Commentary | Health

Consumer-driven health care is a false promise

Opinion pieces and speeches by EPI staff and associates.


Consumer-driven health care is a false promise

By  Elise Gould

Health costs are reducing the ability of American business to compete internationally. At the same time, companies that do provide health insurance to their workers are finding it harder to compete with domestic companies that do not. Premium costs have increased on average 11.4 percent over each of the last five years, while overall inflation grew by just 2.5 percent and real GDP grew by 2.6 percent.

Add to that the cost of retiree coverage, and it’s clear that high health care costs have become an albatross for many American companies.

Top policymakers have suggested the answer to this problem is “consumer-driven health care,” with its requisite high deductibles and health savings accounts. There are two main reasons why this isn’t the answer.

First, workers don’t want these plans. According to a Kaiser Family Foundation’s survey of employers, only 15 percent of employees who were offered health savings account qualified high-deductible health plans decided to enroll. Furthermore, a study by the Commonwealth Fund shows lower satisfaction in these types of plans. It finds that 63 percent of individuals with comprehensive health insurance were extremely or very satisfied with their health plan, compared with 42 percent of consumer-driven health plan enrollees and 33 percent of high-deductible health plan participants. Granted, the status quo isn’t the best option, but low take-up and low user-satisfaction should give employers pause before they decide to rearrange their benefits to offer these types of plans.

At the same time, compelling evidence suggests these consumer-driven health plans will be ineffective in restraining health costs. The ideology behind consumer-driven health care is the belief that Americans over-consume health care. Labeling this a “moral hazard” problem, proponents push for high-deductible health plans that make consumers spend out-of-pocket for the first dollar of coverage up to the plan deductible.

However, the large increases in health care expenditures are on big-ticket spending. It’s not one more visit a year to the doctor that’s driving these costs, or one extra test, or the choice of one doctor over another. The top 20 percent of health spenders account for 80 percent of all health spending. These are people with chronic conditions or costly hospitalizations. By definition, the vast majority of high spending is above the region where these incentives lie.

High-deductible health plans seem to reduce health expenditures because individuals pay the full cost of their health consumption up to the deductible. But contributions to health saving accounts are tax-deductible, and the tax deductibility essentially works as a government subsidy, thus reducing their actual cost-effectiveness. Furthermore, people with high-deductible plans may delay care and end up with serious conditions that might have been prevented.

Current proposals that would raise the deductible contribution limit to health savings accounts really do nothing to reduce health costs, and may increase them. These plans can be viewed, basically, as retirement savings tax shelters for healthy people. If the point is to provide another tax shelter, fine, but this is not a way to lower health costs for business or individuals.

Companies with several plan options should be wary of introducing high-deductible health plans for another reason: They shift costs from one group of employees to another, but are unlikely to reduce costs for the business. The healthier employees are more likely to prefer the high-deductible health plans, because they expect to consume less health care, while the less healthy will prefer more conventional plans with comprehensive coverage. If healthier employees leave conventional health plans, it will drive up the cost of insuring the less healthy workers. As a result, there may be no cost savings with a high-deductible health plan.

Employers do gain from a healthier workforce. A healthier, insured workforce is likely to be more productive, with fewer absences and sick days, and with less turnover.

The solution to the U.S. health care problem should involve increasing the size of pools, not decreasing them. Contrary to a frequently-made claim, encouraging people to purchase in the individual market will not by itself achieve the goal of a healthy and insured workforce. Someone with chronic health problems or pre-existing conditions – or who has family members in those categories — will find it nearly impossible to get adequate coverage in the individual market. Individual insurance companies set rates based on health status and medical history. If you are healthy one year but get sick the next, you will find it more difficult to get good coverage and your rates will go up.

In contrast, pooling and community rating spreads the risks over large groups. In a given year, a large percentage of the pool wont get sick, and the insurance company will be able to maintain profitability, smoothing risk over many individuals or large groups. The result: People keep their coverage, with predictable costs, and with continuity of care.

If consumer-driven health care, high-deductible health plans, and the individual market are not the magic bullet that proponents claim, then where are businesses to turn as health costs continue to rise, to the point where their survival is threatened?

Perhaps it’s time to consider universal coverage. Universal coverage, in a variety of forms, can create the workforce businesses want for little more than they pay for health insurance now. Universal coverage aids businesses by lowering administrative costs for employers and health care providers. Instead of each company having to administer its own health plans, and health providers having to hire insurance personnel to navigate the nightmarishly complex system we have today, a more centralized system can capitalize on consolidated filing and reimbursement mechanisms, thus saving money.

Coverage provided outside the work environment can also allow businesses to enjoy greater flexibility in the workforce. They can hire workers at whatever hours they find most efficient, choose from a pool of better qualified part-time employees, and avoid having to deal with the high fixed costs of hiring full-time employees. Universal coverage can create risk pools that small businesses can’t achieve, and at prices they can afford.

Moreover, a system run at the federal or state level can allow government to negotiate prices and provide incentives for the use of evidence-based medicine, enforce best practices, and encourage cost savings through disease prevention and chronic disease management. Perhaps it’s time for U.S. business to take the lead and move this country into the 21st century, joining other developed countries in providing basic coverage to all.

Elise Gould  is an economist at the Economic Policy Institute in Washington, D.C.


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