|
Reviving Managed Care With Health Savings Accounts
Although health savings accounts (HSAs) and managed care are often seen as antithetical, they can be integrated in fruitful ways. Moreover, combining these approaches would serve policy objectives by clarifying the payment responsibilities of patients, health plans, and premium payers, thus altering important perceptions about health care decision making. The availability in HSAs of funds that patients can use to pay for services not covered under insurance contracts should help to relegitimize the predetermination of benefits and enable the public and the legal system to take a more benign view of corporate health plans as agents of their subscribers.
The recent movement toward "consumer-directed health care," particularly as embodied in new legislation providing for health savings accounts (HSAs), is often seen as arising from the ashes of managed care, which fell precipitately out of consumers’ and politicians’ favor in the late 1990s. HSAs and managed care are not antithetical, however, and are already being integrated by health plans to create synergies that should benefit consumers and bring new cost-consciousness and discipline to the health care marketplace. This paper explains these developments and argues that combining managed care with HSAs can help to relegitimize managed care in the public eye by clarifying the respective decision-making responsibilities of health plans and patients. HSAs are tax-sheltered depositories in which individuals can accumulate funds to pay for their own health care up to the point where a high-deductible health plan (HDHP) kicks in with relatively comprehensive coverage.1 As such, they are the most prominent current manifestation of the consumer-directed health care strategy for motivating patients to economize, if they wish, on their own health care. At best, however, HSAs offer only a partial solution to the problem of moral hazard—that is, the strong inclination of patients and providers to spend insurers’ funds more freely than their own—because the cost-consciousness they induce is diluted once the HDHP’s liability is triggered. For this reason, we consider how HSAs can be integrated with managed care, constructively combining consumer incentives with other methods for giving consumers optimal value for the premiums they pay. Our most original insight is that by encouraging people to set aside funds to help pay for services that their health plans may decide not to cover on benefit/cost grounds, the consumer-directed strategy could help clarify a crucial point of confusion about private health insurance. Specifically, the availability of HSAs should make it clearer to most people that plans’ denials of coverage are not meant to ration health care itself but only to limit the availability of third-party financing. Thus, HSAs should help the public—including the legal system, through which coverage limits must be enforced—come to view well-run corporate health plans more as agents than as enemies of their subscribers, helping them to bargain with providers and make difficult medical spending decisions.2
In its purest form, the consumer-directed health care strategy would require people to pay directly for diagnosis and treatment entirely out of pocket. However, because health care needs are unpredictable and can involve staggering costs, some form of health insurance is a near-necessity for all but the super-rich. The theory of consumer direction therefore anticipates that consumers will pool financial risks with others facing similar risks. It predicts, however, that competing health insurers, in seeking to give consumers optimal value for their premium dollars, will cover mainly unpredictable, unbudgetable needs and will also insist on substantial cost sharing and other measures to contain the utilization-inducing pressures of moral hazard. Tax benefits and moral hazard. The one clear reason why the market for private health insurance has not featured coverage of the kind predicted in consumer-directed theory is the favorable tax treatment long accorded to employer-sponsored health coverage. Because the tax laws exclude employer-financed health benefits from employees’ taxable income, taxpayers have a strong incentive to pay as many, and as much, of their health care bills as possible through their health plans rather than out of pocket. Health plans have therefore evolved to maximize the benefits of this lucrative tax loophole, becoming comprehensive prepayment schemes rather than merely providing efficient insurance protection against financial risk. The overinsurance induced by the tax subsidy is especially costly because of the amplifying effects of moral hazard. The consumer-directed agenda aims to correct the tax-induced tendency to overinsure and overspend, not by cutting back the substantial tax benefits of buying health care through an insurance plan, but by creating an equivalent tax shelter for out-of-pocket spending. In principle, the two components of the consumer-directed reforms, earmarked savings accounts and high-deductible health insurance, are administratively distinct. Not only may an HSA be maintained entirely separate from the employee’s health plan—by a financial services firm, for example—but also, as the individual’s property, it may be used to pay a wide variety of qualified medical expenses, not just those subject to the HDHP’s cost-sharing requirements. Despite their technical independence, HSAs and HDHPs are regularly marketed together and offered by employers to their employees as a package.3 Later discussion will offer some reasons why, for most people, it is more efficient to have their HSAs and HDHPs administered by the same or affiliated institutions. Critics of consumer-directed care. The consumer-directed strategy naturally has critics. Some believe, for example, that patient cost sharing may neither contribute to good health outcomes nor control moral hazard as much or as