Published 4/1/2008

Ahead of the Curve

Issues facing America: Consumer-directed health care

By Sharat Kusuma, MD; Ryan M. Nunley, MD; Aaron Covey, MD; James Genuario, MD; Samir Mehta, MD; and the Washington Health Policy Fellows

Editor’s note: Throughout 2008, the “Ahead of the Curve” series by the Washington Health Policy Fellows will highlight various healthcare issues important to the national presidential election. To read previous columns, visit www.aaosnow.org

The phrase “consumer-directed health care” or “CDHC” is used synonymously in the current healthcare literature with terms such as “consumer-directed health plans” or “consumer-centric health care.” Regardless of the terminology used, the concept is that patients (“consumers”) should have more control in the utilization of their healthcare dollars.1

Implicit in this concept is the theory that requiring patients to take more fiscal responsibility for their healthcare expenditures will make them better educated and more discerning “purchasers” of health care. As in other industries, when consumers become better educated about their choices of goods and services, they demand a higher level of quality and lower costs from suppliers. Providers must compete on the basis of both price and quality to win the business of these consumers. Many experts in the healthcare arena consider CDHC one of the critical market-based forces that will lead to more efficient and cost-effective allocation of scarce healthcare resources.

CDHC is defined more specifically as healthcare plans that combine high-deductible insurance coverage with a tax-advantaged savings account (such as a health savings account [has] or health reimbursement arrangement [HRA]). Such health plans are designed to give patients greater control over expenditures, because most health costs will be paid directly, using the tax-advantaged account. Patients who have more serious health problems and higher associated costs will need to meet the high deductible, before their insurer will pay the remainder of the bill. The rationale for such plans is that patients will be significantly more prudent in their consumption of healthcare resources if they must pay for health care out of their own pockets.

The history of CDHC

Before the 1960s and the advent of federal healthcare programs such as Medicare and Medicaid, patients in the United States paid directly out of pocket for up to 49 percent of their healthcare expenditures.2,3 As employers began offering health insurance to attract employees during a period of high growth and low unemployment, however, the landscape began to change. At the same time, the introduction of the federal Medicare program established a second large payor.

With the concomitant rise in private insurance, healthcare consumers became more reliant on third parties to pay their healthcare bills.

These trends led to a precipitous decline in patient out-of-pocket expenditures. By 2002, patients paid only 14 percent of their medical expenses out-of-pocket; the remaining 86 percent of expenses were paid by designated third parties.4

During the past two decades, many economists concluded that third parties have done a worse job of allocating healthcare resources than would have been accomplished by a free market.3,5 The major problems with the current system of private insurers is the use of adverse selection, higher administrative costs, and incentives to limit expenses at the risk of providing poor medical care. CDHC implies that patients who have greater control over their healthcare expenditures and greater responsibility for their healthcare choices will (through market forces) more efficiently allocate resources.

HSAs and HRAs

Two tax-advantaged accounts are primarily associated with CDHC plans—health savings accounts (HSAs) and health reimbursement arrangements (HRAs). HSAs were first sanctioned as a tax-advantaged component of high-deductible insurance plans under the 2003 Medicare Prescription Drug, Improvement, and Modernization Act. They are fully owned—and therefore, fully portable—by employees. Proponents of HSAs also point out that they increase transparency of healthcare costs, because patients are more likely to demand cost information when they are spending their own money.

HRAs were created under regulations issued by the Internal Revenue Service and the Treasury Department in 2002. HRAs are employer-owned and therefore not portable by employees. Opponents of HRAs argue that this lack of portability significantly limits patients’ options and undermines the perceived benefits of patient ownership.5 Opponents say that employers who use HRAs could cut back on employee benefits and that selection dynamics will leave the chronically ill in traditional health insurance plans with skyrocketing premiums. These drawbacks could reduce the incentive for patients to use and conserve funds in HRAs.

Effects on cost and utilization

The impetus for CDHC is clear. More importantly, the initial implementation of CDHC plans on healthcare utilization and overall spending by patients is encouraging. Initial data from several organizations, including Aetna, Kaiser, and McKinsey and Company, show that CDHC plans reduce health insurance costs for employers and significantly slow the rate of cost increases for such plans.

For example, data from Humana and Aetna revealed that costs for employees in CDHC plans increased an average of 3.6 percent to 6 percent annually (2003-2004). During the same time period, employers with traditional indemnity plans experienced rate increases of 10 percent to 20 percent. Similarly, 2004 data indicate that CDHC plans cost employers $5,233 per employee, while traditional plans cost $6,707 per employee.6,7

Data on utilization of healthcare resources are also encouraging. One study has shown that individuals with high-deductible plans did indeed cut back on utilization with no adverse effects on their health status. CDHC patients were also more likely to use cost-effective preventive care measures and were much more apt to comply with treatment regimens for chronic conditions such as diabetes and hypertension.6,7

The future of CDHC

Additional research on the effects of CDHC plans on healthcare costs and utilization is essential. One thing, however, is certain: The US economy cannot sustain the current trend toward increased healthcare spending, which is predicted, under some scenarios, to consume a staggering two-thirds of the US gross domestic product (GDP) by the year 2050.8

Policymakers, payors, providers, and patients must cooperate to devise a healthcare plan that can efficiently allocate and ration care, decrease costs, and increase quality. For many experts, market-based reforms such as CDHC plans are a step in the right direction. By requiring patients, rather than third parties, to be financially accountable for their healthcare expenditures, CDHC plans will foster a generation of better-informed, more responsible, and more discerning healthcare consumers. Simultaneously, markets will force providers to devise novel ways to improve quality and decrease the cost of the services they provide.

Over the past three decades, major industries in the computing, automotive, mining, and telecommunication sectors have significantly increased quality and drastically decreased costs in response to market pressures. The healthcare industry has been hampered in its ability to achieve similar levels of efficiency due to regulatory obstacles and barriers to market forces. CDHC plans may be one way to help decrease costs and improve the quality of health care in the United States.

The Washington Health Policy Fellows include Sharat Kusuma, MD; Ryan M. Nunley, MD; Aaron Covey, MD; James Genuario, MD; Samir Mehta, MD; A. Alex Jahangir, MD; Alok D. Sharan, MD; Anil Ranawat, MD; and John Flint, MD.

Did you know?

49%: The average proportion of individual out-of-pocket healthcare expenditures for patients in the United States in 1960.2

14%: The average proportion of individual out-of-pocket healthcare expenditures for patients in the United States in 2002.4

10 cents: The average amount that US patients currently pay out-of-pocket for every dollar of physician services they consume.9

33x: The increase in number of employers that offered HRAs or HSAs to their employees between September 2004 and March 2005.6

3.7% to 6%: The average annual cost increase for employers that used CDHC plans from 2003 to 2004.6

10% to 20%: The average annual cost increase for employers that used traditional indemnity health insurance plans from 2003 to 2004.6

66%: The estimated proportion of the United States’ GDP spent on health care by the year 2050 under current projected growth rates. The absolute dollar amount of that figure will equal the entire consumption of all goods and services by the U.S. economy today.