Consumer-driven health care: will it take hold in the public sector?

• Author: Compton, Michael F.

Each decade seems to bring a "shift of gears" in how health care is administered in the United States. The 1960s saw the creation of Medicaid and Medicare. The 1970s witnessed the movement of large employers toward self-insured arrangements. The 1980s was the decade of health maintenance organizations. During the 1990s, the expansion of managed care and the rise of primary provider organizations took center stage. While the story is still being written for the first decade of the new millennium, a new paradigm for health care has already emerged: consumer-driven health care.

The evolution toward a new health care delivery system occurs at an auspicious time. During the past five years, health care inflation has hit employers hard, particularly governments still waiting for tax revenues to recover from the most recent recession. Many governments were able to absorb rising health care costs at the height of the economic expansion of the late 1990s, but this is no longer the case. Consequently, governments at all levels are searching for ways to rein in health care costs without jeopardizing their employee's health or pocketbooks.

Despite vendor claims to the contrary, it is unlikely that any one solution to the health care benefits challenge facing so many governments today will suffice. However, the preliminary evidence shows that consumer-driven health care plans help contain health care costs while offering employees flexible, quality health care at a lower cost. While it is too early to draw definitive conclusions about consumer-driven health care, governments should be aware of this growing trend in health care. This article will explain what consumer-driven health care is, outline the arguments for and against, and examine the experiences of two governments that have been early adopters of this approach.

CONSUMER-DRIVEN HEALTH CARE EXPLAINED

Conceptually, consumer-driven health care is not particularly hard to comprehend. Exhibit 1 illustrates the basic plan design for a typical consumer-driven health plan. The plan consists of three levels of funding:

1. an employer-funded health care account;

2. a high-deductible health plan funded by the insurer; and

3. a gap between the two, for which the employee is responsible for 100 percent of the costs.

The employer contributes a fixed dollar amount toward each employee's out-of-pocket health care costs by depositing funds in a health care account. Typically, this is a tax-exempt health account, such as a health reimbursement account, out of which the employee pays for medical expenses. Any unspent money in the account at the end of the year is automatically rolled over to the next year. If the money in the account is exhausted, the employee bears responsibility for any health care expenses up to a high-deductible threshold. Once the deductible has been met, the employee is covered by a standard indemnity or PPO plan, and shares the cost of health care through co-payments. Consumer-driven health care plans may either be purchased from an insurance company or self-funded.

The consumer-driven health care model requires that consumers have access to information about provider price and quality so that they can make wise health care decisions. Accordingly, most consumer-driven plans offer Internet-based support so that consumers can track and manage their bills, research the quality of potential providers, and manage their health on a preventative basis. Many offer full coverage for in-network preventative care and wellness visits, as well as incentives for healthy lifestyle choices.

The Rationale Behind Consumer-Driven Health Care.

Proponents of consumer-driven health care contend that it addresses a serious problem of the health care system in the United States--namely, that it removes the consumer from the buying process, creating an unbalanced, potentially unsustainable economic model. In most economic transactions, the consumer decides whether the cost of a particular product or service is worth the benefits, and pays 100 percent of the cost out of pocket. However, with medical transactions, (a) the costs are not transparent; (b) the consumer is often unaware of the total cost of a medical service at the time it is provided; and (c) the consumer pays only a small fraction of the cost, in the form of a co-payment or co-insurance. (1)

Under today's system, there are very few incentives for consumers to shop around for quality health care at a competitive price. Their choice of medical service providers is limited to those participating in the plan offered by their employer, and the costs of medical services are fixed by the plan design. Because they do not pay the full cost of medical services themselves (in most cases, they do not know what the full cost is), employees and their dependents tend to consume more medical services than they would...