well as consumer-directed care advocates seem to expect. Although this is a highly empirical question, the RAND Health Insurance Experiment provided some evidence that an earlier form of high deductibles caused people to avoid seeking care without objectively assessing their need for it, with possible adverse consequences.4 That study also found evidence that when people with such coverage sought care, the total costs they incurred were no less than the costs incurred by those with comparable conditions and full insurance. Thus, the main effects of cost sharing may be on initial decisions about whether to seek care at all (and perhaps also on initial choices of providers). As to people who do seek care for which they pay the full cost, the RAND study suggests that the great majority of them may still defer to their physicians’ prescriptions without exercising independent judgment about treatment options and benefit/cost ratios. Moreover, we know from a variety of settings and types of studies that many patients do not want to bear the psychological and emotional burden of medical decision making and so prefer to delegate decisional authority to their physicians.5 In addition, preliminary evidence shows that people in consumer-directed plans use advanced information resources much less than expected and that high-deductible plans reduce overall spending only modestly at best.6 Although we are only in the very early stages of the consumer-directed movement, it appears that its theory has yet to confront the reality of how most patients make medical spending decisions. Health care is often, as economists have said, a world of "supplier-induced demand," in which the patient’s primary source of information about whether and what care is needed is the same physician who is being paid to deliver the care or has other personal reasons for believing in its efficacy. Despite these question marks, the strategy of causing consumers to set aside assets for spending on their own health care should inspire at least some economizing behavior of the sort that has been systematically missing with comprehensive first-dollar coverage. It may also help increase patients’ awareness that medical care costs real money and thus diminish the extreme entitlement mentality that affects most people’s attitudes toward health care. To be sure, the consumer-directed initiative does not altogether displace health insurance, moral hazard, or entitlements. But it goes quite far toward making moral hazard only an inherent cost of insuring against undue financial risks and no longer primarily a function of a tax loophole. With health insurance restored to its true purpose, the logic of managed care should become more apparent to the public eye.
Although the consumer-directed reforms followed closely the public backlash against managed care, they should not be viewed as being measures against health maintenance organizations (HMOs). Instead, by correcting the tax-induced bias toward comprehensive HMO-style coverage, the reforms simply level the playing field so as to give consumers an additional set of options in the marketplace. Thus, like the HMO movement before it, the consumer-directed strategy places much faith in consumer choice as a force to guide U.S. health care.7 Viewed this way, the reforms represent a progressive, pro-consumer advance over managed care—just as the HMO movement itself represented a pro-consumer challenge to the medical profession’s earlier dominance over the health care system. The ultimate aim of the consumer-directed reforms is to give patients more control at the micro level of spending on specific services, whereas the HMO strategy relied principally on choices among competing health plans. Indeed, HMOs largely embraced, in their own way, the important tenet of the professional paradigm of medical care that assigns only a very limited role to patient choice. Although HMOs frequently use nominal copayments, they generally give members very little spending discretion once they are enrolled in a plan. Instead, HMOs generally expect patients to take whatever medicine the HMO system prescribes, no more and no less, and rarely give their enrollees the routine option of paying additional amounts for additional increments of arguable quality—such as, say, a magnetic resonance imaging (MRI) scan for certain sports injuries instead of the less costly computed tomography (CT) scan or x-ray indicated under plan guidelines. Even in HMOs, the operative principle remains highly consistent with medical ideology: The system knows best.8 Only one right way. HMOs and managed care plans have also adhered to the principle that the health plan knows best in another remarkable respect. Almost universally, whenever a plan decides against covering a costly course of treatment on the grounds that it is "experimental" or not "medically necessary" under professional standards, it generally pays nothing toward the patient’s care.9 Purely as a matter of insurance theory and practice, it is anomalous that health plans in such cases do not simply increase coinsurance for nonstandard treatment or pay a cash indemnity up to the estimated cost of their standard treatment. The industry’s our-way-or-no-way attitude undoubtedly contributed to the public backlash against HMOs and managed care. The consumer-directed movement seeks to give patients caught in these situations more options and may inspire some managed care plans finally to provide coverage that is more respectful of consumer-patient sovereignty. Many other features of the marketplace in which managed care plans previously prospered also reflected the medical profession’s preferred paradigm of medical care as a noneconomic good and its general resistance to giving patients opportunities to make consequential choices with costs or prices in view. The tax subsidy itself limited the chances that consumers would come to defy the dominant paradigm of medical care or that health plans would strive to