Can consumers solve what’s wrong with healthcare?

April 12, 2011

Bonnary Lek, a manager at Discovery Communications headquarters, is examined by Discovery Wellness Center Medical Director Liz Sequeira during an appointment at the clinic in Silver Spring, Maryland December 3, 2009. REUTERS/Jim Bourg “An educated consumer is our best customer,” says Syms, one of the country’s best-known clothing retailers. It seems to work for men’s suits. How about healthcare?

“We don’t want government in healthcare,’’ said Paul Ryan (R-Wisconsin), chairman of the House Budget Committee, said last week when he unveiled the GOP’s plan to reform the massive Medicare health insurance program for seniors. “Either healthcare is going to be run by 30,000 bureaucrats in Washington, or 300 million Americans acting as consumers.”

Letting consumers call the shots is a central idea in Ryan’s Medicare plan. He hopes to replace fee-for-service Medicare with a voucher that seniors would use to buy private health insurance on a public insurance exchange. Another central — but unstated — idea is cost-shifting: projections show that seniors’ healthcare tabs would far exceed the voucher’s value, which means they’d have to cover the difference out of pocket.

Ryan’s plan faces an uncertain legislative fate. But we already have a large and growing consumer-driven health insurance experiment running in this country: consumer-directed health plans (CDHPs).

CDHPs are plans that exchange big breaks on insurance premiums for a very high deductible. While premiums can range 10 percent to 40 percent below traditional co-pay health plans, the consumer pays at least the first $4,000 $1,200 in annual cost for individual coverage, or $6,000 $2,400 for family coverage. That means a good deal of routine care is covered by the consumer out of savings on insurance premiums up to the deductible, with insurance covering 80 percent beyond that point up to an out-of-pocket maximum.

Since it’s your own money, you’ll be that much more careful with how you spend it, the theory goes. “You tend to think of it as spending your own money,” says Helen Darling, president of the National Business Group on Health, a nonprofit association focused on employer healthcare issues and concerns. “That’s because it is.”

CDHPs usually are coupled with Health Savings Accounts (HSAs), which were created during the Bush years. HSAs allow tax-free contributions and withdrawals so long as the funds are used to pay for healthcare. They also can provide a vehicle for long-term saving to offset health the rising cost of healthcare in retirement, since unused funds can be rolled over from year to year, and the accounts offer IRA-like portability. HSAs permit total contributions up to $3,050 (individual) or $6,150 (family); the numbers are $1,000 higher if you’re over age 55. And some employers make direct contributions to employee accounts.

Do CDHPs reduce health expenditures? For employers, yes. A survey of large health plan sponsors by Towers Watson and the National Business Group on Health (NBGH) finds that sponsors with at least half their employees enrolled in an account-based health plan (there are a varieties of types), spend about $600 less annually for coverage compared with companies using traditional co-pay insurance.

But that reflects mainly the cost shift from plan sponsors to enrollees. Is there any evidence of lower utilization and prices? The data on that are “all over the map,” according to Helen Darling, NBGH’s president.

CDHPs and HSAs looked like a potential victim of last year’s health reform law. The Affordable Care Act (ACA) generally aims to push the health insurance industry toward more robust insurance coverage, not less.

But both survived the ACA — and they’re growing. The Towers Watson NBGH survey shows that 38 percent of companies had a CDHP coupled with an HSA in 2010, with another seven percent expected to add the option in 2012. Separately, Fidelity Investments reported recently that its base of plan sponsors offering HSAs to employees grew 52 percent last year.

One reason HSAs haven’t spread more widely is that they can be used only when coupled with high-deductible insurance plans. For employers, this tends to be an all-or-nothing decision; adding a CDHP option alongside traditional group coverage can lead to adverse selection, where young, healthier workers pick the CDHP, leaving only older, less healthy workers in the traditional plan.

But cutting over to CDHP-only coverage is a big leap for employers, Darling says. “Many employers aren’t ready to fully replace their plans with CDHPs. It’s a very big change, and people don’t like change.”

The ACA may have given corporate health plan sponsors an unintended incentive to shift to CDHPs — namely, the law’s excise tax on high-value “Cadillac” health plans. Starting in 2018, plans with total value over $10,200 for individual coverage and $27,500 for families will be subject to a 40 percent tax on the amount exceeding those thresholds. Towers Watson’s research indicates that the tax would hit 60 percent of companies by 2018; CDHPs offer a way to stay under the excise tax thresholds.

If your employer offers a CDHP, it can be a good deal if you’re in good health and don’t mind paying for routine care out of your own pocket. But keep an eye on these potential pitfalls:

Catastrophic coverage. Many – but not all — CDHP plans have strong coverage above the out-of-pocket limit. Be sure to read the fine print to understand how well you’re covered in the event of serious illness.

Preventive care. The CDHP model can discourage enrollees from using appropriate level of preventive care, since payment for those services comes from the consumer’s pocket, argues Dan Mendelson, CEO of Avalere Health, a research and consulting company specializing in healthcare. “But there’s been an interesting change lately in the design of some plans to cover certain types of preventive care and generic medicines,” he says.” Again, check the fine print to understand what preventive services are covered, and which you’ll pay out of pocket.

Current expenses or saving? Fidelity Investments says 24 percent of its HSA account-holders are used for long-term saving. HSAs can be rolled over if you change jobs, or moved to a standalone IRA-style account.

How to invest. Most HSA account holders can choose between an array of equity and fixed-income investments, but most make conservative choices, says William Applegate, vice president for HSA products at Fidelity. “Most people leave the bulk of their account balances in cash, partly because it’s a relatively new product and the balances are low.”

