Ten Tools for Achieving Consumer Driven Health Care
June 2003
For too many years Americans have been divorced from the consequences of their health care decisions. Third-party payment has enabled us to see a doctor, purchase medications, and receive surgery, without a thought about cost. In some minds this is a wonderful thing – get all the health care services you need without agonizing over affordability.
But being unconcerned about affordability carries a price. If we as consumers are not worried about cost, we spend more than we would otherwise. That puts pressure on the people who actually pay the bills. If we are not worried about cost, they certainly are. They will not give us a blank check. They will limit our access to services, one way or another.
They will make the decisions about what services we can and cannot have, based on their values and judgments – not ours. We have ceded the responsibility for those decisions to someone else, so we are hardly in a position to complain when they decide differently than we would. That is the cost we pay for “free” care provided by a third-party.
The same phenomenon will happen regardless of the kind of third-party involved. Whether it is an insurer, an employer, or the government, they will decide what is worth paying for and what is not.
When health care is cheap, they can pay for a lot and we hardly notice the restraints. But when it gets costly, they will become less generous, and they will manage our care much more tightly.
This results in unhappy consumers who will take their complaints to their political representatives, who in turn will try to “manage the managers” and prohibit certain kinds of rationing. Unfortunately, the consumers who prevail are the ones with the most political clout. Health care becomes politically determined, based on majority opinion, not on the needs of the patient.
The entire system becomes more remote from the values and needs of the individual, and the people who are left out of the bargain are the very people with the greatest need – a very small number of patients with serious and expensive conditions who are too ill to exercise political influence.
After fifty years of reliance on ever-growing third-party payment, and the resulting cost increases, rationing, and political intervention, we have reached the edge of a precipice. We can either fall off the cliff into a totally government run health care system, or we can change direction.
Americans have an instinctive aversion to putting the whole $1.4 trillion system in the hands of the government. We have rejected the idea every time it has been suggested since 1948. We doubt that substituting governmental third-party payers for private ones will improve matters. We look at the experience of Medicaid where it is nearly impossible to find a doctor who will accept new patients, and Medicare where a simple improvement like adding a prescription drug benefit has become a decade-long political battle, and conclude that the approach will not solve the essential problem – that the needs of the patient has taken a back seat to the struggles between interest groups.
Ultimately, there is only one way to put patients back in the driver’s seat. Give them control over the resources, so they can make their own value judgments and trade-offs about their own health care priorities.
After all, it is their health at stake. And it is their money at stake, as well. Every penny spent on health care comes from the people who are ultimately the users of health care services. Employers pay it out as a form of compensation earned by workers. Insurers pay it out in return for premiums paid by the insured. And the government pays it out as a result of taxes paid by taxpayers.
Health care is not a gift from a benevolent overseer. It is earned and paid for by the people who use it.
Getting from where we are today to a system in which people have control over their own resources and their own decisions is not going to be easy. It will require a change of thinking by everybody involved in the system.
Fortunately tools are being created to help us make the transition. These tools are still pretty primitive, but they will get better every year. They will be revised and fine-tuned as we get more experience in this new era – provided the government allows the process to go forward. Some of the tools that are currently available – and ways they can be improved – include:
1. Flexible Spending Accounts (FSAs)
FSAs and cafeteria plans have been available since the late 1980s. They enable workers to place part of their salary into an account for paying directly for health care expenses. The accounts are widely used, but not as much as their potential. There are several problems with them:
There are proposals in Congress to fix some of these problems, especially the use-it-or-lose it provision.
2. Medical Savings Accounts (MSAs)
MSAs require a high-deductible insurance plan, with no coverage below the deductible. They assume that the account holder will deposit an amount of money approximating the premium savings from the higher deductible into the savings account for use. The accounts are actually owned by the employee, not the employer. Unused funds stay in the accounts and may build interest over time. Account holders may withdraw money for non-medical purposes by paying taxes and a 15% penalty on the amount withdrawn. There are many problems with the way they were designed by Congress in 1996:
The president has proposed and Congress is considering changes to the MSA program that would address some of these problems. The changes would make all employers eligible, remove the enrollment caps, lower the allowable deductibles, allow 100% of the deductible to be deposited every year, and possibly allow some first-dollar coverage of preventive services. These changes should make the approach much more popular in the marketplace.
