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Consumer Driven Health Care Plans
For about the last 10 years the United States has been experimenting with consumer driven health care plans. CDH plans typically combine a high-deductible insurance policy with a health savings account or health reimbursement account. CDH plans now cover well over 8 million individuals, up considerably from 4.5 million in 2007 and these types of plans continue to grow rapidly. So what have been the results?
The American Academy of Actuaries has recently produced a review of high quality research on these plans. Here are their conclusions:
The primary indications are that properly designed CDH plans can produce significant (even substantial) savings without adversely affecting member health status. To the knowledge of the work group, no data-based study has emerged that presents a contrary view.
Cost-savings in the first year of instituting a CDH plan relative to a traditional plan ranged from 12% to 21%, remarkably large figures. Moreover, costs appear to grow more slowly under CDH plans than under traditional plans.
The knock on CDH plans has always been that they could cause people to avoid preventative case. Not only does this appear to be false it's the opposite of the truth:
Generally, all of the studies indicated that cost savings did not result from avoidance of inappropriate care and that necessary care was received in equal or greater degree relative to traditional plans. All of the studies reported a signficant increase in preventative services for CDH participants.
Especially interesting is that some of the studies found that CDH plans resulted in better compliance with evidence-based care.
Note that these results come from CDH plans instituted within the current system. One would expect that the general equilibrium effects of consumer driven health plans would be even larger than the partial equilibrium effects, see Singapore for evidence (but consider Tyler's remarks).
The American Academy of Actuaries is a credible organization but I would like to see more of the underlying data. All of the studies the AAA reviewed used credible methodologies, controlled for selection and were based on substantial data but the major studies so far have been industry funded.
It's remarkable that in the current debate over how to control health care costs so little attention is being given to the important results of our 10-year experiment with consumer driven health plans.
Posted by Alex Tabarrok on August 12, 2009 at 07:41 AM in Economics, Medicine | Permalink
Comments
interesting.
intuitively this makes sense.
Posted by: babar at Aug 12, 2009 7:53:20 AM
I agree completely. We switched to a HSA account, and we have been very pleased. We are able to make purchase decisions using realistic prices that are given to us once we communicate our form of payment. We have offered this type of insurance to our employees, and they have accepted it as well. They pay the very low insurance portion of the plan, and we give them funds to cover the deductible. If they don't spend it, they keep it as savings. Incentives are a wonderful thing.
Posted by: bastiat at Aug 12, 2009 8:07:25 AM
does it really matter?
Posted by: josh at Aug 12, 2009 8:18:07 AM
No see, what we need to do is reform the entire medical 1/7th of the economy at once, not expand these options. We need bold moves, not wait for promising incremental improvements.
That way, we can tell our grandchildren how private companies used to provide insurance before the government instituted progress like they invented it, kinda like how my grandparents told me about how insurance companies got the idea from doctor co-ops.
I can tell you being one of the 8 million, having just taken my child to a clinic, we paid a reasonable amount in cash and I even refused a chest X-ray. The empowerment felt terrible. Don't let your friends and neighbors suffer this fate!
Posted by: Andrew at Aug 12, 2009 8:21:00 AM
HDHP/HSA is great as long as you don't live in a nanny state like NY or NJ. Then it's not a good deal at all.
Posted by: David at Aug 12, 2009 8:38:52 AM
If you tell your physician etc., that you will be paying cash, you generally get a better price. I was at the dermatologist this week and he told me that the removal of one benign growth would be covered by insurance whereas the removal of some other "tags" would not - I asked him how much and he gave me what I thought was a reasonable quote. Empowerment, indeed - imagine getting competitive prices.
Note also that there is no health care crisis in veterinary medicine, where almost all services are paid for out of pocket, or in procedures to correct vision through laser, etc.
Posted by: Rich Berger at Aug 12, 2009 8:41:05 AM
"It's remarkable that in the current debate over how to control health care costs so little attention is being given to the important results of our 10-year experiment with consumer driven health plans."
It's only remarkable if you assume that health care reform is about improving health care and not simply a government power grab.
Posted by: Colin at Aug 12, 2009 8:48:14 AM
"It's remarkable that in the current debate over how to control health care costs so little attention is being given to the important results of our 10-year experiment with consumer driven health plans."
Are you surprised?
For the left, any evidence that anything other than a single payer system can work is irrelevant. The goal is to pass something that guarantees a single payer government system in the future.
For the right, any evidence that government intervention combined with individual choice can work is irrelevant. The goal is to keep the status quo.
It seems that the Singapore will be a perfect solution for us.