Will you save money? Nearly 60 percent of respondents in the Towers survey said employees are paying CDHP premiums that are at least 30 percent less than those for traditional co-pay plans. “If you put that aside in an HSA account, most people would come out ahead, unless they have very large families who get sick a lot,” said Darling.

Many employers with CDHPs offer online modeling tools to employees to do what-if analysis. Fidelity’s site offers hypothetical examples.

This article was amended on April 12, 2011 to correct the minimum deductible levels stated in the 5th paragraph.

8 comments

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That the people who approve or deny your health coverage get a bonus for denying it is not the best state of affairs. The for-profit model is bad for police protection, fire protection, military forces, and healthcare. That the healthcare industry is hugely profitable and that it continues to increase the percentage of the GDP it sucks up is a simple fact. That the healthcare industry spends many millions of dollars spreading fear and lies about nationalized healthcare and bribing laawmakers is also a simple fact. The only winners with our present system are the healthcare industry CEOs, stockholders, and the corrupt politicians they own in both parties and the whitehouse. Dumping health coverage for senior citizens while slashing already low tax rates even further for the super rich is Paul Ryan’s “Path to Prosperity” – unfortunately that prosperity is only for a very few and they are already historically prosperous.

Posted by TLWiz | Report as abusive

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Posted by Can consumers solve what’s wrong with health care? | RetirementRevised | Report as abusive

want to help make a major input into medical care?–all you have to do is stop suing us or worse threatening to sue us-we in medicine keep telling the politicians that legal costs are costing you 80% of the cost of your care–no one has listened to the medical profession. therefore you will get what you deserve–massive out of pocket expenses just to cover 80% of the cost of your care–be prepared for hospitals to offer you open wards and in fact you just might have to be in one.–want to phone your MD for a prescription?–forget it you are going to have to get an appointment–you on medicare?–worked your entire life be prepared to open your wallet for patients on Medicaid–think your MD likes a cut in insurance to fund medicaid–just ask him/her. Ask your Physician if he/she would recommend any student planning on entering medical school and see what they say–wait till the large hospitals gobble up private practice. Like having a medical record stored on computer?–ask your Physician about this–I have no real answer after 30 years of providing medical care but be prepared to open your wallet big time

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The high costs of medical care are due to consumers using what is percieved as someone else’s money to pay the bills. An impossible standard set by our legal system, replete with punitive awards regardless of scientific facts adds enormously to the amount of unnecessary tests and procedures. There are too many non working people with time on their hands to clog up the doctors offices and emergency rooms because their bill is covered, in one way or another by our government, either by popular programs designed to get leaders re-elected or by unfunded government mandates. So when you speak of consumers controlling medical costs, remember this will not work unless consumers have to regard the payment as their money!

Posted by zotdoc | Report as abusive

Your arguments about costs being out of control due to legal issues is just flat wrong. The costs of legal judgements against healthcare professionals and/or providers is, last i saw, less then 1% of the total cost. This, IMHO, is a small price to pay for the checks and balances against negligence that possible lawsuits provide. This on of the reasons why Republicans/Conservatives will NEVER have a comprehensive healthcare plan, one of their cornerstones is tort reform and this is such a small part of the cost it will not make a noticeable difference.

On another note, most outside of the legal profession do not realize how hard it is to win a medical malpractice case. These are some of the hardest civil suits to win, for a variety of different reasons.

Posted by USAPragmatist | Report as abusive

If you are getting sued frequently, you might want to look at a different profession. You are not doing your job well.

Posted by USAPragmatist | Report as abusive

Isn’t most of the health care spending in the last 2-3 months of someone’s life, most usually the elderly? The family would not be in a position emotionally to turn down the extra tests, procedures etc that the medical community suggests – they are in no position to be cost-savers at that time. We as a society need guidelines & rules that will help us prevent over-testing, over-doing procedures, etc. This is not crass. If you’ve lived through it with a relative, you know there were way too many things done and it probably wasn’t fun for the patient.

Also the article didn’t talk about the fact that currently – if you cannot get insurance due to pre-existing positions (which will occur until 2014) – you have to pay a higher rate for everything (since you aren’t covered by rates negotiated by insurance companies) AND you cannot take advantage of an HSA account since you can’t purchase insurance – It’s crazy!

Posted by moderateMidWest | Report as abusive

My sister needed hip replacement surgery. Since she had a global insurance policy, she did some research and discovered the best place to have hip replacement surgery is in Belgium. Only four other doctors in the world had done the procedure more often than her doctor. He was one of the world’s best. She had excellent results. The cost? $17,000.00. A friend of hers had the same procedure in the US. The cost? $42,000.00. Something is very wrong with our healthcare costs!

Posted by moonhill | Report as abusive

Is it health insurance or a health program? I would rather get insurance. Insurance means if something happens *out of the ordinary*, I get covered, otherwise I just pay for it.

If car insurance were like health insurance then Jiffy Lube would cost me just a $3 copay. Regular miles based maintenance would be free (because regular preventive check ups are important!!!).

I had a rare occasion to need … pills. Antibiotics. OK, I concurred with the MD that I needed them. The cost? $20. How much did I pay? $3. That is just silly. I should pay the $20. That is like having my car insurance cover replacing a burned out headlight (I can just hear it now “which can cause a mortal accident – so clearly should be covered to encourage everyone to have working headlights!”).

Let me think for myself and let other think for themselves and help educate us to think well (to counteract advertising, etc.), but don’t think for us. Please.

Posted by Bruce999 | Report as abusive