3. Health Reimbursement Arrangements (HRAs)
The IRS approved HRAs in June 2002. They are the core concept of “consumer driven” health plans. They are similar to, and inspired by, medical savings accounts, with some important differences. They may accompany any kind of insurance plan, they may be for any amount of money, they may include first-dollar coverage, and they may rollover and build-up over time.
HRAs are extremely flexible, but still contain some problems:
-
The employer owns the account, and may limit access to the funds from year-to-year or post employment. Even when an employer allows post-employment access to the funds, the former employee will have to return to the employer to access the money. The accounts are not portable.
Remedies are not yet in the works. The program is still new enough, and flexible enough, that the market is experimenting with the optimal design. After another year or two, the limitations will become more evident and change may be sought at that time. But for now HRAs have launched a tremendous amount of creative energy in benefit design.
4. Indemnity Coverage
Third-party payment is not the same as “insurance.” Third-party payment means something specific – it is when a third-party accepts premiums from a consumer and pays providers for services delivered. The money goes from consumer to payer to provider. The consumer has little, if any, awareness of the cost of the service or the amount paid to the provider. Insurance is something different. Insurance is a “two-party” contract in which an “insured” pays a premium for future protection, and the insurer pays money to the insured when a loss occurs. The insured can then spend the money to purchase the services of his/her choosing. This is actually known as “indemnity insurance” because the insured is “indemnified” against a loss. There are many ways an insurance policy can pay out benefits. Some companies are re-thinking so-called schedule-of-allowance programs that pay a specific amount of money for a specific service or diagnosis. Others might base benefits on a standard system of relative values, such as Medicare DRG payments. The important thing is that the consumer is paid the benefit, and is then responsible for paying for the service received. There is no expectation that the insurer have anything to do with the provider of care. Problems:
Whatever the benefits structure, the notion of a two-party arrangement should greatly lower administrative expenses and reduce interference in the patient-physician relationship. It should also create a new level of awareness of costs and alternatives for patients.
5. Defined Contribution
As the movement evolves, the term “defined contribution” is becoming more clearly defined. At the core it means the employer provides a fixed payment dedicated to employee health insurance benefits, and workers then use that contribution as core funding for a variety of benefit plans or benefit structures, often supplementing that contribution with their own funds. This approach is the opening salvo in a move to ensure more individual ownership and portability of a benefits plan. It has taken two primary forms. In one, a single carrier, often a Blue Cross Blue Shield plan, offers a choice of predetermined health plans to be chosen on an individual basis by the employees of small firms. Another approach involves allowing individual workers to actually mix and match their own benefits packages, sometimes down to the individual specialist level. Problems:
This approach is still being refined and will encounter major regulatory obstacles. But once identified, the obstacles can be addressed, especially if the private sector is positioned to take advantage of the opportunity.
6. Opt-Out Provisions
Employees earn their benefits just as surely as they earn their wages. Yet very often they forfeit those benefits if they prefer to stay on a spouse’s coverage, or have other reasons to decline the particular offering from an employer. In an economy that is characterized by two-income families, mobile workforces, and part-time employees, it no longer makes sense for companies to take an all-or-nothing approach. Workers should be allowed to make a rational decision to use their employer’s contribution to supplement a spouse’s coverage, or for both earners to pool their funds to purchase coverage for the whole family. Some employers do this already. They may allow a worker to opt-out of the benefits package and receive 50% or 75% of the value of the coverage. Yet the employee has earned 100% of the contribution, and the firm is no worse off if they take that money in the form of a cash contribution rather than benefits. Problems:
7. Tiered Copayment Arrangements
These approaches have been offered to employers as an alternative to more consumer-based ideas. They have been widely adopted in prescription drug programs where generic drugs have a very small copayment; name brands a higher one, and off-formulary drugs substantially higher. Now some carriers are trying the same approach with hospitals and thinking about applying it to physician services. There are some very big conceptual problems with the approach:
-
While they might direct patients to cheaper products at the margin, they fail to give people any understanding of the true cost of the service. Even generic drugs cover a very wide range of prices, which a fixed copayment doesn’t reflect.
-
Applying the same concept to hospitals is even more problematic. Hospital services are complex, and price does not equal efficiency. It is entirely possible (even likely) that the most expensive hospital is also the most efficient, with better outcomes and speedier service.
-
Ultimately, these programs are not “empowering,” but punitive to patients.
