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MARKETWATCHDo Consumer-Directed Health Benefits Favor The Young And Healthy?
This paper demonstrates through a simulation and demographic analysis of consumers’ out-of-pocket payments for premiums and medical care that the young and healthy are potential winners with consumer-directed health benefits (CDHBs), and the moderately sick are the losers. However, benefit design constraints and job tenure realities limit the savings opportunities for the young. As employee cost sharing continues unabated, one potential remedy is to cap expenses as a percentage of income, thereby placing a limit on the burden to the sick and ensuring that all Americans share the burden equally according to ability to pay.
Leaders in medicine, business, and academe have called for a "consumer-driven" health care system1. The current manifestation of consumer-driven health care is consumer-directed health benefits, the key design features of which are a health reimbursement account (HRA), a large deductible, catastrophic insurance, and information supports. The espoused active ingredient of consumer-directed benefits is increased financial exposure to medical expenses to motivate consumers to be more prudent purchasers as they make price-sensitive choices subject to their own budgetary constraints. Economic theory and health insurance research findings support the proposition that exposure to higher out-of-pocket payments reduces spending.2 However, market-based approaches to health care finance and payment systems that place a premium on efficiency can sacrifice equity in the process. In terms of equity, proponents proclaim that the majority will benefit through lower out-of-pocket payments. Opponents contend that consumer-directed benefits will not affect all consumers in the same way and will benefit the healthy and wealthy and hurt the sick and poor. Proponents refer to the "not-for-the-sick" and the "class warfare" arguments as "scare stories" that should not be believed.3 The purpose of this paper is to address the "young and healthy" hypothesis through a simulation of estimated out-of-pocket spending by consumers in consumer-directed versus traditional plans (health maintenance organizations, or HMOs, and preferred provider organizations, or PPOs) and through an analysis of demographic variables associated with out-of-pocket spending.
Researchers have not yet evaluated the actual experience of consumer-directed plans in relation to these equity questions. Vendors have provided preliminary information. A Humana spokesperson suggested that the "super healthy" enroll in its CoverageFirst plan. The actuarial value estimated for the plan was 0.85 relative to the reference plan. However, claims for the prior twelve months before enrollment for actual enrollees were 0.43 relative to the reference plan, and claims following enrollment were 0.25 relative to the reference plan, which indicates a much healthier population.4 DefinityHealth indicated that the average age of enrollees in its consumer-directed plan for "employer A" was higher by 1.3 years, claims were 50 percent higher relative to a standard PPO, and the young-and-healthy selection concern was "overrated."5 Definitions and research. Consumer-directed benefits bear a striking resemblance to medical savings accounts (MSAs), in that both provide a savings/reimbursement account, tax exclusion of deposits and carryover balances, a large deductible, and wraparound coverage. Accordingly, research on MSAs might provide insights into consumer-directed plans. Although there have been no published evaluations on the experience of MSAs in the U.S. private or public sectors, there was a flurry of policy debate in the mid-1990s.6 There also have been simulations of MSAs’ impact on total spending and their distributional consequences.7 The most relevant simulation found that winners are more likely to be younger, male, healthier, and low-wage earners relative to people having fee-for-service indemnity insurance.8 Other actuaries and researchers have come to the same conclusion about the potential gains for the young and healthy.9 International experience. Other countries, including Singapore, South Africa, and China, have implemented MSAs.10 Although the impact on total health spending remains uncertain, the equity impact is clearer. In China, one year after implementation, 17 percent of MSA enrollees incurred catastrophic expenses, spent through their savings accounts, and spent 5 percent of their income on deductibles (the maximum allowed by law). About one-third of enrollees had no expenses (the very healthy) and saved the 6 percent payroll contribution.11 Singapore has had the longest experience with MSAs with its compulsory Medisave program, to which employees and employers each contribute 6–8 percent of wages. However, outpatient care is largely uncovered, and extreme restrictions on coverage and preexisting conditions result in consumers’ paying directly for 57.5 percent of medical expenditures and MSAs’ paying only 8.5 percent.12 This has led some analysts to conclude that MSAs have exacerbated the existing inequitable treatment of the most vulnerable populations—the poor, low-wage workers, and those with serious chronic illnesses.13 In South Africa about 10 percent of the population buys private insurance in the form of MSAs in addition to the free public system, mostly to avoid long queues and the perception of declining quality. Services deemed nondiscretionary, including hospitalization and drugs for chronic conditions, are exempt from the deductible, thereby lessening the burden on the very sick, although outpatient care has a deductible of $1,100. However, because of exclusions for preexisting conditions and greatly increased premiums for people over age thirty-five, even proponents agree that private insurance is geared to the young and healthy.14
