treatment increases exponentially.
    From a financial standpoint, many employers and health plans have allowed the cost-sharing burden to erode over the past several years, staying with fairly static, fixed-dollar co-pays. As drug prices have continued to rise, and the product mix has skewed toward more-expensive brand name drugs, the industry has seen an erosion of point-of-service cost sharing, removing employees further and further from the real and ever-increasing cost of prescription drugs.
    Of course, these are just some of the factors influencing pharmaceutical cost trends. Let’s now take a look at how employers have historically responded to the challenge of regaining control over prescription drug costs.

Traditional Responses to Rising Rx Costs
In the past, employers often shared cost increases with their employees by raising the employee share of the premium. This resulted in a one-time-only “sticker-shock” at open enrollment. However, since cost increases have continued unabated at high levels, employers have increasingly turned to cost sharing at the point of service.
    According to a recently released study conducted by Fidelity Management Research, for plan year 2004, large employers have increased employees’ share of premium expense by 11 percent over 2003, but increased employees’ out of pocket expense by 30 percent.
    For the most part, this cost shifting has been accomplished through modest changes to existing benefit plan designs. For prescription drug benefits, it has meant working largely within the framework of fixed-dollar co-pays. Some employers have added tiers to their co-pay structures, moving from two-tiered to three- and four-tiered arrangements. For example, they

might charge more for brand name drugs that are not on the formulary, ending up with a structure like this: $10 (generic), $20 (brand name on formulary), $30 (brand name non-formulary).
    As a hedge against inflation, some sponsors have eliminated flat co-pays and returned to coinsurance, requiring employees to pay 20 or 30 percent of the cost of all drugs, whether generic or brand name.
    While these strategies are a step in the right direction, their impact is only modest, as they do not fully expose consumers to the true cost of drugs. According to some startling research by Medco Health, a leading pharmacy benefit manager, consumers typically believe cost increases benefit insurance companies and don’t help their employers. They have no idea what drugs really cost, what the value of their prescription drug benefit is, or how it affects their employers’ bottom lines.
    If recent history is any indication, it’s clear that employers are going to have to do more than shift costs to employees if they want to change their behavior. It’s going to require fostering mutual understanding and engaging in clear, two-way communication, coupled with the right plan designs and incentives, in order to achieve mutually desirable goals.
    And, as many plan sponsors are discovering, involving consumers in the decision-making process is exactly what consumer-directed health care is all about.

The Consumer-Directed Continuum and FSAs
The term “consumerism,” as applied to health benefits, can have many meanings. And lots of different models have been developed in support of this concept. The basic consumer-directed model, and the one employed most often, involves the use of high-deductible coverage combined with an

employer-funded HRA.
    Typically, the employer’s contribution to the HRA is less than the amount of the deductible (usually about half). This plan design requires the employee to pay 100 percent of the costs out of pocket after the HRA has been spent, until the deductible has been satisfied. This out-of-pocket exposure is commonly referred to as the “gap.”
    After the deductible has been satisfied, the health plan and the employee share costs on a coinsurance basis (e.g., 80/20). Many plans include an employee out-of-pocket maximum as well. To encourage people to seek necessary preventive and wellness care, it is also common to find those services carved out and not subject to the deductible. In some cases, the plan might pay most or all of the cost of such services.
    The employer may choose to carry over some or all of any remaining HRA funds at the end of the plan year. Those funds can serve as an important “carrot” in the benefit plan design: if employees spend them wisely, they will have more to spend the following plan year. This complements nicely the “stick” of the gap exposure, which places responsibility for spending squarely in the hands of employees, turning them into true consumers in a real marketplace.
    Although clearly, there are a few employers who have embraced the CDH model as a full replacement for their previous plan offerings, for the most part they have tended to evolve toward what we generally think of as the CDH model, as illustrated [here].And despite all the attention paid to CDH models, many employers are still proceeding cautiously.
    At our company, we tend to view the drive to consumerism as a continuum, consisting of incremental steps toward eventual adoption of CDH principles. At any point in this evolutionary process – indeed, throughout the continuum – a flexible spending account (FSA) may be employed to support the