Health Affairs, 25, no. 6 (2006): w552-w554 (Published online 24 October 2006) doi: 10.1377/hlthaff.25.w552 © 2006 by Project HOPE	New Online   Senate Health Reform Bill   Rewarding Providers   Public Option Policy Brief   Health Reform & Abortion   Delivery System Reform

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PERSPECTIVE

Consumer-Directed Health Care: It’s Not Whether The Glass Is Half-Empty, But Why

Abstract

 
Analyses of consumer-directed health plans often focus on how use of services under such a plan compares with what use would have been under a more comprehensive benefit design. That’s a natural perspective for analysts who observe movement from a world of rich coverage to one of more limited coverage. But the comparison may confuse the message with the messenger. In a world where employers are seeking any port in a storm of unsustainable cost growth, it might be more useful to compare offering a consumer-directed plan to other options that employers could have chosen in constraining health costs.

That consumer-directed plans are not yet transformational is hardly surprising. As a catalyst of better quality and lower cost, the effect of "skin in the game" is dampened by the existence of few reliable data on the quality of care furnished by individual providers and meaningful transaction prices. (Recent efforts to encourage publication of "Manufacturer’s Suggested Retail Price" only scratch the surface, and it remains unclear how consumers will use those prices or how they might be misused in the contracting process.)² Moreover, the lion’s share of spending continues to be incurred by people with chronic and other serious illnesses.³ These people will easily exceed their deductible, and traditional insurer payment rules rather than "skin in the game" will govern spending.

Selection issues. That said, as Buntin and colleagues note, even modest engagement of consumers in their care decisions is the right thing to do. So the question then becomes how the modest positives to date of consumer-directed plans compare with their potential negative impacts. Critics—or at least skeptics—have raised two main issues. First, they note that a consumer-directed plan offered side by side with a more costly comprehensive plan will experience favorable selection. Although the empirical evidence remains limited, it is surely the case. Whether or not adverse selection should worry us depends in part on whether we believe that health insurance should not only mitigate financial losses associated with random spells of illness but also work as a tool for transferring income from the healthy to the sick (or young to old). Reasonable minds can differ on this question.

Quality of consumer decision making. The second issue raised by critics of CDHC is that patients generally cannot distinguish between necessary and unnecessary care when making health care decisions. As a result, while consumer-directed plans might have the intended effect of reducing spending—at least up front—they might do so at the cost of poorer health and potentially higher long-term costs. The analytics here are straightforward: Other things being equal, people with more limited coverage will use fewer services than they would with richer coverage. How much less care they use will depend on their underlying preferences for health care as well as the dampening effect of other resources such as health savings accounts (HSAs). But even setting aside whether fully insured people use the "right" amount of services, how useful is this comparison as a guide for assessing the impact of CDHC? In the real world, the choice to maintain comprehensive benefits is not an option for many employers and their employees.

Two different situations illustrate the limitations of comparing consumer-directed plans to comprehensive benefits. Consider first the case in which an employer seeks not to reduce costs but simply to expand employees’ choices by introducing a consumer-directed plan alongside a comprehensive product. (Assume that the employer shares any premium savings with CDHC choosers in a tax-favored account.) In this case, some employees will choose the consumer-directed plans, and some of them will get sick. If we only assess the situation looking back, we are likely to conclude that people who chose the consumer-directed plan and got sick were worse off (because of higher out-of-pocket costs or because they did not use needed care). But so, too—using this reasoning—were people who chose the comprehensive product and did not get sick; ex post, they seem to have purchased too much insurance. Comparing only spending misses the value of whatever consumer-directed plan purchasers did with their premium savings and misses the peace of mind for those who bought more insurance than they "needed."

Now consider an employer that has been contributing to a comprehensive benefit plan but believes that maintaining that contribution will render its labor costs uncompetitive and therefore chooses to replace the comprehensive benefit with a consumer-directed plan. A "traditional" comparison—looking at the difference between the old and new plans in what employees pay for premiums and out-of-pocket costs—will correctly lead us to conclude that employees are worse off. (By assumption, they are.) But where we need to be careful is in attributing that decline in welfare to the consumer-directed plan.