customize coverage to fit not the professional paradigm but the pocketbooks of different members of an employment group. Thus, instead of seeking to differentiate their products, health plans universally undertook, as the paradigm dictated, to pay for any service that was both medically necessary under professional standards and of sufficiently proven effectiveness to have been accepted by the medical profession. The legal and regulatory system, likewise, embraced professional standards in malpractice cases and other litigation. In all of these ways, the health care system’s environment has limited, both de facto and de jure, the choices available to consumers. Whether the consumer-directed movement will create pressures for a wider range of choices is unclear, but it points strongly in that direction. Continuing role for managed care. Although the consumer-directed movement aims at widening the scope of patient sovereignty where managed care plans have restricted it, it clearly does not rule out a continuing role for health plans’ management of health care costs. Because the HSA legislation expressly contemplates that HDHPs will provide comprehensive coverage for expenses incurred above the applicable deductible, a great deal of costly health care will continue to be provided with little or no economic constraint beyond that supplied by health plans themselves.10 A high percentage of total health care costs in any given year are incurred by a small percentage of insured people, most of whose treatment costs far exceed the limits of patient responsibility under consumer-directed care schemes.11 Thus, although consumer-directed care advocates stress the new role they visualize for patient decision making, they cannot reasonably dispute that managed care controls of some kind are still needed to check the moral hazard that operates whenever medical costs are fully or heavily insured. Again, despite appearances, consumer-directed and managed care are not fundamentally at odds. Potential for major conflict. Unfortunately, however, there is a nontrivial potential for major conflict between consumer-directed care theory and the necessity to counteract moral hazard. Consumer-directed theorists generally seem to assume that patients’ spending of their HSA funds will be unrestricted and that any restrictions on patients’ choices will apply only after the HDHP becomes responsible for payment. But even though patients legally may use their HSA funds as they choose, HDHPs can assert a legitimate interest in how quickly the deductible is exhausted. Moral hazard begins to operate, after all, whenever a patient and his or her physician realize that an applicable annual deductible is likely to be exceeded. Spending of HSA funds may initiate courses of treatment with large implications for the ultimate liability of insurers. Precisely because irresponsible spending that exhausts the deductible would directly increase the insurer’s costs, health plans could seek to supervise at least some physican/patient choices financed with HSA funds, creating the potential for misunderstanding. Thus, HDHPs could find it difficult to take measures that are necessary if costs are to be optimally controlled in the most economically significant cases. Because HDHPs must combat moral hazard and must do so by using the same methods that got health plans into hot water in the 1990s, the question arises whether managed care can, as a practical matter, be combined with HSAs and HDHPs to provide truly efficient coverage.
As long as consumer-directed health care is viewed only as a way to prompt more informed and efficient point-of-service spending decisions, we doubt that it alone can do very much to rationalize medical spending. Specifically, it will achieve very little for the many patients who lack the confidence, cognitive skills, or inclination to participate actively in such choices and very little for medical spending beyond patients’ deductibles. On the other hand, giving patients both a substantial economic stake in many medical decisions and the means to bear the costs entailed by such decisions cannot be a bad thing. Indeed, if the stated goal of the consumer-directed movement were enlarged to include a general raising of cost-consciousness among patients, it could make a substantial contribution to the larger effort by private health plans to solve the moral hazard problem as a service to their subscribers.12 Once patients bear responsibility for much day-to-day spending on their health needs, they should be increasingly sensitized to the difficult trade-offs that abound in medical care and more likely to understand that health plans have not only a legitimate interest in scrutinizing how premiums are spent but also a duty to do so. Having been made aware that health care is complex and uncertain as well as very costly, people may finally come not only to understand the need for reasonable limits on patients’ and providers’ freedom to tap into the premium pool but also to appreciate the help that health plans can give them and their doctors in making reasonable choices. With this view of the potential policy significance of consumer-directed care, we now consider how, as a practical matter, managed care plans can incorporate HSAs. Administrative efficiencies. The marketplace has quickly realized that joint administration of an HSA and an HDHP is convenient for everyone concerned. Without integration, providers would have to bill and collect directly from patients for each service, and patients would have to document to the HDHP each expenditure that might help satisfy the plan’s deductible. Integration, on the other hand, permits providers to bill, and be paid directly by, the HDHP—from a patient’s HSA funds or the plan’s own resources, as the case may be. Whether integration can yield benefits beyond these obvious ones is less clear. Access to price information and discounts. A major potential advantage of HSA-HDHP integration is patient