Research Paper on Health
Effects of Enrollment in Consumer-Directed Health Plans
During the past several years, new complementary things for “consumer-directed” health plans have drawn significant interest and debate and have enrolled few million participants. Such plans include a high-deductible health insurance policy with a tax-sheltered account that enrollees are able use for financing their out-of-pocket costs for health care services.
The main idea outside such designs is that policy holders will stay insured against extraordinary expenses but will be more prudent with the services use than they would be having a conventional health insurance plan that gives more coverage of primary health care costs. And simultaneously, people are being anxious that such plans will have just a little influence on general health care spending and could negatively impact those people who have high health care costs. In this paper I will present my research results and findings regarding the examination the potential effects of consumer-directed plan designs, analyzing the influence they may have on the utilization of health care, health care services price and quality issues, and the enrollees’ health. In this paper I will also discuss the implementation of the consumer directed health plans in the prism of the international community, and not only of the place, where it emerged- the United States. For the simple reason that the plan design is comparatively new, there is no very much information regarding its implementation results.
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1. Introduction
One of the outstanding features of the U.S. health care system that is tightly connected with the development of consumer-directed health plan designs is the tax advantage presented for insurance, which can be bought through employer. For a simple employee, the tax treatment difference amounts to a subsidy for insured costs of about 30 percent (which is the reflection of both the employer’s and employee’s payroll taxes and income taxes). On the other side, health care out-of-pocket payments have not received favorable tax treatment. The outcome has been to encourage companies to provide broader health insurance policies for their employees and rise part of costs that are supposed to be covered and reduce the share that workers should pay for services—tendencies that unexpectedly have increased total spending on health care.
Consumer-directed health plans are available in two basic forms: health savings accounts (HSAs) and health reimbursement arrangements (HRAs). For the reason that consumer-directed plans appeared comparatively recently, data regarding enrollment in them and their specific features of the policies that enrollees have picked up is a little bit limited. The information that consumer-directed designs appeared relatively recently also means that there is not much evidence available about their real effects, and it is not clear whether they gain popularity in the long run or not. Nevertheless, their potential influence on health care use and spending has aroused interest of many people and companies. In this paper I will present research results of evidences as well as studies of similar insurance plans in the attempt to answer three general questions. The first one is about how consumer-directed designs impact enrollees’ motivation to use health care, and what influence would that motivation have on health care spending if enrollment in consumer-directed plans was representative of the nonelderly population in general (that is, if the same mixture of sicker and healthier individuals enrolled in those plans). The second is about what influence may consumer-directed plans have on the health care services prices, the information availability and use regarding the quality and benefits of the provided care, and the their enrollees’ health. And finally the third one is about to what extent is primary enrollment in consumer-directed plans will be centered on the lower-cost, healthier individuals in general and what the short- and long-term involvement would be for insurance markets and health care spending in general.
2. Influence of Consumer-Directed Plans upon the Reasons to Use Health Care
2.1 Motivation for Spending Limit
HSAs and HRAs provide motivation for enrollees to confine their health care spending2. The high rollovers and deductibles of account balances, which are unused, and that those plans feature are created to encourage enrollees to be more accurate about their health care use. If enrollees use less services (or services that are less expensive) before they get their deductible, they are able to sustain most of the resulting savings. If we compare the deductibles in consumer directed plans with those in conventional health care plans, which are private health plans types which are used by most people in the world at present moment—they are obviously much lower. At the same time, the tax-free accounts provisions and provisions for contributions by workers to those accounts make it simpler for enrollees to cover out-of-pocket costs. Of course, the accounts contribution could be set in the way so that consumer-directed plans contained the same value on average as conventional health plans—that is, there could hypothetically be same costs under both designs to cover a presenting set of medical demands. Those provisions may be able also to induce enrollees to be less accurate with their spending, at least when compared with high deductible health plan, because they would tend to decrease the costs of services that are proposed to enrollees. The pure effect that consumer-directed designs will have on the implementation of health care is therefore dependant upon the competing pressures—the motivation to restrict spending that comes from the high-deductible design versus the stimulus to spend tax-free funds and workers’ to the accounts contributions.
In order to obtain the full picture of those influences, it is necessary to compare consumer-directed and conventional health plans with equal overall value. In another situation, the difference in spending will just show the difference in the values of the plans. Comparison of plans with equal value also provides us a trade-off: if both types of plan contain annual limits on out-of-pocket costs, enrollees in consumer directed plans would get to those limits faster because they are supposed to pay a bigger part of their initial costs, whereas enrollees in conventional plans in general would go on to be concerned with some cost sharing at higher levels of total spending. That difference could influence the comparison of spending for the reason that most health care costs are stipulated by a little percentage of people who are consumers of the most expensive services.
