RALEIGH – The future of consumer-driven health care rests on the ability of consumers to, well, drive rather than just ride. The early evidence is promising.
While the specifics are complicated, the basic concept behind consumer-driven health care is simple enough: health insurance ought to be insurance. As with other insurance products, health insurance ought to be used to hedge unforeseen risks with big price tags. Homeowners insurance isn’t designed to pay for replacing shingles or cleaning gutters. Auto insurance isn’t designed to pay for oil changes and tire rotation. Life insurance is a bet that you hope not to collect from (assuming you buy only term coverage, which you should).
Consumer-driven health plans come in at least two flavors: health savings accounts (HSAs) and health reimbursement accounts (HRAs). The major difference is that HSAs are owned by individuals, HRAs by employers. But both seek to use tax-free cash rather than insurance claims to pay for routine medical expenses, reserving insurance for its more appropriate role of covering emergencies and major medical procedures.
Raising the insurance deductible results in substantially lower premiums, which are then used to supplement employee pay. Employees deposit some or all of their salary supplement into accounts they control. In an HSA plan, the money stays in their account until they use it, for years if they wish. With HRAs, it works a little differently. Usually, employees have a flexible spending account (FSA) into which flow tax-free dollars, but any unspent funds revert to the employer. The same is true for the HRA itself – unspent funds stay in the employer’s account. Still, it’s money that the employer can subsequently use to pay employee medical expenses, allowing for higher deductibles and lower premiums.
Some critics of consumer-driven health care just don’t understand what it is. They see only deductibles and co-pays going away, not additional dollars flowing to employees to pay for routine care. They are under the impression that $85 drugs and $125 doctor visits really cost $15.
Other critics are, however, more clued in – incorrect, but not ignorant. They make at least three arguments. One is that because a large share of health-care spending derives from major medical interventions, often in the last weeks or months of a patient’s life, the potential savings from consumer-driven health care are small. Well, it’s true that about 4 percent of highly expensive patients account for half of health-care spending. But that means the other half contains lots of small-dollar claims. Plus, insurance coverage doesn’t just kick in 100 percent at the deductible. Patients spending HSA dollars for coinsurance up to their out-of-pocket cap (ranging from $5,000 to $10,000, depending on the plan and PPO) still have incentives to consume wisely. Half of all health care spending is for bills up to $12,000. There’s plenty of potential savings to be derived from savvy consumers facing the right incentives.
Another argument is that consumer-driven plans are too complex to take hold in the real world. That argument is running up against market trends. For years, large insurers actively opposed HSAs and other consumer-driven arrangements. Now they are selling the products. One national survey this year found that consumer-driven plans made up nearly 10 percent of the plans employers offer employees after just three years of full availability. Many industry analysts believe this number will increase to between 25 percent and 40 percent within the next two years, fueled in part by federal changes late last year to allow larger HSA deposits.
Still another criticism is that any short-term savings from these plans will be offset by long-term costs as consumers defer needed preventive care to preserve cash in their accounts. There is no significant evidence of such an effect. HSA owners are more likely to demand information on costs and benefits, more likely to plan ahead for their medical needs, and more likely to participate in preventive programs such as exercise, nutrition, stress management, and smoking cessation.
My employees at the John Locke Foundation have had their choice of an HRA and HSA plan for several years now. There were some early snafus, as might have been expected, but for the most part JLF folks are satisfied. They value the additional control they can exercise over a substantial portion of their compensation (one of the major benefits of consumer-driven plans is to reinforce the point to employees that health insurance is another way to get paid, not a gift). As local providers have become more familiar with the experience of patients spending cash rather than filing lengthy and convoluted claims, plan operations have gotten smoother.
Every year, more and more health-care consumers will be moving from the passenger’s seat to the driver’s seat. That’s one shift to the left worth celebrating.
Hood is president of the John Locke Foundation.