access to a network of providers with whom the HDHP has negotiated price schedules or discounts not only for its own benefit but also for the benefit of patients paying their own bills.13 Letting subscribers enjoy low prices obtained by exercising the health plan’s bargaining power not only makes the plan competitively attractive but also reduces the plan’s exposure by making deductibles go further. Without health plans’ assistance, patients would be in a poor position both to bargain on their own for lower prices and to discover the exact prices of various services before deciding whether to purchase them. Unfortunately, practical considerations complicate giving HSA owners the full benefit of, and precise information about, plan-negotiated discounts from providers’ list prices. Almost universally, providers and health plans insist on treating negotiated fee-for-service rates as confidential trade secrets in order to not be at a strategic disadvantage in negotiating with other parties. Therefore, patients may be unable to learn exactly what their physicians will charge for prescribed services. Likewise, physicians will find it hard or impossible, in advising patients of their options, to estimate accurately the cost of hospital and ancillary services needed in various treatment scenarios, and health plans will be reluctant, or legally unable, to do the same. Obviously, secret or unpredictable prices are incompatible with any strategy that contemplates empowering patients to make informed consumption decisions with costs in view. Unless these problems can be solved, patients buying their own care will not only have to pay prices that are higher than competitive prices but will also face medical care choices without good information about the costs of their various options. Health plans suggest that even though actual prices might not be available, typical or average rates can be quoted, and patients can be told the relative or approximate cost differences between treatment options. Patients paying their own bills might not be content with such general guidance, however, and might demand to know firm prices for each alternative. Perhaps the best way to solve this problem and to give patients the full benefit of price competition is for health plans to negotiate fee schedules specifically for their HSA patients, so that fees disclosed to HSA-financed patients would not necessarily be the same fees that providers had agreed to on other business.14 Integrating HSAs with HDHPs may stimulate other pro–patient/consumer innovations in provider payment. For example, plans might negotiate firm global prices from providers for treating particular episodes of illness and contract with centers of excellence for especially difficult and expensive treatment.15 Complications of a different kind arise if a health plan pays its providers in a way other than fee-for-service, such as a fixed rate per period of time (capitation or salary) or per hospital admission. Lacking a fee-for-service element, such payment methods do not fit easily into the consumer-directed strategy, which contemplates discrete payments from the patient’s HSA as specific services are rendered. Similar complexities also exist under payment methods based on performance measures related to cost, quality, outcome, or patient satisfaction, calculated retrospectively. Although creative approaches to these problems may be found, the payment method most compatible with consumer-directed care is clearly fee-for-service. In the end, it remains to be seen how or to what extent insurers offering HDHPs will assist patients in obtaining low, predetermined prices for services that are not the responsibility of the plan itself. We see no technical obstacle, however, to plans’ negotiating with providers over a fee schedule specifically applicable to care under the deductible. Even so, because inertia, provider resistance, and first-mover problems could easily preclude major changes in provider contracting and benefit administration, employers purchasing HDHPs should push plans to make favorable (and specific) prices available to enrollees paying for care with their own funds. Administration of benefits. If, as we anticipate, HDHPs coupled with HSAs rely principally on unit pricing of discrete services (and fee-for-service payments to providers), their tools for countering moral hazard will necessarily be those of traditional health insurers—coverage limits (including cost sharing) and careful administration of those limits (using such methods as predetermination of coverage, reliance on gatekeepers, and disease management). The challenge is to adapt these traditional methods to a consumer-driven environment where the normal assumption is that health plans should have no say over how patients spend their own money. Integrating HSA administration with administration of insurance benefits can create, we think, an opportunity for patients to recognize that they share a common interest with health plans in making wise medical spending decisions. Coverage determinations for deductible amounts. The need for an HDHP to make explicit coverage determinations in individual cases does not arise only when the plan itself is paying the bill. Even when an expense is paid from an insured person’s HSA, the HDHP still might have to decide whether it is a covered expense to determine whether someone’s deductible has been exceeded. This could be done in a variety of ways. At one extreme, the plan could simply defer any claims adjudication until the subscriber believes that the deductible has been met and then review all payments retrospectively, refusing to count toward the deductible those payments that do not meet the insurance contract’s coverage criteria.16 At the other extreme, the health plan could use the same claims determination process for spending below and above the deductible. Arrangements between these two extremes are also imaginable, although the possibilities and pros and