FAQ: Consumer-Directed Health Care
By David Hogberg (about)

1. What is consumer-driven health care?

There are many definitions of consumer driven health care, but most simply it means that patients will behave as medical consumers. The patients will be the ones deciding how their health care dollars will be spent-not doctors, employers, insurance companies, or government.

In her book Consumer-Driven Health Care, Regina Herzlinger provides a good description:

Consumer-driven health care is fundamentally about empowering health care consumers-all of us-with control, choice, and information. Consumer control will reward innovative insurers and providers for creating the higher-quality, lower-cost services we want and deserve. In this consumer-driven system, government will protect us with financial assistance and oversight, not micromanagement.

2. Isn’t consumer-driven health care all about health savings accounts (HSAs) and high-deductible insurance policies?

David E. Williams of the health business blog states that a “typical consumer-directed health plan includes a high-deductible PPO plan coupled with a Health Savings Account (HSA).” (For an explanation of those, go here.) Although HSAs and high-deductible policies are an important part, it highly inaccurate to think that those are the only things involved in consumer-driven health care.

Consumer-driven health care also means: Giving consumers more choice of health insurance policies; empowering patients by giving them more control over the dollars spent on more expensive health care treatment; rolling back government regulations that interfere with consumer’s health care choices and providers ability to innovate.

3. Aren’t HSAs Primarily for the “Healthy and Wealthy”?

This is a common critique of the left, that since HSAs require considerable out-of-pocket expenses, they won’t appeal to people who are ill and have high health care costs. They further argue that since the money put into an HSA is income-tax free, it will have little appeal to the poor, since they pay little income taxes. They often point to a study by the Government Accountability Office (GAO) showing that found that 51% of those opening an HSA in 2004 had incomes $75,000 or more.

But other data shows that HSAs have considerable appeal to the sick and those with low income. For example, BlueCross BlueShield survey that looked at HSA holders The survey found that the percentage of those with HSA policies reporting either fair or poor health was similar to those in more traditional plans, suggesting that HSAs are not merely for the healthy. It also shows that the lower cost of an HSA policy appeals to the uninsured: 10% of those who chose HSAs were previously uninsured vs. only 3% of those who chose more traditional plans.

Furthermore, the GAO study only examined the first year in which HSAs were widely available. New products are often adopted first by people with higher income, since those with higher income tend to be better educated. What the GAO study found was probably the effect of education on HSA adoption, not income. Over time, we will probably see more people of lower income adoptions HSAs. Indeed, the GAO report did find that about 15% of those who adopted HSAs earned less than $30,000, suggesting that HSAs have appeal to those with lower incomes.

4. Do patients have adequate information to be competent health-care consumers?

The idea that patients do not have sufficient information to be good health care consumers stems from a 1963 article by Nobel prize winning economist Kenneth Arrow. Arrow’s article is quite dense, but scholar Arnold S. Relman provides a very readable summary of Arrow’s principal finding:

√Čperhaps the most important of Arrow’s insights was the recognition of what he called the “uncertainty” inherent in medical services. By this he meant the great asymmetry of information between provider and buyer concerning the need for, and the probable consequences of, a medical service or a course of medical action. Since patients usually know little about the technical aspects of medicine and are often sick and frightened, they cannot independently choose their own medical services the way that consumers choose most services in the usual market. As a result, patients must trust physicians to choose what services they need, not just to provide the services. To protect the interests of patients in such circumstances, Arrow contended, society has had to rely on non-market mechanisms (such as professional educational requirements and state licensure) rather than on the discipline of the market and the choices of informed buyers.

While this situation may accurately have described the world of 1963, it seems dated when one considers all of the medical information now available via the internet. Internet sites like Web MD and FamilyDoctor.org offer tools to help patients educate themselves about medical conditions and treatment options. As economist James C. Robinson recently noted:

Patients with serious chronic disease√Čnow increasingly have more, not less, information concerning their specific clinical condition than do their treating physicians. Some arrive in the office with a stack of articles downloaded from the clinical journals that the doctor has no time to read, with performance statistics on the services provided by particular providers and facilities, and with support from cybernetworks of fellow sufferers who trade experiences, anecdotes, and Web site references.

Patients are better informed than ever before. Give them the resources, and they will make excellent health care consumers.

5. What would consumer-driven health care mean for health insurance?

In a consumer-driven system, we will eventually move away from an employer-based health insurance system. The employer-based system limits the choice of insurance policies. Under our current system, most people get their health insurance through their employers, and 9 out of 10 employers only offer their employees one insurance plan. Furthermore, employees find it very difficult to take their health insurance with them when they change jobs. Under a consumer-driven health care system, employees would purchase insurance on their own, and employees could reimburse them for it. This will enable employees to take their insurance from job to job.

A consumer-driven system will also mean that individuals can purchase health insurance out-of-state. Many states impose highly restrictive regulations on their health insurance markets, making health insurance very expensive. New Jersey is one of the worst, imposing so many regulations that it now has some of the highest health insurance costs in the nation. Yet suppose a consumer living in New Jersey does not want to buy insurance in his state, where the average annual premium for an individual is $4,080, but would rather buy it in Wyoming, where the average is $1,284. Currently, New Jersey, like most states, prohibits consumers from purchasing insurance out of state.

Under a consumer-driven system, consumers will be able to purchase health insurance out of state, like they can purchase any other insurance product out of state. This will enable them to buy less costly insurance and put pressure on states to deregulate their health insurance markets. Legislation that has been introduced in Congress by Representatives Dennis Hastert and John Shadegg would empower consumers to buy insurance out of state. For more on that, go here.

6. Isn’t CDHC only for routine health care expenses? How do we bring CDHC to catastrophic health care expenses?

Health savings accounts are primarily for routine health care expenses. Consumer-driven health care can apply to catastrophic costs by letting patients direct the funds used to pay for catastrophic care.

Obviously, patients will be in no position to direct the funds used for emergency care. But most catastrophic care is non-emergency, and patients could direct how the funds for their care is spent. For example, insurance companies could give patients a fixed amount to pay for elective surgery or cancer treatment. The patient could then shop around, looking at different places to get the treatment, and comparing on the basis of quality and price. If he chose a place that charged less than the set amount, he would get to keep the difference. If he chose one that charged more, he would pick up the difference.

Dr. James Pendelton proposes another approach (PDF) in which the insurance company would offer to pay for the “average” cost of a procedure in a given region. If the patient chose to get the treatment where the cost is below the average, he would receive the difference. If it cost more, he would pay the difference.

There are probably many ways to bring CDHC to catastrophic care that have not even been conceived of yet. What is needed is a free market in health care so that innovative entrepreneurs can come up with them.