Options available to employers. A more appropriate way to analyze the situation is to ask instead what options were open to the employer and to compare—hypothetically—the observed outcomes under the CDHC option with what would have happened in the other cases. At least four alternatives come to mind, each of which reduces labor costs by the difference in the employer’s contribution to the premium. (1) The employer could have dropped coverage entirely and added the amount of the consumer-directed plan premium to another tax-favored benefit. Workers who could not obtain coverage through a spouse would be worse off by having to purchase a plan in the individual market using after-tax income. (2) The employer could have maintained comprehensive coverage but reduced employees’ cash wages by the difference in premiums between the comprehensive and consumer-directed plans. (3) The employer could have chosen to offer both plans but capped the employer contribution at the consumer-directed plan premium. As in the earlier illustration, the change in welfare occurs when the contribution rule changes, not when the consumer-directed plan is chosen. (4) The employer could have chosen a benefit structure with the same actuarial value as the consumer-directed plan but not the high deductible. This option would produce a different set of "losers" than would the consumer-directed option, but the aggregate would be the same.

The real villain. When the situation is framed this way, the real villain emerges: Unsustainable increases in health care costs force employers to take action, and that action will often involve shifting costs back to employees. If, as is typically the case, employers cannot reduce cash wages in the short run, then the alternative will involve less-comprehensive coverage, a lower employer contribution, or both. Consumer-directed plans are only a tool used to accomplish this objective. Indeed, banning these plans (that is, requiring minimum benefit packages) would not change the reality that something has to give.

Promising strategies. So, given the options available to employers seeking to constrain health care costs, do some strategies offer more promise than others? On the surface, increasing employee contributions to premiums rather than point-of-service cost sharing would seem to be a fairer way to accommodate rising costs. But such a strategy is not without disadvantages. First, it will ultimately lead some workers to drop coverage, which could have catastrophic implications for them later. (It could also affect government costs to the extent that such workers were picked up by public programs.) Second, maintaining comprehensive benefits—particularly for loosely managed network plans—gives up any hope of enlisting consumer financial incentives in the battle to control costs.

Neither pushing costs back to employees in the form of higher premiums or deductibles is going to address the cost problem where it is: chronically ill people with spending whose care needs quickly take them past any plausible deductible, and acutely ill people getting high-intensity interventions who are not well positioned to make care decisions on the basis of price and who, once they exceed the deductible, lack financial incentives in any case.

A more promising strategy might be to bring organized provider groups and delivery systems into the equation to take advantage of their arguably superior disease management, health information technology, and reliance on evidence-based medicine. But this strategy needs to be pursued carefully so that it does not simply set up a selection spiral where a loose-network consumer-directed plan is positioned alongside a delivery system that provides more-comprehensive coverage. One possibility is to have the employer’s contribution to the plans risk-adjusted in the background to offset selection. Alternatively, organized delivery system models could provide a suite of products in a single-replacement scheme. (Carrier HMOs are doing this now.) A third possibility is to have the organized delivery system model offer the same plan design as a consumer-directed plan; workers could choose "integrated" or "loose," but choices would not be driven by richness of coverage.

ULTIMATELY, WE NEED to come to grips with unsustainable health costs, and that will involve public and private policy changes that go well beyond benefit design. We should watch the new consumer-directed plans carefully but not let this distract us from the larger issues.

Editor's Notes

 
Murray Ross (murray.ross{at}kp.org) is director, health policy analysis and research, at the Kaiser Permanente Institute for Health Policy in Oakland, California.

The views expressed are those of the author and do not necessarily reflect those of Kaiser Foundation Health Plan or the Permanente Medical Groups.

NOTES

Top NOTES

 

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]
2. In May 2006, the Centers for Medicare and Medicaid Services (CMS) began posting payments for thirty common elective procedures and for common nonsurgical admissions. For each procedure, the CMS Web site shows the range of payments by county and the number of cases treated at each hospital for a variety of treatments provided in fiscal year 2005. See CMS, "Health Care Consumer Initiatives: Overview," 1 June 2006, http://www.cms.hhs.gov/HealthCareConInit/01_Overview.asp#TopOfPage (accessed 19 September 2006).
3. See M.L. Berk and A.C. Monheit, "The Concentration of Health Care Expenditures, Revisited," Health Affairs 20, no. 2 (2001): 9–18.[Abstract/Free Full Text]

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