the appeal of these plans. GAO examined survey data on
CDHP enrollment and interviewed or obtained data from employers, insurance
carriers, individuals, financial institutions, and other CDHP experts.

Enrollment in CDHPs accounts for a small but growing share of the 177
million Americans with private health insurance coverage. From January
2005 to January 2006, the number of enrollees and dependents covered by a
CDHP-either an HRA-based plan or an HSA-eligible plan-increased from about
3 million to between about 5 and 6 million. An increasing number of health
insurance carriers and employers began offering CDHPs during 2005.

Most employers made a contribution to their employees' health accounts,
and the share of account funds spent by enrollees varied. Employers
commonly contributed to their employees' HRAs from $500 to $750 for
individual coverage and $1,500 to $2,000 for family coverage in 2004. Most
HRA-based plan enrollees spent some or all of these HRA funds in that
year. For HSAs, industry representatives noted that not all HSA-eligible
plan enrollees opened and contributed to an HSA, and survey data indicate
that two-thirds of employers offering these plans contributed to their
employees' HSAs. Industry representatives indicated that while most HSA
account holders withdrew a portion of their account funds in 2005, some
account holders used other, out-of-pocket funds, rather than their HSAs,
to pay for medical care.

According to industry officials and experts, the primary factor
responsible for the growth of CDHPs is the rising cost of health care
coverage. Prompting the growth of enrollment among individuals is the
desire to lower premiums and accumulate tax-advantaged savings, according
to the officials. Experts noted that employers would be more likely to
offer a CDHP if the plans demonstrate the ability to restrain rising
costs, and employees would be more likely to enroll in a CDHP if employers
offered more comprehensive CDHP benefits coupled with education about the
plans.

Experts and industry officials cited several factors that may limit the
appeal of CDHPs. Certain federal requirements for HSAs and HSA-eligible
plans may preclude changes desired by some, such as higher annual
contribution limits for HSAs. Certain state insurance requirements or
income tax laws in eight states do not reflect federal statutory
provisions for HSAs and HSA-eligible plans. Insurers are generally unable
to determine the amount to be deducted from the patient's CDHP account at
the time of service or offer decision-support tools that provide enrollees
with sufficiently detailed data on the cost and quality of health care.

GAO received technical comments from organizations that provided data for
this report, and incorporated the comments as appropriate.
*** End of document. ***