Why Consumer-Driven Health Care Will Fail

Why Consumer-Driven Health Care Will Fail

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The creation of consumer-driven health plans (CDHPs), health insurance policies with high deductibles linked to a savings option and with more financial responsibility shouldered by patients and employees and less by employers, was completely inevitable. The American public likes to have everything, whether consumer electronics or other services, as cheap as possible. With escalating health care expenses rising far more rapidly than wages or inflation, it’s not surprising employers needed a way to manage this increasingly costly business expense.

In the past, companies faced a similar dilemma.  It wasn’t about medical costs, but managing increasingly expensive retirement and pension plan obligations. Years ago, companies moved from these defined benefit plans to defined contribution plans like 401(k)s. After all, much like health care, the reasoning by many was that employees were best able to manage retirement planning because they would have far more financial incentive, responsibility, and self-motivation to make the right choices to ensure a successful outcome.

How did that assumption turn out anyway?

Disastrous according to a recent Wall Street Journal article titled Retiring Boomers Find 401(k) Plans Fall Short.

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.

In others words a lot of people don’t have enough money to retire.   The options they have are simply “postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments and making other sacrifices they never imagined….In general, people facing problems today got too little advice, or bad advice.”

Though employers were able to manage retirement expenses, employees paid a significant price.  This wasn’t intuitively obvious in the 1980’s when these plans became more commonplace.  Over the past decade, the less than rational behavior by employees hasn’t gone unnoticed by those who study behavioral economics or those in the government.  As a result, more organizations and companies are nudging employees into the right behaviors with auto-enrollment into 401(k) plans and auto-allocation of these funds with protection from any future liability as noted in the Pension Protection Act of 2006.

The analogies to health care and specifically consumer-driven health plans should be clear.  Workers don’t save adequately for retirement even when in their best interest.  It’s very likely that workers won’t save money adequately to fund future health expenses.  After all, if people can’t fund retirement, something we undoubtedly all look forward to, which one of us is willing to saving for chemotherapy or open heart surgery, which no one wants?  According to the annual Kaiser Family Foundation Employer Benefits Survey, the average annual deductible for single coverage and family coverage is nearly $2000 and $4000 respectively for health insurance plans that are health savings accounts (HSA) eligible.   The deductibles are slightly lower in health insurance policies that are linked to health reimbursement arrangement (HRA).  About 13 percent of employees are covered under either plan.

Unlike those in retirement planning who can work longer, even if not desirable, employees who are ill may not have an option to work to pay for their medical expenses.  There continues to be evidence that people are curbing their health care due to the ability to pay.

Though experts debate on whether this is a good thing (patients are avoiding unnecessary and expensive therapies and opting for less pricey but equally as effective options) or a bad thing (patients are avoiding the preventive screening tests or therapies that overall can decrease future costs), the opportunities to ensure patients make the right choices should be clear from workers’ less than optimal experience with 401(k)s.

If employers wish to help curb medical costs, then they will need to engage workers with programs like employee wellness, assisted decision making (either as second opinions or patient-friendly informed consent), and access to medical experts, equivalent to personal financial advisors, who may be able to help workers make the right choices for their health.  Within the business community, there is some acknowledgment that access to these tools will be necessary to not only manage costs but keep employees healthy and productive.

Done correctly, consumer-driven health care can be what everyone hoped they would be, nudging healthy behaviors and slowing health care costs with workers selecting only cost-effective therapies.  If implemented poorly and organizations simply shift health care costs and financial responsibilities to workers like retirement planning decades ago, the nation will need to accept more than ever that increasingly more people get the medical care based simply on their ability to pay and not on medical necessity.

As a practicing primary care doctor, I hope that day never comes.

Davis Liu, MD, is a practicing board-certified family physician and author of the book, “Stay Healthy, Live Longer, Spend Wisely – Making Intelligent Choices in America’s Healthcare System.” Follow him at his blog, Saving Money and Surviving the Healthcare Crisis or on Twitter, davisliumd.

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85 Comments on "Why Consumer-Driven Health Care Will Fail"


Guest

[…] This post was mentioned on Twitter by Chris Rauber and THCBstaff, Paulo Machado. Paulo Machado said: Benefits of health too far off vs short term $ saved… RT @THCBstaff: Why Consumer-Driven Health Care Will Fail by Liu http://bit.ly/eIjD33 […]

Guest

Well-reasoned article. You write the following: “If employers wish to help curb medical costs, then they will need to engage workers with programs like employee wellness, assisted decision making (either as second opinions or patient-friendly informed consent), and access to medical experts, equivalent to personal financial advisors, who may be able to help workers make the right choices for their health.” Good point. Isn’t this essentially what PCPs should be doing, at least in the ideal world where we are reimbursed adequately for engaging in these activities with patients?

Guest
Feb 23, 2011

Completely agree! What I am seeing is that increasingly more patients with higher copays and deductibles erroneously think that seeing a primary care doctor and getting a good history and physical is a waste of time. Instead they simply want MRIs or blood work to get to the root of the problem. This is another topic for another day. http://davisliumd.blogspot.com/2009/09/did-you-pass-out-felt-dizzy-what-you.html

Guest
Feb 23, 2011

Your assumptions are so on point, for example I dumped all of my 401K when my older child hit college and there it all went. Immediate needs will often trump planning for the future when consumers are left to prioritize their healthcare, as with retirement. We are a “now” oriented culture.

