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PERSPECTIVE

Getting On The Soapbox: Views Of An Innovator In Consumer-Directed Care

Abstract

 
Consumer-directed health care (CDHC) is often thought of solely as a demand-side solution to the health care cost crisis. One could argue that CDHC is a financing and service revolution that seeks to develop more-efficient financial services products with consumer information to bring about market-based changes in the U.S. health care system. Developing a balanced review of CDHC’s potential will help construct future implementations of consumer-directed products and services and advance policy recommendations that improve the cost and quality of health care services.

Asking the right questions. Another way to look at this would be to start from the question: "Why do the chronically ill in this country continue to receive substandard care while health care costs continue to escalate?" Once we’ve agreed on some potential drivers for those issues (for example, third-party payment, perverse reimbursement schemes, and tax policy), the next question should be: "Does CDHC hold promise for solving those problems?" As a champion and proponent of CDHC, I wish to share an alternative perspective on how these concepts evolved in the marketplace, how consumer-directed plans work, and what their potential effect is on the "system."

Financing versus cost shifting: a paradox. When one stops to consider that employer spending on health care is just really a form of tax-beneficial compensation to employees, one can see that taxpayers and recipients of employer-sponsored health care finance the $1.8 trillion U.S. health care system. In light of this, we do a terrible disservice to U.S. consumers by telling them that any shift in plan design is a move to shift costs to them. CDHC is not about plan designs and accounts as a way for consumers to get "skin in the game" in making rational economic decisions. It is about a change in the way we are going to finance our consumption of health care services so that users of those services have more control over how the dollars are spent.

At Definity Health, we started with a central question about whose money was being spent on health care (not plan designs)—it was, after all, the consumer’s money, not the government’s or the employer’s. In our view, the way that money was used to finance health care use through health insurance–based products was inefficient. For example, have you ever seen a comprehensive first-dollar automobile insurance policy, and, if so, would you pay for it? The original integrated health reimbursement arrangement (HRA) plan designs we introduced to the market were based on the notion of creating first-party financing: Put consumers in charge of their own health and of the benefits they are ultimately paying for. They were not designed solely as a "demand-side incentive" to reduce use (both necessary and unnecessary).

Furthermore, over the long run, insurance performs poorly in a financial and actuarial sense against the vagaries of disease, especially when one considers how often people change health insurance plans. Aligning financial products that mirror the epidemiological reality of disease (funding over multiple years) would involve buying insurance where insurance really works and then developing funded annuities that roll over year after year to help the consumer with cash-flow smoothing at the individual level through group underwriting. In most of Definity’s products, we also extended an employer-financed line of credit for pharmacy benefits, and the next evolution of these products will be to offer credit as bridge financing between the annuity and the insurance for all kinds of medical services.

The reality of this type of financing shift is misrepresented in the Milliman analysis referenced in Yegian’s paper. The Milliman cost comparisons completely eliminated the account from their analyses (most consumer-directed plans would fund a consumer account with the premium savings that are generated from moving an individual from a first-dollar health maintenance organization or preferred provider organization to a high-deductible plan, thereby reducing the consumer’s actual out-of-pocket exposure). If one accepts the fact that all money spent by an employer for health care is part of the employee’s compensation, then as an underwriter (employer or health plan) realizes the advantage of the deductible leveraging on health benefit costs, it should create a pool of money that becomes available for that individual consumer in the form of a health spending account. Also, if we modeled those "cost-sharing" designs over a longer time frame (say, five years), we would discover that the actuarial probability of a person’s spending more out of pocket with these programs versus "conventional" products is a small percentage of the whole.

The Milliman analysis was done looking at the individual market in California, so one could argue that there was no "group" that could recoup the economics of the deductible leveraging. In this case, the "group" is the insurance company that previously offered a first-dollar HMO, and it could transfer some of the actuarial and economic effect in reducing a person’s coverage beyond just his or her premium savings and could fund an account with these higher deductibles. If an insurer wants to win share in the individual market, it needs to offer funded accounts to consumers who move away from first-dollar insurance policies.

