he era of generous, employer-funded health-care plans is swiftly going the way of the family-doctor house call. An increasing number of people, even those with full-time jobs, have no or minimal health insurance, and they are being forced to pay health-care expenses out of pocket. This has given rise to a new array of consumer-driven health-care (CDHC) options that are changing the face of health-care spending yet again.

As employers struggle to rein in escalating employee health-care costs, employees grapple with sky-high deductibles, lower insurance caps, and sharply increasing discrepancies between the actual cost of medical services and the amount insurance plans are willing to allocate for them.

Meanwhile, doctors and other medical practitioners wrestle with ways to collect the higher amounts owed by their patients. And discerning ISOs and merchant level salespeople (MLSs) are devising solutions to facilitate this transition in health-care payments.

The government steps in

To address the health-care crisis, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which created tax-advantaged health savings accounts to complement high-deductible health plans (HDHPs). The legislation permits consumers to own health-care assets and to carry them from employer to employer.

The lower cost to employers of CDHC options - combined with a concentrated push by the Bush administration, which considers these plans "market-driven solutions to the health-care cost crisis" - has led to a slowly growing popularity of plans like flexible spending accounts (FSAs), health savings accounts (HSAs) and health reimbursement arrangements (HRAs).

Such plans have the potential to profoundly affect the $2 trillion health-care industry. They may also have a profound effect on the payments industry, particularly on those who specialize in the health-care market.

The market grows

According to the health insurance lobbying group America's Health Insurance Plans, more than 3 million people now have HSAs. That's triple the approximately 1 million people who were covered by HSA-compatible insurance policies in March 2005. Those 3 million enrollees represent only about 1.5% of the approximately 198 million people with health insurance. Nonetheless, they represent a growing market.

TowerGroup, a MasterCard Worldwide-owned research firm, projects the total number of HSAs and FSAs will rise to nearly 29.1 million by 2010, up from just 17.3 million in 2005.

"If past history is any indication of future performance, then all of the consumer-driven health-care accounts will continue to grow, to become more widely ingrained in the American consumers' mindset and easier to use," said James S. Gandolfo, Senior Director/Vice President of PFPC, a solution provider to the global investment industry. "There has been a wide acceptance of these products, partially because of credit cards," he added. "American consumers want to choose and control how and when they spend their money, and that has carried over into their health-care spending. But employers are also embracing these accounts as a way to help influence and control health-care costs."

New financial products needed

Gandolfo compared this era in consumer-driven health care to the early days of individual retirement accounts. "Explaining the benefits to the consumer is the biggest challenge, but I don't think it will be for long," he said.

The growth of these plans has created a need for new financial products, including vehicles to invest, track and access the accumulated balances, and payment vehicles to help consumers finance their $1,000 to $2,000 of personal responsibility each year. Health-care benefit debit cards, for example, are becoming an essential part of the health benefits mix.

The number of consumers reporting they had used credit or debit cards for medical purposes grew by 50% between 1998 and 2003, according to TowerGroup. By 2010, 71% of those with FSAs, HSAs and HRAs, and 95% of those with HSAs, may rely on payment cards.

Opportunities for payment processing professionals exist in two areas: on the employer side, for products such as prepaid debit cards, and on the receiving medical-office side, for payment processing services.

"The continuing shift of those costs to consumers' shoulders is creating an important new pool of payment funds for which financial service industries are in a position to compete," said Dennis Moroney, Senior Research Analyst with TowerGroup and the author of at least two reports on HSA opportunities.

"What's more, a growing percentage of health-care savings accounts is moving from a paper-based reimbursement environment to a plastic payments card, reducing associated costs and eliminating the delays or receipt collection seen with reimbursement," he said.

Shifting the physician's mindset

That dynamic has been observed in the medical field: In May, the American Medical News reported physicians might find they need to adjust their practices to the business realities of CDHC. It suggested no amount of technology would help if a practice does not get into the habit of collecting payment upfront from patients.

That's an uncomfortable shift for many doctors who would prefer to see themselves as their patients' advocate rather than their patients' biller.

"There is really no difference between writing an application for a doctor's office and, say, a bagel shop, but doctors would really rather not think that way," said Jeffrey Shavitz, Executive Vice President of Charge Card Systems Inc., an ISO focusing on the medical field. "Some of the best doctors are the worst businessmen. Medical offices frequently outsource their accounting, so they don't always see day-to-day the impact collection has on them.

"If you do an analysis to show when a doctor is actually getting paid, they're frequently surprised - and unhappy - to see that the average [time it takes to get paid] may be 90 or 100 days. They may say they don't want to look like a retail shop, or they don't want to pay an extra 2%, but once they compare asking for a credit card and getting next-day funding to [waiting] 100 days, you've got their attention."

