Healthy Choices

An article in Monday’s L.A. Times reports a trend that, if it continues, bodes well for healthcare in this country. The article’s subject is “consumer-directed health plans,” a fancy name for what free-market healthcare reformers have advocated for years: high-deductible insurance plans accompanied by health savings accounts. Health savings accounts allow people to sock away pre-tax dollars for medical expenses, including deductibles, thereby removing the tax bias that favors health insurance over direct payment for services. Here are some of the key bits:

Learning what a treatment or procedure costs — then deciding whether to pay for it – is a new step for most Americans with health insurance. Even traditional fee-for-service plans, in which consumers pay 20% of a bill, don't prompt most people to analyze a procedure's cost or their actual need for it, experts say. But when consumers are held solely responsible for a medical bill, they tend to think twice.

Having patients assume responsibility for such costs is the centerpiece of this increasingly popular type of insurance, called consumer-directed healthcare. Now a small part of the insurance market, about 2%, consumer-directed plans are expected to become much more common in the next few years as a way to potentially curb employers' rising healthcare costs. The plans could account for 7% of health insurance by 2007 and one-quarter in about five years, according to Forrester Research, an independent technology research company.

Eventually, about 40% of consumers who now use preferred provider organizations or point-of-service plans will likely opt for consumer-directed plans, predicts Brad Holmes, vice president and research director of Forrester, who has studied the trend.

The strategy, which takes some of the control over spending away from employers and insurers, typically allows people to select their own physicians and hospitals, avoiding "gatekeepers" who might limit their care.

In turn, consumers pay more up front — such as the first $1,000 to $2,500 per year spent on healthcare — and bear the responsibility to spend those funds wisely. Consumers can then find themselves considering whether to have that ingrown toenail treated or whether to choose a generic heart medication over a more expensive brand-name product.

"I think there is hardly an employer in the country who isn't considering some version of this approach," says Greg Scandlen, director of the Center for Consumer Driven Healthcare at the Galen Institute, a nonprofit health policy research organization in Alexandria, Va. "The notion that consumers can take charge of their own healthcare is what puts the sizzle behind this."
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Interest in such plans got a jump-start last year with the creation of health savings accounts.

As with existing health-spending accounts, consumers can use the new accounts to set aside money annually, tax-free, for medical costs. Unlike spending accounts, however, the savings accounts earn interest and can be rolled over from year to year if the money goes unused.
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A typical plan, for example, has an annual $2,000 deductible that must be met before insurance will kick in; the insurance company then pays 90% of costs, she says. Although the deductible is high, the consumer can use a health savings account to pay for those initial expenses.

This is really excellent news – indeed, good enough news that I might even forgive Congress and the President for passing the outrageously costly prescription drug benefit bill, which included health savings accounts as a rider.

I have one small complaint about the article. The headline of the article says, “More choice, at a cost: Consumer-directed health plans give patients freedom to choose – and a larger bill,” which is a major theme of the article. One the one hand, that’s just right – choice generally does involve greater cost, and people should know that. HMOs are able to charge lower premiums precisely because they ration your care and give you fewer options. But on the other hand, it’s missing a key feature of high-deductible insurance plans: that they typically charge substantially lower premiums. That’s (a) because consumers are paying more out of pocket or from savings accounts – the obvious reason, but not the most important, (b) because bureaucratic processing costs fall, (c) because the moral hazard problem of people buying services they don’t need is reduced, and (d) because as the plans become common, consumers become smarter shoppers whose efforts give doctors an incentive to lower prices. The article observes (a), but while it observes the others, it does not explain how they will tend to reduce the overall cost. As a result, the claim that people will get more choice “at a cost” misleads; they might actually get more choice at less cost.