Posted by: Jose in Houston at Aug 12, 2009 9:01:25 AM
It is possible that some of the cost savings can be explained by self-selection among CDH plan participants. My employer offers a CDH plan in addition to two HMO plans and a PPO plan. The few of us who chose the CDH plan are without exception young, healthy and light users of healthcare. I have not read the linked monograph but I wonder how typical this is.
Posted by: Josh at Aug 12, 2009 9:05:45 AM
Josh is absolutely right, healthier people self-select the CDH plans given an option. Even companies that fully replace traditional PPOs and HMOs with CDHPs see cost savings as employees move to spouse's plans. I don't know how easily the partial equilibrium applies to general equilibrium.
That said working in the industry and having a CDHP, I know CDHPs create incentives that drive better behavior. For instance without first dollar Rx coverage it was a no brainer for me to buy Prilosec at $30 than Nexium at $250. If I had my employer's PPO option though my out of pocket cost on the Nexium would have been $20.
I would love to see a single payer system, and the single payer plan should be a CDHP.
Posted by: Tim at Aug 12, 2009 9:18:34 AM
Some versions of some of the health care bills that came out of different committees in Congress would effectively outlaw most of these plans. They have provisions against consumers bearing too much of the cost of their health care plans, and the wording is structured to disallow high-deductible plans.
Of course, like anything, it could change, and there are several different bills.
Posted by: John Thacker at Aug 12, 2009 9:23:20 AM
Unfortunately, selection is a real issue. As the study notes:
"When CDH plans are offered as the lowest-price (and presumably the lowest-value) option in a choice environment, it should be expected that this plan will benefit from positive selection. ... This positive selection must be taken into account in any claim evaluation. Unfortunately, the CDH plan carrier often does not have all of the desired information to adequately assess this selection issue."
Looking at trends instead of levels does not solve this problem: people with known health problems like diabetes are likely to have higher costs AND faster growth in costs over time, and they will self-select into the more expensive plans with more coverage.
Adverse selection is a huge determinant of costs, which is why insurance companies spend billions to ferret out these people in our existing system (except for Medicare, the VA and other public options).
Posted by: a student of economics at Aug 12, 2009 9:27:22 AM
Tim point out that "...CDHPs create incentives that drive better behavior. For instance without first dollar Rx coverage it was a no brainer for me to buy Prilosec at $30 than Nexium at $250."
However, it is my understand that the main drivers of medical costs are the big ticket items (heart surgery, dialysis, etc) and it's hard to see how CDHPs help with them.
Posted by: a student of economics at Aug 12, 2009 9:32:36 AM
Interesting point. I have been with multiple CDHPs (from big traditional insurance providers: Aetna, Lumenos, Anthem BCBS) in the past few years, and have had a good experience. One point I wanted to share was that every CDHP included and encouraged free preventative care (does not count towards your deductible).
Posted by: Chris at Aug 12, 2009 9:38:14 AM
Are the people who would sign up for and fund an HSA different from other people? I would guess that they are more knowledgeable on the subjects of insurance and healthcare and are more conservative.
Posted by: Floccina at Aug 12, 2009 9:52:04 AM
As usual, SOE cherry-picks the quote, which continues:
"Various methods have been applied to adjust for selection, such as risk-assessment methodologies, age/gender factors, etc. However, the most straightforward approach used by the studies reviewed was to simply focus on the change in cost per person (i.e., trend rates) for CDH versus traditional plans. A lower trend rate for the CDH contingent is taken as an indicator that the program is successful.
Interestingly, using the difference in trend rates may understate the true impact of consumer-driven plans. If the lower cost individuals opt for the CDH plan, it is expected that the trend rates would be higher than for the general population since the positive selection wears off over time (i.e., regression to the mean). Also, where offered in a choice environment, participation in CDH plans has generally increased from year to year. Each subsequent cohort would be less select than the previous one, which increases the average cost of the CDH block of business. Before the CDH plan experience can exhibit lower trend than the traditional business, it must first overcome these two obstacles.
It might be possible to design a study that would negate selection as a factor by examining total cost rates and trends for employers who offer a CDH plan versus those that do not. Assuming the control group was constructed to mirror the traditional plan offerings for the study population, the difference in trend rates would truly indicate CDH plan value (also assuming the other considerations discussed in this section are appropriately adjusted for). If the study population was large enough, one could look at how trend rate differences correlate (or not) with the CDH participation percentage. Note, however, that many of the considerations cited above would also be concerns for such a study, although perhaps to a lesser extent."
