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Consumerism’s big problem – reality

A strong dose of consumerism will solve the health care cost crisis because people will be more careful in spending their own money than they are when bills are paid by great big insurance companies. That’s the theory behind the latest ‘innovation’ in health insurance – consumer directed health plans (CDHPs).
Unfortunately, that theory doesn’t work very well in the real world.

CDHPs combine super-high-deductible health plans with private Health Savings Accounts (HSAs). The idea is that people set aside funds in tax-deferred HSAs and use those funds to pay deductibles, which run over $1,000 annually for a single person, or $5,000 for a family.
Positive spin about CDHPs abounds, mostly from the usual suspects: GOP think tanks, presidential candidates, and the reigning incumbent. The spin falls into three arguments: HSA plans are growing rapidly; CDHPs will reduce health care costs; and individual tax incentives will spur the purchase of health insurance. There are kernels of truth in each of these claims, but the important word is kernels. Doubling enrollment is no great hurrah when you start with a mere handful of members; reported cost savings are based on one or two years’ of claims, a wafer-thin sampling that is too green to be meaningful; and as for tax incentives, the few folks who have enrolled in CDHPs and funded their HSA accounts (less than half of all accounts have any money in them) are significantly wealthier than the average American. HSAs are great tax shelters for the privileged few, but if you don’t make enough to pay high taxes, you won’t find much shelter.
The underpinnings of CDHPs lie in the economic theory of “Moral Hazard.” Journalist-author Malcolm Gladwell describes this as the belief that “insurance can change the behavior of the person being insured” and notes that it is popular among many economists and think-tank types and, consequently, has been influential in shaping health care delivery systems. The idea is that if insurance covers the bills, people are more likely to seek care and run up unnecessary costs.
The Moral Hazard theory falls short when confronted by the rather uncomfortable reality of actually having health care services rendered to one’s own person. Why would anyone want to subject themselves to surgery or hospitalization if there were an option to avoid it and just go fishing instead?
But on the surface, the concept makes some sense. Most people would be careful about getting an MRI if they knew they had to foot the bill, but perhaps too careful. People will not simply avoid discretionary care; they will avoid necessary care, as several studies indicate. One Rand Corporation study concludes that when individuals are required to pay more for prescription drugs, they don’t take them as they should. This leads to nasty physical and financial problems, such as more strokes, which cause lots of pain and cost lots of money to fix when a few blood-pressure pills might have sufficed. As far as drug copays go, increasing consumers’ costs actually drives up total medical expenses. It’s not a great leap to think individuals with high deductibles will likely wait before scheduling an appointment with their physician to see if a problem just goes away on its own. In a time when the Centers for Disease Control describe diabetes as “a runaway train,” is it economically wise to foster measures that discourage preventive care?
The coup de gras for CDHP is its old nemesis, the real world. CDHP’s fatal flaw is that the “consumer” part is directed at the wrong people. Half of U.S. health care costs are spent on five percent of the population. A deductible has little impact on the purchasing behavior of these folks; they’ll blow through a few thousand bucks in a couple of months
Conversely, over two-thirds of Americans spend less than a thousand dollars a year on health care. The only effect a high deductible will have on these folks is to discourage the use of preventive care.
Consumerism is not all bad – health care shouldn’t be “free” for anyone. Requiring people to share in the cost of their care should be a part of any serious reform effort. The fix for CDHP is relatively simple – get rid of high deductibles, which are unaffordable for many and may well discourage preventive care, and replace them with copays per service to ensure patients have some financial skin in the game. Insurance companies should keep an income-indexed out-of pocket-maximum, while covering preventive services and maintenance medications at very low copays, to encourage their use. Oh, and test the plan in the real world before declaring victory.

7 thoughts on “Consumerism’s big problem – reality”

  1. There is yet another faultline in CDHC. The lack of qualified information on quality and cost. The lack of availability of this information from an objective source prevents the consumer from making intelligent cost/quality choices as to when to get care, where to get care and who has the best price/outcomes. Until this is readily available and transparent to all payors, providers and patients, consumer driven health care is merely yet another stop gap scheme.

  2. Joe:
    I have been investigating opening some nurse staffing agencies using both US and foreign-trained nurses. In doing so I have found out why there is such a nurse shortage. Congress in its invite wisdom decided not to renew H1A visas for nurses and so severely restrict H1C that the 500 a year maximum don’t get issued at all.
    Of course since the federal government effectively limits US nursing and medical schools and then limits immigration of nurses and doctors. Combine that with allowing drug companies to gouge the US consumer and not the entire developed world.
    Health care is way too expensive. If it cost what it should cost people outside of the wealthy class would not to so hesitant to use it if they were paying for it. Also health insurance would fall to reasonable rates making it more affordable (most people can pay for it they just don’t, we have had this discussion before).
    So lets get congress off their collective ass and do what is right and a lot of the arguments for universal access or universal care will disappear.
    Charles J. Read

  3. Joe,
    I want to point out that Part D is providing an unexpectedly positive example of how consumer involvement can lower costs. Seniors have strong incentives to keep their total drug costs below the lower end of the donut hole. As a result, more seniors are trying to get the biggest bang for their buck by accepting generic substitution as well as shopping around at pharmacies.
    More details on my blog:

  4. I have a Friend whose small employer has a $5,000 HDHP. The empluer will match 2 for 1 on dollars put into his find. So He put $1500 in and the employer $3,000. So he had $4,500 of the $5,000 ded. Only now the money went for health care luxuries not necessitties. People forget this approach failed 25 years ago.

  5. You make the giant assumption that people with insurance will utilize preventative care services.
    Before I switched to a HD HSA, I had pay per service. Not once did I use my preventative care benefit.
    In fact, even now, my HD HSA insurer comes with a predefined 100% payable benefit for preventative medicine and I have not been inclined to use it.
    Just because I have insurance for preventative care does not mean I will use it.
    And just because I don’t have insurance doesn’t mean I won’t get preventative care.
    The horse will drink when it wants to.

  6. Consumerism is essential to reform because (1) the demand for healthcare in nearly infinite if it is free and (2) informed patient input to healthcare decisions improve both quality and value. HDHP products were poorly designed and should be restructured with first dollar coverage of most prevention, low deductible coverage of high value diagnostics and Rx, and rebates for positive behaviors. Finally, the information needed to make intelligent choices must be integrated into the plans, which will take the most work.
    Alignment of primary care provider reimbursement with these rational patient incentives would further advantage this design.
    The savings component of the HDHPs has significant value; pre-funding the ability to pay directly benefits the individual and the nation because insurance mechanisms are always disadvantaged by (1) moral hazard, (2) administrative costs, (3) intrusions into the decision making processes. As this national pool of savings grows, many will need to buy insurance only for catastrophic costs, the proper role of insurance.

  7. A big problem with the concept of “consumerism” in healthcare is that price transparency and managed care can’t coexist: The fees providers charge must be higher than what any contracted managed care plan pays. Most managed care contracts include a clause that states the plan will pay their contracted fees unless the provider is charging anyone else a lower fee, in which case, the plan will pay the lower fee.
    What this means for patients in CDHPs is that a provider who sees managed care patients charges fees higher than the expected reimbursement, but can’t lower them without losing money. And while “self-pay” discounts are allowed for the uninsured who pay at the time of service, should they apply to insured patients? It seems that the insurance company would benefit from that, but not the patient and certainly not the provider.

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Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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