Tapping an untapped niche

Medical offices often use technologically advanced medical equipment but have dinosaur payment systems. This could mean this sector is one of the last, great untapped markets for ISOs and MLSs.

Bill Bartzak, Chief Executive Officer of MD On-Line Inc., a real-time insurance eligibility and payment collection service, said 48% of doctors in offices with one to five practitioners still submit claims by paper. "There's a lot of market left to reach," he said.

According to Christy Corey, President of TransFirst Health Services Inc., most health care practices use stand-alone systems to process patient payments, and these systems are neither efficient nor cost effective. "Health care has been lagging in certain segments of technology largely due to the fact that there has been little need to address private-pay collection," she said. "It simply represented an insignificant percent of overall revenue."

With the upsurge of HSAs and HDHPs and an increasing number of uninsured patients, that percentage is quickly becoming significant. However, many experts suggest success in this market lies in further specialization.

"There are differences in billing practices between the specialties," Shavitz said. "They may seem like small differences to us, but to the doctors, those differences are important. If you can establish yourself as a specialist for dermatologists or plastic surgeons, you can really mine the niche. And doctors very much understand the concept of giving referrals."

Ironing out CDHC wrinkles

There is opportunity in this growing field, but there are also obstacles to widespread adoption of CDHC products. Consumers are reluctant to abandon traditional managed plans, for which employers bear the brunt of expenses. They are also reluctant to embrace consumer-driven plans, which give employees more choice but also expose them to more financial risk.

Employers offering FSAs find less than 20% of their employees take advantage of them. Those offering HRAs - less than 5% of all U.S. companies - find an even lower percentage: less than 10%. Still, these types of products are in their infancy. "Early versions of health-care accounts, such as the health reimbursement arrangement and the medical savings account, had little uptake because they were highly restricted in terms of usage, asset ownership and year-to-year rollover capabilities," Moroney said.

For example, those who did not spend the money in their FSAs lost the money at the end of the year. In May 2005, the Department of the Treasury approved FSA holders to carry over unused account balances for 2.5 months into the following year, which is still not as generous as the current crop of HSAs (balances for newer accounts carry forward indefinitely).

While the new carry-over terms help fund medical treatments early in the year, mitigating a major drawback to FSA use, these accounts work best for people who can schedule medical procedures later in the year when their accounts are already funded.

Also, FSAs began primarily as paper-based systems, requiring users to save receipts, fill out forms and be reimbursed several weeks later. A 2003 IRS ruling allowing FSAs to be paired with prepaid cards has created a growing pool of card-based FSAs. TowerGroup estimates that by the end of 2004, 20% of the 14.2 million existing FSAs were card based.

Partly because FSAs were not as well-received as hoped, many employers have moved slowly and gently into the realm of CDHC. Most continue to offer traditional insurance at a slightly higher price to their employees. Many experts anticipate employers will eventually phase out the more expensive insurance plans, which will hasten the growth of CDHC plans.

HIPAA headaches

Another factor complicating the widespread adoption of CDHC plans is the Health Insurance Portability and Accountability Act (HIPAA), whose creators did not envision the need for coordinated health and financial service products. Service providers fear liability in the event of data breaches involving systems that can access consumer medical and financial records simultaneously.

Data-sharing regulations within HIPAA and the Gramm-Leach-Bliley Act (financial modernization legislation) make partnership between the health-care and financial-services industries problematic.

Obstacles to cooperation could lead to competition. According to Moroney, health-care providers and the consumer payments industry may cooperate to reach this burgeoning market, or they may compete for the growing pool of health-care account business.

Virtually all products now offered have been developed since HIPAA was approved, and are likely to meet HIPAA guidelines. But as the use of technology becomes more ubiquitous, the medical field will begin to demand the efficiencies in payment processing that other industries experience: 24/7 help, online access to account information, and the ability to cross reference both medical and financial data within one consolidated system.

Heightened privacy concerns about access to confidential medical records could lead to greater and stricter regulation of CDHC products and payment vehicles designed to accommodate them.

But the opportunities may well outweigh the obstacles. "Consumers, politicians and businesses are exerting their influence, each flying their traditional flags of consumer protectionism, public interest and profit," said Sarah Phelps of First Annapolis Consulting.

"This power play is creating an opportunity for financial services companies to introduce efficiencies into the health-care industry that may help rein in these escalating costs," she added. "There is no time like the present to assess the health-care market and design the approach that makes the most sense for your organization."