Further, in the executive summary, they state:
"With regard to first-year cost savings, all studies showed a favorable effect on cost in the first year of a CDH plan. CDH plan trends ranged from -4 percent to -15 percent. Coupled with a control population on traditional plans that experienced trends of +8 percent to +9 percent, the total savings generated could be as much as 12 percent to 20 percent in the first year. All studies used some variation of normalization or control groups to account for selection bias."
I am a member of the AAA, although I do not primarily work in the health area. I believe, based on reading of their reports for 25 years, the AAA is a reasonably objective organization, with no obvious political agenda.
Posted by: Rich Berger at Aug 12, 2009 9:52:18 AM
Hey Rich, I didn't cherry pick. In fact, I specifically addressed the point made in the additional 3 paragraphs you cut and pasted, which boil down to "Interestingly, using the difference in trend rates MAY understate the true impact of consumer-driven plans." [emphasis added]
As I note in my comment, IMHO, trends at least as likely to OVERSTATE the true impact, since people with chronic conditions tend to get worse over time faster than healthy people do, and this will result in an adverse selection bias in both trends and levels.
Adjusting for age, etc. doesn't solve the self-selection bias, so I ignored that.
Finally, I agree that "It might be possible to design a study that would negate selection as a factor ... Assuming the control group was constructed to mirror the traditional plan offerings for the study population"
To do this right requires a controlled experiment. However, this has not been done. Let's do a few and then talk.
The AAA may not be especially political but a) the underlying studies reviewed were undertaken by parties with strong vested interests, and b) apparently none of the parties doing or reviewing the research were professional academics and the work was not published in peer-reviewed journals (with all due respect to actuaries and insurance executives).
Bottom line: the existing evidence is unconvincing.
Posted by: a student of economics at Aug 12, 2009 10:14:14 AM
reasonable price my ass. my g/f had an ingrown nail cut in an ER (5 min or less) for a quite reasonable $2500. and that was AFTER she said that she would pay cash.
Posted by: mishka at Aug 12, 2009 10:17:21 AM
SOE-
Your arguments are weak. The AAA study contradicts you in that it indicates that trend rates are likely to UNDERSTATE the impact. The AAA actually took the time to do a disciplined study. All the studies examined showed that CDHPs had a favorable impact. You don't like the conclusions and substituted hand waving for analysis.
Posted by: Rich Berger at Aug 12, 2009 10:25:55 AM
The cost of dialysis is due to the government-imposed difficulties in the kidney market.
The cost of big ticket items will be affected over time as people with HSAs come to terms with the fact that potentially ineffective treatments will impact their estate.
Posted by: Andrew at Aug 12, 2009 10:27:40 AM
HSA's will never cover catastrophic medical needs.
I have an HSA that I have been contributing to for a few years now and its almost totally exhausted already due to just a few visits to doctor and dentist this year.
Catastrophic care is what drives most people into bankrupcy.
SINGLE PAYER UNIVERSAL HEALTH CARE NOW!
Posted by: Scott Burger at Aug 12, 2009 11:07:25 AM
Rich:
you said, "Note also that there is no health care crisis in veterinary medicine, where almost all services are paid for out of pocket."
I completely agree. In veterinary medicine, the end of life option is a whole lot easier. It's so much easier to put Fido down for a broken hip than it is Grandma. When people have free choices, especially choices about when to end their existence with dignity, health costs can go down substantially. More people just need to embrace the final phase of life and enjoy the ride . . .
Posted by: Fletcher at Aug 12, 2009 11:08:26 AM
This study is interesting, but as Alex and SOE say, it is not yet completely convincing.
I'm surprised* at the number of commentors who mistakenly believe that the healthcare reform plans under consideration would prevent companies from adopting this kind of insurance. But I do find myself asking, if this is so good, what is limiting the rate at which companies adopt this?
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* Given that this is MR, I am not really surprised.
Posted by: MostlyAPragmatist at Aug 12, 2009 11:15:22 AM
Mishka said:
"reasonable price my ass. my g/f had an ingrown nail cut in an ER (5 min or less) for a quite reasonable $2500. and that was AFTER she said that she would pay cash."
That's like going to an exotic car dealer and asking to pay cash for a car that you can drive off the lot right away. Any car purchased at that lot will be expensive. ERs are not supposed to be the first response to ingrown toenails.
I would be all in favor of more urgent care clinics staffed with more nurse practitioners and physician assistants, with one or two MD's as consultants.
Posted by: Fletcher at Aug 12, 2009 11:20:32 AM
Are these plans going to survive under the Obama insurance mandate? Or will they be counted as "underinsured"?
Posted by: PeterW at Aug 12, 2009 11:27:59 AM