Whither risk? Follow the queen. The destruction of the "risk pool" argument that policymakers have about these products is more theoretical than real. We have fragmented the risk pool—between employers and government, between regional and national plans, between small employers and large, and so on. These products, when priced in a competitive marketplace, do not present any additional disruption to the already fragmented risk pool. The risk argument misses the mark on who is ultimately the single greatest agent for managing health risk: It is not a plan, it is not a product, it is not a "disease manager"—it is the individual. Yet no one wants to admit this.

In fact, the calls for risk adjustment–based premium plans, taken to their extreme, essentially say, "Do not worry how sick you are going to get—we’ll just keep adjusting the amount of revenue that your underwriter will receive." But in that case, as an underwriter, what incentive do I have to actually make you healthy? The sicker you are, the more revenue I get! An alternative policy might make a risk-adjustment payment when members decide to leave their underwriter, with compensating adjustments based on the current observed health status or sickness compared to observed measures when one entered the plan. That is a better alignment of incentives for the "health" system.

Product innovation: curing the regulators. I agree with the observations and recommendations that advise removing legislative roadblocks to market-based innovation around plan design. It is unfortunate that Congress believed that it could design product structures that enable consumptive behavior around health better than the general public could. If we really want to have a radical improvement in new benefit structures, we should not be seeking tweaks to the HSA laws; rather, we should be going to the heart of the problem by making employer and employee spending on health care tax-equivalent. Let the policymakers decide whether it should be before-tax or after-tax spending (if one goal of tax policies is to stimulate or restrict consumption, let’s stimulate health spending).

This simple reality is why many large employers still continue to use the HRA-based version of consumer accounts rather than the HSA version: namely, because the design flexibility, for example, allows financial incentives to diabetics who comply with their recommended treatment plans (a program that Definity calls "Rewards for Actions," which increases the benefits for chronically ill patients who meet evidence-based guidelines for their care). There are examples of this product already in use, and no new regulations are needed.

Innovating systems: birthing an adult elephant. CDHC as an applied health plan product is five years old. Developing new financial services products is easier than developing a market-based, transparent care delivery system that is organized and incented around the needs of its consumers. One could argue that all of the newfound energy around prices in health care can be attributed not just to rising costs themselves, but to the recognition that prices (and variation among them) matter, so it pays to be informed. New health care pricing Web sites and services seem to be popping up daily, presumably in response to demand of some kind. CDHC didn’t wait for the perfect market answer; it started developing reasons for consumers and plan sponsors to care about these questions.

Additionally, people are interested in knowing more about these plans. New data are emerging on the effects of CDHC. More studies and experiments will need to be run to determine how to optimally launch CDHC so that we emphasize the positive results while controlling for unintended consequences. The calls for research by the public policy community should recognize that because of the rhetoric around these plans ("cost shifting," "regressive tax policy," "only the healthy and wealthy," and so on), plan sponsors are reluctant to share their data in public view for fear of being vilified based on half-truths and myths. Policymakers need to recognize that most of the data being used to evaluate these plans are being collected in the private sector with no explicit goal of meeting health policy objectives, and most employers to date are involved in these plans because of fiscal necessity. A balanced perspective (theory and market reality) on why people have turned to these plans as alternatives to the current system should be used in any study of CDHC.

Editor's Notes

 
Tony Miller (tmiller{at}lemhiventures.com) is managing director of Lemhi Ventures in Excelsior, Minnesota. cofounder and chief executive officer of Definity Health, one of the earliest consumer-directed health plans.

NOTE

Top NOTE

 

1. M.B. Buntin et al., "Consumer-directed Health Care: Early Evidence about Effects on Cost and Quality," Health Affairs 25 (2006): w516–w530 (published online 24 October 2006; 10.1377/hlthaff.25.w516)[Abstract/Free Full Text]; and J.M. Yegian, "Coordinated Care in a ‘Consumer-driven’ Health System," Health Affairs 25 (2006): w531–w536 (published online 24 October 2006; 10.1377/hlthaff.25.w531).[Abstract/Free Full Text]

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