For the simulation, we compared a traditional comprehensive benefit plan design (PPO and HMO with $0 deductible, $5–$10 copayment, and maximum out-of-pocket payment limit of $2,000–$2,250) with "first generation" consumer-directed benefit designs as offered by DefinityHealth ($1,000 HRA with total deductibles of $1,500, $2,500, and $3,500; maximum out-of-pocket limit at the deductible; and no coinsurance). We determined average medical spending for an array of expense types (such as hospitalization, office visits, and prescription drugs) for four total medical spending groups: (1) the "healthy" (63 percent of the working-age population, with average annual spending less than $580), (2) the "slightly sick" (next 22 percent), (3) the "moderately sick" (next 10 percent), and (4) the "very sick" (those in the top 5 percent of spending). These data were derived from the 1998 Medical Expenditure Panel Survey (MEPS) and aged to 2002.15 We then ran the average spending for each spending type through the insurance policy features (for example, deductible, coinsurance, and out-of-pocket maximum) to generate average benefits paid by the insurance policy and out-of-pocket payments by the beneficiary, by insurance plan. For the traditional plan, the HMO and PPO results were determined separately and then averaged. A 10 percent reduction in overall spending attributable to a "consumer effect" was applied to the consumer-directed plans, which is twice as generous as the estimate used by leading employee benefit consulting firms.16 An employee benefit consultant, Hewitt Associates, computed the actuarial values of the plans based on the consumer effect, 10 percent retention of the balance of the HRA, and a 10 percent discount differential between traditional and consumer-directed plans (in favor of the traditional). The average single premium price for 2002 ($3,000) and a fixed-percentage employer contribution formula (85 percent) were used to estimate out-of-pocket payments for premiums based on the actuarial values.17 Total out-of-pocket expenses were the sum of premium share and medical out-of-pocket expenditures. The association between demographic and (perceived) health status variables and spending were tested with bivariate descriptive statistics. The data are from MEPS 1999 survey data for the working-age population with private health insurance.
Comparative out-of-pocket spending. The healthy. The healthy (group 1) save an average of $584 with a consumer-directed plan relative to the traditional plan, or a 491 percent gain. They actually spend more out of pocket on medical services in the consumer-directed plan, but the $1,000 HRA covers these costs and nets a balance of $495. The healthy account for three-fourths of the overall impact of consumer-directed benefits in terms of the total change in out-of-pocket payments across all spending groups. The slightly sick. The slightly sick (group 2) lose an average of $250 in consumer-directed plans relative to traditional plans, or a 66 percent loss. Average annual total expenses for this category are $2,451; hence, most people have spent through the annual HRA of $1,000 and are into the deductible "gap," paying out of pocket for 100 percent of expenses, instead of paying a copayment of $5 or $10 in an HMO or PPO. The moderately sick. The moderately sick (group 3) lose an average of $581 in consumer-directed plans relative to traditional plans, a 61 percent loss. These people are deeper into the "gap," with average annual spending of more than $6,000. Unlike for groups 1 and 2, there is a wide range in the change of payments depending on the size of the deductible. There is an average loss of $1,541 in the high-deductible plan and an average gain of $374 in the low-deductible plan. The low-deductible plan has a maximum out-of-pocket limit of $1,500, compared with $3,500 for the high-deductible plan. Hence, there is exposure to an additional $2,000 with the high-deductible plan. The very sick. The very sick (group 4) gain an average of $300 in the consumer-directed plan, a savings of 16 percent. They would gain up to $1,253 if they chose a low-deductible plan or lose $693 if they chose a high-deductible plan. The very sick account for only 3 percent of the impact of consumer-directed plans in terms of the overall change in out-of-pocket payments. Data limitations. The foregoing analysis is based on cross-sectional data that might not be sufficient to test the potential positive impact of consumer-directed benefits. Proponents suggest that these plans provide the opportunity for consumers to save during the healthy years for the inevitable "rainy days" of sickness. Indeed, if one were persistently healthy, it would be possible to save $5,000 over five years, the equivalent of $6,750 for the average taxpayer.18 Employees could use the balance in the account to pay for future premiums, cover exposure in a higher-deductible plan, buy services that are not typically covered, buy up to a more comprehensive plan, or pay retiree premiums. Longitudinal cohort data are needed to track spending transitions. However, there are no national databases that do so for more than two years, although the need has been recognized for many years.19 There have been some reports from private industry of expense transitions over a two- or three-year period, but they are of limited value because only selected age groups are reported on, the cell sizes are small for age and sex analyses, or the follow-up period is brief.20 In lieu of such data, it might be possible to draw some inferences from analyses of the association between selected demographic variables and spending levels.
Reaching the "gap."
Exhibit 1
The likelihood of reaching the gap increases with age to more than 50 percent for those 55–64 years of age. Older men (ages 55–64) are three times more likely than younger men (ages 18–34) to enter the gap. This is consonant with actuarial data on the association between age and serious illness.21 Women are more likely than men to enter the gap at all ages, and women ages 18–34 are twice as likely as men in the same age group are to enter it. Part of the sex differential could be attributable to childbearing. However, after the usual childbearing years, women are still 36 percent more likely to enter the gap.