Guest
Feb 23, 2011

“…increasingly more people get the medical care based simply on their ability to pay and not on medical necessity…… I hope that day never comes”

That day came and went. Precisely because we continue conversing about “workers” and how employers are interested in keeping them “productive”, and thus will be engaging in all sorts of wellness and beneficial health management activities. You could make very similar arguments (and they were made) about the symbiotic relationship between plantation owners and their “work force” a couple of centuries ago.

I tend to agree with Dr. Rothschild that wellness and health management are the job of physicians, not employers. I would prefer that medical decision making is facilitated by someone who actually went to medical school and is not evaluating the person in front of them (and his/her children) as a business asset or liability (same goes for legal and financial decisions).
Surrendering your health, and your family’s health, to an all powerful employer is a throwback to darker times and it needs to go away.

Guest
Feb 23, 2011

I certainly didn’t make the case of a symbiotic relationship between employers or employees because I don’t believe even remotely in the analogy you suggest. The reality is that people spend far more time at work than in the doctors offices. Employers increasingly are discovering that the American health care system is unable to keep the country healthy. They don’t want the responsibility, but as a result they are trying to find solutions. One of them, unfortunately, is consumer driven health care. Others may be better including having primary care doctors at the worksite. Whether these are better only time will tell.

Guest
Feb 23, 2011

Not sure I get your reasoning here. Because employees are making choices that you think don’t make sense, the employer needs to be more paternalistic?

The era of a company taking care of people worked when companies were built to last and the expectation was that you would work your way up the ladder at one institution for your career.

In today’s economy, big players go bankrupt overnight. Do you want to have Enron holding your pension? Or GM without the bailout? Didn’t think so.

You diagnose the right problem…people don’t save appropriately for health issues nor retirement. The root cause however, isn’t that they need more gudiance…it stems from a broader decline in the work force where they aren’t making enough to fund expensive versions of retirement at 65 (for 30 years) or medical care into their 80’s.

What matters more is enabling a marketplace where cheaper alternatives can attract more customers. Today’s incentive and licensing models lock them out…and then we wonder why we can’t afford anything.

Guest
kim
Feb 23, 2011

The ironic thing is that we’ve also discovered that defined benefit pension plans don’t always do so hot either — e.g., social security, many public sector pension plans, several large manufacturing companies…need I go on?

The huge local, state, and federal budget deficits illustrate that leaving financial decisions to others is literally a bankrupt strategy…one way or another, consumers will need to figure out how to manage their health care to affordable levels, the way they have to in every other part of their life.

Guest
Feb 23, 2011

Not recommending organizations go back to defined benefit plans, but rather that whether defined contribution plans or consumer driven health plans that benefit design be considered thoughtfully so that the assumptions of what behavior should occur actually do occur. Certainly the book – Nudge – has some interesting insight about this – http://www.amazon.com/Nudge-Improving-Decisions-Health-Happiness/dp/0300122233

Guest
Peter
Feb 23, 2011

“The ironic thing is that we’ve also discovered that defined benefit pension plans don’t always do so hot either — e.g., social security, many public sector pension plans, several large manufacturing companies…need I go ”

The reason they may not do so great is inadequate contributions. SS is easily fixed with more FICA contributions and public sector contributions from employers and employees also need the same. What we see in state plans is legislators skipping or reducing their part of the contribution contract to balance budgets they messed up to begin with. But you know, the business community doesn’t want good worker savers and planners because that would reduce what they could spend on their products. They’d rather see workers spend all their wages on stuff now and not save for the future. It’s like the company owned store in remote mining communities, The workers wages and what the company store charged never allowed for savings – just an indebted and obligated workforce. All this might be OK unless you ponder what an explosion of baby-boomer poor old people would do to the economy. We can also add this lack of pension/healthcare savings to already devalued middle class home equity and debt obligations courtesy of the well bonus-ed thieves on Wall Street. Consumer driven health care is just another carrot too far.

Guest
Feb 23, 2011

Dr. Liu is exactly right. When I read the title, my immediate reaction was, “Of course they’ll fail … if you don’t do them the right way.” And of course, many employers will not — and that will not only hurt their employees, it will hurt their own bottom line. Employers and insurers need to get much more involved. But the image given by Dr. Goel of a “paternalistic” employer, and given by Ms. Gur-Arie of “surrendering your health to an all-powerful employer” reminiscent of plantation days ignores the better new models arising in the employer healthcare market, such as fully privacy-protected onsite clinics like Cisco’s, that both improve the patients’ health and lower costs for both patient and employer. Done right, there is no downside to it.

Guest
Feb 23, 2011

Completely agree! Must be done right and that takes time and insight. Certainly Cisco’s example is an excellent one.