cons are too complex to examine here. Although efficiency considerations may point plans decisively in one direction or another, we expect the market to feature HDHP-HSA combinations both with and without routine oversight of expenditures from patients’ HSAs. Whichever way an HDHP chooses to review coverage for spending below the deductible, a crucial point is that its decision would not itself determine whether the patient actually receives the proposed treatment. Instead, the consumption decision would remain the patient’s, whose HSA would pay for it in any event. Plan coverage decisions affecting only the deductible therefore should not strike outside observers, including courts and jurors, as especially consequential for the patient’s health. This should in turn make the health plan feel less inhibited in taking a principled position against noncovered expenditures than it probably feels in denying coverage today, in the aftermath of the managed care backlash. Moreover, even after the deductible has been met and the plan has become the primary payer, the availability of HSA funds from which the patient can purchase non-covered care should make the plan appreciably more comfortable in enforcing its contract and holding the cost line.17 Reducing conflict of interest. Patients, however, will still view coverage denials as intrusive and contrary to their financial and medical interests. To mitigate this tension, health plans that administer HSAs can modify certain business practices to reduce their apparent conflicts of interest. First, health plans must disclose their business objectives and methods more candidly than they have in the past, clarifying that cost control is an explicit and central function of their effort and describing an intelligible contractual standard to be used in containing costs.18 In addition, the legitimacy of coverage limits and their active administration would be increased if the plan limited the profit accruing to itself from denying coverage in particular cases. Thus, for costly treatments that the plan does not deem covered under its policy (being unproven or not medically necessary under the circumstances, for example), it should nevertheless provide the patient an indemnity (or a credit toward the deductible) corresponding to the cost of the treatment it would be willing to pay for (assuming there is a reasonable alternative). These suggested approaches to benefit administration would present patients with choices similar to those that many already face (under so-called tiered benefit plans) in deciding whether to seek care outside their insurer’s provider network or to use a drug not listed in the plan’s formulary. Because patients with HSAs to draw upon could realistically pay the higher cost if they believed the additional expense were justified, plaintiffs’ lawyers, journalists, politicians, and other observers could not, as they have in the past, convincingly accuse the plan of standing between the patient and needed health care. In our view, the consumer-directed movement’s greatest contribution may be to make it finally clear to the public at large that health plans’ coverage decisions differ—not just conceptually, but also in fact—from treatment decisions and that benefit administration is an essential part of a larger process by which people make choices about spending on health care. The legal system, in particular, needs to appreciate the need for health plans to place meaningful contractual limits on coverage and to administer those limits without undue second-guessing. It is hard to predict how the foregoing suggestions will strike advocates of consumer-directed health care. Many fans of this model will instinctively object to health insurers’ overseeing or interfering with physician/patient choices. But active managed care, if done according to meaningful, consensual contractual standards and subject to appropriate judicial or administrative review enforcing those standards, can serve the interests of both patients and insurers, for spending both below and above the high deductible. Even self-paying patients may finally appreciate that their health plan can help them in making difficult medical/economic choices. If, understanding this, some consumer-directed supporters still resist our favorable view of managed care’s renewed potential, it may be because they are in fact less interested in empowering patients than in re-empowering providers vis-à-vis health plans. Although these advocates purport to be supporters of the free market, they sometimes stop short of acknowledging that consumers might freely choose corporate agents to assist them in bargaining with providers, in combating moral hazard, and in making difficult trade-offs necessitated by their circumstances. But even if the consumer-directed movement is an antimarket wolf masquerading in consumer-friendly sheep’s clothing, combining HSAs with active benefit management by HDHPs is, in our view, a highly plausible way to provide health care at reasonable cost for the working population.
Mark Hall (mhall{at}wfubmc.edu) is a professor of law and public health, Department of Public Health Sciences, at Wake Forest University Medical School, in Winston-Salem, North Carolina. Clark Havighurst is the William Neal Reynolds Emeritus Professor of Law at Duke University School of Law in Durham, North Carolina. An earlier version of this paper was presented at "Health Care Market Competition: How Well Can It Work?" at Lansdowne, Virginia, 29 April 2005. The meeting was cosponsored by Health Affairs, the Kaiser Permanente Institute for Health Policy, and the Center for Studying Health System Change. Mark Hall’s work on this paper was supported by a grant from the Robert Wood Johnson Foundation, under its Investigator Awards in Health Policy program.
This article has been cited by other articles:
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Top
Consumer-Directed Care In Theory...
Managed Care Versus Consumer...