It does not take much medical care to trip the $1,000 gap at today’s medical prices. For example, a relatively healthy middle-aged person with high blood pressure and high cholesterol treated with brand-name medications such as Lipitor and Vasotec would spend more than $1,300 a year just for the medications. Also, all people over age fifty are advised to have a colonoscopy, at an average price of more than $1,000. Exhibit 2
Perceived health status. Finally, people are more likely to select comprehensive insurance if they think they will need it because of poor health. Young people are 1.6 times more likely to perceive their health status as "excellent" and one-fifth as likely to perceive it as "poor" (Exhibit 3  ). Hence, their likelihood of selecting less comprehensive insurance, such as consumer-directed plans, is high relative to that for older workers.
Potential winners and limited opportunity. In summary, my findings indicate that the young and healthy are potential winners with consumer-directed plans because their relatively low use of medical care allows them to build up HRA balances. Further, older people are less likely to choose high-deductible plans because of their perceived higher risk of illness and worse health status. The opportunities for the young and the healthy to gain with consumer-directed benefits are limited, however, because of restricted design specifications. First, most employers do not provide the opportunity for employees to take HRA balances with them at termination, despite the fact that the Internal Revenue Code allows it.22 This curtails the potential for savings because, according to the Bureau of Labor Statistics, the average worker holds nine jobs between ages eighteen and thirty-four.23 Further, the median length of service with an employer was 4.8 years for men and 3.7 years for women, ages 35–39, in 2000.24 Hence, most young people do not have the opportunity to save for long periods of time and might be forced to "use it or lose it" when leaving an employer. Second, the HRA balances do not provide investment opportunities, as do 401(k) pension savings plans or MSAs, because the balances are notional accounts and represent an unfunded liability to employers. Indeed, young and healthy employees might do better financially by selecting low-cost, less comprehensive plans, which can reduce premium costs by up to 50 percent.25 If the persistently healthy put these premium savings into a tax-free, interest-bearing account, such as an individual retirement account (IRA), the five-year savings could amount to $8,220—a $1,500 gain relative to a consumer-directed plan.26 Caveats. This paper uses nationally representative data for the working population with health insurance in a simulation and demographic analysis to address whether the young and healthy clearly benefit from consumer-directed benefits. The simulation estimates are a function of the assumptions used in the model, including the estimated size of the consumer effect, the retention of HRA balances, and the network discount differential, which were obtained from leading employee benefit consultants and adjusted to give consumer-directed plans the benefit of the doubt, so that savings might be overstated by 5 percent. DefinityHealth deductible levels are used in the analysis; however, this is an evaluation not of DefinityHealth but of generic deductible levels. In the absence of longitudinal cohort data on health spending transitions, a variety of analyses attempt to triangulate on the hypothesis to show a consistency of argument, direction of effects, and magnitude of the estimate.
This simulation of gains and losses with consumer-directed plans, along with the analysis of the demographic characteristics of those entering the "gap," support the hypothesis that the healthy, especially young men, are the potential winners with these plans. However, restrictions placed on the plans for investing and portability, in addition to the short job tenure for young workers, short-circuit this potential. Consumer-directed benefits are one manifestation of the ideal of consumer-directed health care. Its main premise is that consumers will use fewer unnecessary services primarily through the looming threat of exposure to the full price of goods and services in the deductible "gap." There is an implicit presumption that services for people "in the middle," who spend up to a few thousand dollars, are more discretionary than services for people incurring a higher level of spending, as the latter can zoom through the deductible in a matter of hours with a hospitalization, for example, over which they have little control. However, the argument that those in the middle are more likely to moderate their consumption could be spurious. First, the facts about the relative effectiveness of products and services are not well known for most conditions. For example, is fat or carbohydrate intake the cause of obesity? Second, the facts that are known are not often made available to consumers. Although information is a feature promoted in consumer-directed plans, these supports are nascent at this time. Third, the direct-to-consumer marketing of medical marvels, the human hope for extension of life and functional improvements, and the medical art to do so through all means possible make the decision process more emotional than rational. Finally, less use is not necessarily better use. When exposed to increased payment for medical services, people use less of both appropriate and inappropriate services, which does not necessarily translate into more efficient medical care.27 Hence, the notion that consumers can make better judgments about their care when faced with financial risk in the new era of consumer-directed care than their physician counterparts did when they were faced with financial risk during the era of managed care is not well supported. As employers face the seventh consecutive year of higher health insurance expenses, employee cost sharing for deductibles, office visits, prescription drugs, and hospital stays continues to increase with no ceiling in sight.28 One potential remedy is to limit the maximum out-of-pocket exposure for medical expenses to a small percentage of income (up to 5 percent), as in most European countries for expenses incurred outside the free universal systems and in emerging market-based systems (such as China).29 This would cap how much of the cost burden is shifted to the sick and ensure that all working Americans share the burden equally according to ability to pay.
Dwight McNeill is an expert, quality and patient safety, at the Agency for Healthcare Research and Quality in Rockville, Maryland. This research was completed while he was a senior scientist at the Heller School for Social Policy and Management at Brandeis University. This research benefited from the insights of Stuart Altman, Brandeis University; David Friend, Watson Wyatt Worldwide; Ken Sperling, Hewitt Associates; and an anonymous reviewer. The research was partially funded by a training grant from the Agency for Healthcare Research and Quality.
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Background
Study Methods
