Consumer Driven Health Plans


I.  Why now?

The rapidly increasing cost of health care, with the resulting increase in the cost of employer-provided health benefit plans, has caused employers to search for ways to contain their health plan expenses.  Rising costs, along with general employee dissatisfaction with the lack of choice of health care providers under many plans and the perceived lack of quality within many of the networks available to employees, has created an environment ripe for new ideas.

Consumer driven health plans, sometimes referred to as defined contribution health plans or patient directed health plans, (“DC Health Plans”) are being touted as the first “new” idea in health benefit plans in a decade. Aggressive marketing, along with promises of decreased costs resulting from employees who will be better consumers of health care under these plans, have made them popular topics within the highest levels of companies.

II.  Key Components.

DC Health Plans consist of high deductible insurance coverage, coupled with a spending account, known generally as a Personal Care Account or “PCA.”  The PCA is funded by the employer, and is designed to permit the employee to use the funds in that account to pay for medical benefits. If employees don’t spend all of the money in the PCA in any one year, the balance can be rolled over to subsequent years. The medical expenses that may be paid from that account are often tied to the benefits otherwise covered by the plan. This assures that the PCA is not used for medical expenses that otherwise would not be anticipated under the plan.

III.  The Theory.

The theory behind the cost containment value of the DC Health Plan is that if the employees are given an account balance to cover their medical expenses before the high deductible insurance coverage applies, they will be more careful in their consumption of medical care, and will become more informed in selecting providers.  Overall costs will be reduced because the employee will not spend unnecessarily, and long-term costs won’t rise as rapidly due to consumer pressure.

IV.  Necessary Ingredients (Non-legal).

In order for the theory to work, certain ingredients are required. Employee education is absolutely necessary. Employees must understand the theory and then must actually practice it.  This will require that the employee have the resources to become an informed consumer (i.e., internet accessibility), and be self-sufficient (i.e., be able to become an informed consumer).  In addition, the employer must be willing to invest in and actually implement initial training and ongoing communication.  Finally, the employer must be making relatively high contributions to the overall cost of the plan in order to fund the PCA’s.

DC Health Plans are not appropriate for employee groups that require a lot of hand-holding, or for employers who are unwilling to invest the necessary time and resources in employee education and communication.

V.  The Big Misconception.

Probably the biggest misconception about DC Health Plans is the notion that they will have an immediate positive impact on the costs for health plan coverage.  There is support for the belief that they will not. Statistics show that 20% of covered persons will incur virtually no medical expenses, 60% will incur 20% of the costs, and the remaining 20% will incur 80% of the costs. Yet the PCA’s generally will make the same amount available to all employees.  Thus, unless the 20% who spend nothing don’t use any of the money in their PCAs, in the short run these plans may actually be more expensive than the current coverage. Beyond the short term, whether these plans will reduce costs over what they otherwise would be depends on a number of great unknowns.

VI.  The Great Unknowns.

Will employees have the time and patience and resources to become informed consumers? (A recent survey found that only 1 out of 5 participants in defined contribution retirement plans actually took advantage of the online investment advice available to them.)  Will employees then make the “right” decisions (i.e., shop for doctors, resist or at least challenge certain tests, buy generic drugs, and so forth)?  Will doctors cooperate?  Will employees opt to save money now and forego early treatment, resulting in higher overall costs in the long run?  Will adverse selection occur, if employees are given a choice between a DC Health Plan and a traditional plan, with the result that insured or self-insured HMOs or indemnity plans will have adverse claims experience and thus higher costs?  In addition, even though the IRS has issued guidance on PCAs that answered some of the legal issues, there still are a number of other unresolved legal issues.  For example, when a family has a COBRA qualifying event, will each qualified beneficiary in the family be able to elect to continue coverage under the full amount of the PCA, in order to give each the same benefits as on the day before the qualifying event, thereby multiplying the employer’s exposure?

One further concern for employers involves employee relations.  Since the recommended amounts for employers to contribute to PCAs in many DC Health Plan proposals is less than the amount employees may be out of pocket before the high deductible insurance coverage applies, many employees may find they must pay for medical expenses they were expecting would be covered by the plan.

Obviously, no one knows the answers to many of these questions, but it is the employer who is taking the gamble on the right answers.

For further information on the legal issues associated with DC Health Plans or other employee benefits matters, please contact the undersigned or any of the attorneys in the Haynes and Boone, LLP Employee Benefits/Executive Compensation Practice Group listed above and at

Email Disclaimer