Guest
Feb 23, 2011

There are really two issues here. One is CDHP, which is another term for shifting financial burden to patients under the guise of “empowerment” and “personal responsibility”, and the other issue is whether employers should actively engage in providing health care (not just paying for it).

I agree that shifting more burden to patients is inevitable, considering that health care unit costs are rising and nobody is willing to regulate those. The problem I see with CDHP is that the burden is not equitably spread across populations. The hardship for those that happen to be poor and sick is disproportionately higher than for those who happen to be healthier (at the moment) and wealthier.
Financing health care through taxation seems to me to be a better solution, and this does not necessarily imply single payer and/or single provider.

As to employers entering the health care provider market, if large employers wish to provide the benefit of on-site clinics, on-site gyms, on-site cafeteria, on-site Starbucks, on-site daycare, etc. I have no problem with that.
I do have a problem with employers assuming an “altruistic” role in driving health care costs down because I cannot see a genuine alignment of interests here between employers and people (I don’t like the term workers). Of course, as long as employers are forced to foot the bill for health care, they will actively try to minimize liability and engage in efforts to keep the people that work for them healthy, and some of those efforts will even look pretty good, Joe.

But is this what we really want? Are we ready to concede that we cannot manage our own health, our hospitals and doctors cannot do their job and our elected representative cannot manage any of this, but Cisco can? Is what Cisco wants and we want really the same? Have we really reached a level of dysfunction where we are willing to abdicate our responsibilities to unelected, uncontrollable, clearly self-interested entities just to keep the trains on time?

Guest
Nate Ogden
Feb 24, 2011

” One is CDHP, which is another term for shifting financial burden to patients under the guise of “empowerment” and “personal responsibility”,

I know you hate to be bothered with facts Margalit but how does an HSA that has a deductible 100% funded by the employer shift cost or financial burden to the employer. A large percentage of CDHPs I see put in place actually lower the members maximum financial liability. I would estimate 80-90% of CHDPs have lower maximum liability then the traditional plan they replace.

Reality is the exact opposite of your assumption.

“I do have a problem with employers assuming an “altruistic” role in driving health care costs down because I cannot see a genuine alignment of interests here between employers and people”

Unlike the hugely successful relationship between government and Medicaid members?

Employers have a vested interest in their employees and families being healthy, government at most needs your vote every 2 or 4 years.

Guest
Feb 24, 2011

Somewhat interesting argument by analogy but does it not really miss the point? Dr. Liu starts by correctly identifying the problem:

“With escalating health care expenses rising far more rapidly than wages or inflation, it’s not surprising employers needed a way to manage this increasingly costly business expense.”

If we wish to control or manage health care costs, why don’t we talk to physicians who are ultimately responsible for $600 billion in unnecessary treatment and medical cost?

We could try something totally unique. Pay primary care physicians promptly and fairly and ask in return that they provide appropriate care and not overtreat. I know this is a difficult concept to grasp. The thought that a professional would accept fair compensation for doing the job he or she was trained to do must seem hopelessly naive.

One can dream.

Guest
imdoc
Feb 24, 2011

So, one argument is that people will always act imprudently in regard to their own welfare. This being the case, we need a paternalistic authority to put away the funds for healthcare, retirement, etc. This is simply the Progressive liberal point of view once again.
Alternative view: individuals become responsible adults and master their own destinies.

Guest
Davis Liu, MD
Feb 24, 2011

No mention of paternalism at all. In terms of retirement planning and setting the default position as auto-enroll into 401k plan and auto-escalate (increasing contribution to 401k over time), employees if they do on their own, these options do not apply. It’s about designing systems to enable the right behavior. I agree people have to be responsible for their own behavior, but how do we minimize the barriers so they are more likely to do the right thing?
http://www.youtube.com/watch?v=sf9SaySaQZA&feature=youtube_gdata_player

Guest
Feb 24, 2011

Unfortunately, history has shown that people don’t always act in their own best interest. A significant number of the diseases we treat are related to bad choices and behaviors committed by patients over years of abuse to their bodies. Smoking, excess alcohol consumption, poor dietary choices and lack of exercise are but a few that have long term negative consequences on a patient’s health.

People, for most part, dont look after themselves in their day to day lives. I don’t think it’s reasonable to assume that they will suddenly learn to save to pay for their failing health that all those years of self inflicted abuse have caused.

Guest
Feb 24, 2011

Imdoc: “People act imprudently/paternalism vs. individuals become responsible adults and masters of their own destiny.” This is a false dichotomy. For the people who don’t take care of themselves, from their point of view in their particular situation, with the information and incentives they have, they are often making a rational economic choice. In the day-to-day of their lives, deductibles to see a doctor or consult a diabetes nutritionist compete with the rent and food on the table and gas in the truck. I’m not sure what “paternalism” would mean here except “doing something that benefits someone who works for you.” There is no force involved. Smart benefit design drives down the employers cost and the employees cost and makes the employee healthier. It’s not a choice between “paternalism” and “individual responsibility.” The choice is: If you are providing health benefits to someone, you want to do it smart or stupid? Do you, as an employer, want to cost yourself and your employees more money or less? Do you want them healthier or sicker? The evidence about how to do this right is out there.