Tiered copayments are, along with mandatory use of “evidence-based” medicine, the last gasps of a paternalistic, centrally planned system of health care financing that has been rejected in the market.
8. Independent Physicians
There is a growing movement in the physician community to opt-out of participation in insurance schemes. Growing numbers of doctors have decided to terminate contracts with managed care companies and/or stop participating in Medicare, or at least stop taking new Medicare patients. Many of these are switching to a cash-based system, either independently or as part of a network of similarly inclined physicians. Others are moving into “boutique” medical practices. In most cases, they believe the terms of an insurance contract are between the patient and the insurer, and have (or should have) nothing to do with how they practice medicine or how they bill for their services.
One form is SimpleCare. Consumers choosing this approach pay the doctor’s fee with cash, check or credit card at the time of service. In return, SimpleCare providers often reduce their standard fees by 30 to 50 percent to plan members. This approach avoids many of costs associated with third-party payment, such as claim filings, prior approval requirements, procedural codes, formulary lists, closed plans and price controls. For example, SimpleCare reduces the usual number of insurance billing codes from 7,500 to three. Currently some 600 providers and over 3,000 patients use SimpleCare.
Independent physicians are finding substantial savings in overhead costs, which enable them to charge less for services. Problems:
9. Independent Hospitals
This is not as far along as the movement among physicians, but there is at least discussion of hospitals operating on more of a cash basis, with fixed fees for defined services. There are some anecdotal examples of facilities that do this, but very often they are based outside of the United States where the cost of labor, regulations, and construction is less. Particularly interesting is the growth of cosmetic surgery centers in tropical areas where patients can combine elective procedures with recuperation in a vacation spot. These facilities may be the leading edge of a trend that ignores national borders, relying on telemedicine and low-cost airfare to attract patients to an offshore facility. It is too early to do more than speculate on what problems might occur with this trend.
10. Information Systems
This is the mortar between the bricks. Few of these changes could happen without the transactional power of the Internet. Individuals are able to identify their resources and match them up with preferred coverage or services. But it goes far beyond on-line enrollment and benefit selection. It is impossible to make a definitive list of all the services that will be delivered in the Information Age, but they surely include:
There will be an explosion of information services in the next few years as needs are identified, and as data is refined and organized. However, HIPAA and other restrictions on how electronic information can be used may impede innovation and progress. We do not yet know the best applications of information systems, and it is foolish to pretend that what we thought we knew in 1996 when HIPAA was enacted will still apply a decade later.
There is today a burst of innovation and energy going into creating a new approach for health care financing. That innovation has to keep up with a similar explosion of new ideas on the health care delivery side. We cannot support 21st Century medicine with a 20th Century payment system.
In both financing and service delivery, we are entering the Information Age and leaving behind Industrial Age ideas of centralization, standardization, and paternalism. The new age implies the exact opposite – decentralization, customization, and empowerment.
The new age is infinitely more complex and precise than the old one, but Americans are infinitely better educated and better able to manage complexity than ever before.
The new era will put patients back where they belong – in the driver’s seat of the health care system. After all, health care is not primarily about doctors, hospitals, insurers, and it is certainly not about employers and the government.
Health care is about people. It is their needs, values, and desires that must predominate. The best way for people to express their needs, values and desires is through a market-based system that gives them the power to spend resources in keeping with those values.
All of the other interests in health care exist to serve the needs of the patient. To the extent they succeed, they will be rewarded. To the extent they fail, they will be punished, possibly by having to pursue some other line of work.
That is what consumer driven health care will deliver – a mechanism of rewards and punishments that will fundamentally transform health care in America and around the world.
About the Author
Greg Scandlen is the director of the new Center for Consumer Driven Health Care at Galen Institute, a non-profit, non-partisan research organization in Alexandria, Virginia.
Prior to joining Galen, Mr. Scandlen was a senior fellow in health policy at the National Center for Policy Analysis, the president of the Health Benefits Group and the founder and executive director of the Council for Affordable Health Insurance. He also spent 12 years in the Blue Cross Blue Shield system, most recently as the director of state research at the national association.
Mr. Scandlen is an accomplished writer, researcher, and public speaker. He is considered one of the nation’s experts on health care financing, insurance regulation and employee benefits. He has particular expertise in issues such as medical savings accounts, employee benefits, health care tax policy, the uninsured, the individual and small group insurance markets, and public programs like Medicare, Medicaid, and SCHIP.