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Tag: High deductibles

Consumer-Driven Medicine’s Fatal Flaw

The possibility that the Supreme Court will strike down all or part of the Affordable Care Act has given new life to Republican calls to put market mechanisms to work in holding down health care costs. The public is certain to hear lots more about it on the campaign trail later this year.

There’s one big problem, though. Markets cannot work when consumers and patients have almost no information about the prices they pay for health care.

Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, has resuscitated his proposal to turn Medicare over to insurance carriers. Future retirees would be offered financial help to pay for policies sold through public exchanges similar to the ones set up under the health care reform law, a.k.a. Obamacare. The subsidy would be limited to the value of the second-lowest cost plan offered on the market. The idea is that over-65 consumers, who would still have the option of remaining in traditional fee-for-service Medicare, would drive down costs by forcing the plans to compete for their business by offering lower-cost alternatives.

Other Republicans and conservative think tanks are touting laws that would allow insurance carriers to sell individuals policies across state lines, which would be coupled with incentives to shift people away from employer-based coverage. Under such plans, individuals could buy catastrophic coverage for expensive hospital stays while using the savings to pay the entire cost of routine health services, just like they pay out-of-pocket now for lawyers, flat-screen TVs or the week’s groceries.

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Why Consumer-Driven Health Care Will Fail

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.Continue reading…

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