Representative enrollment in consumer-directed health plans may have less influence in total on enrollees’ health care expenditures. Enrollees in consumer-directed plans (particularly those in HSAs) are able to take untaxed funds from their account. The tax subsidy that those funds obtain decreases the efficient prices that enrollees have for their health care services and therefore diminishes their motivation to spend their account funds accurately—because they have to balance the advantages of their care against only a part of costs. For a common employee, the efficient subsidy can be as much as 25 percent (reflects income taxes and the portion of payroll taxes of the enrollee and not the worker’s portion). For the longer period, the emergence of the additional pressure could be followed: provision of advantageous tax treatment to out-of-pocket spending would motivate enrollees in consumer-directed plans to move toward policies with lower premiums and greater deductibles. And finally it is uncertain if the reduction in total spending as a result of the shift would at the end be big enough to compensate the primary impact of the tax subsidy for out-of-pocket costs.
2.2 Contributions of the Workers.
The second reason concerns the way the contributions of the employers are treated. Enrollees will have a firm financial motivation to treat those funds like cash and thus restrict spending. In the case with HRAs, the restrictions on the use and balance portability in the accounts can make enrollees to treat those funds not like cash and more like the resource that is available — in particular if they did not want their account to be totally depleted. As a result of this, the affect of a high deductible policy on financial motivation of enrollees would be muted.
2.3 Plan Management
The American Academy of Actuaries considers that a consumer directed plan would decrease enrollees’ health care spending from 2 to 5 percents in relation to spending under a conventional PPO plan of equal value or similar plans. Those results presume that representative enrollment in consumer directed plans may finally decrease health care spending under the plans by about 5 percent in relation to spending under conventionally designed PPO plans—but it may not decrease the level of spending relative to HMOs, and even can increase it.
The advance evidence that is available about how real consumer-directed plans influence health care prices is very restricted in solving those domains of uncertainty—and provided the limitations of that evidence, it should be treated accurately. Some researches claimed substantial cost savings from consumer-directed plans, but those results can present diminished costs for the insurer and not the affect on total enrollees health care spending. Even in case when the emphasis is on general expenditures, the savings that are claimed can still be the reflection the affect of diminishing the total value of the coverage and not just the influence of the design change. Particularly, expenditures comparisons under real consumer-directed and conventional plans need to estimate for potential differences between their enrollees that can significantly influence the outcomes, which I will discuss later. Much information regarding the influence of consumer-directed plans on the use of health care services must become available over time for broad public, as they are being used more and more often.
3. Designs of Consumer-Directed Health Plans
Even though the broad range of health plan designs may be considered “consumer-directed,” this notion refers to the plan with two key characteristics: an account that can be involved to pay out-of-pocket health care costs with funds that have not been taxed and a high-deductible health insurance policy. The two major types of consumer directed designs are health reimbursement arrangements (HRAs) and health savings accounts (HSAs). In each design type, the high-deductible health plan and its associated account are formally different.
Those two plan types have many common features but they differ along several important things, that include: availability to purchasing coverage in the individual insurance market or they are simply restricted to the employer-based group coverage market; the second difference concerns whether individuals are able to contribute directly to their account; the third difference is about whether unused funds in the accounts are portable from job to job; and finally whether funds can be withdrawn and spent exclusively to cover health care costs.
Additionally to HRAs and HSAs, there are two similar options that have received favorable treatment under the tax code: flexible spending accounts (FSAs), which are offered by some employers; and medical savings account (MSA) health plans— which were used before consumer directed health plans were introduced and hat served the limited circle of customers.
4. Effects of Consumer-Directed Plans on Health Care Prices, Quality, and Outcomes
Additionally to the influencing of the number of health care services that can be used, consumer-directed plans can have an affect on the prices of the provided services, on the quality of the care that is delivered to the consumers and even upon their health in the long run.
Those people who support the idea argue that the heightened emphasis on the costs and benefits of care under consumer-directed designs will finally transform the health care system, and bring to it not only decreased prices—either by means of direct negotiations between providers and enrollees or competitive pressures on services providers—but also will guarantee drastic quality improvements.
The main question by the way remains how efficient the common efforts of individual enrollees can be in achieving those goals in relation to the health insurers’ actions. At the same time, opponents argue that consumer-directed plans will make enrollees refuse from getting needed care and in such a manner will bring the opposite impact on their health— but this particular point of view seems meaningless.
4.1 Price Competition and Assessment of Quality
Some supporters of consumer-directed plans claim that enrollees should negotiate and make contracts with doctors directly and hospitals as well upon the prices of the services they get. But still even when the given price is taken, enrollees in consumer directed plans would have the temptation to look for the best value that will definitely promote even harsher price competition among providers of health care services. Advocates of consumer directed plans conclude that such occasions may not be possible for particular services, for instance for emergency care, but believe they can be very useful in less urgent or more discretionary cases. People who participated in the RAND experiment and faced significant sharing cost are also reasons to look for lower-priced providers. But the thing is that the study included just the sample of several thousands of enrollees and therefore it was impossible to follow any systematic pressure and subsequently compare and diminish prices. If such pressures are observed, the influence of consumer-directed plans on health care spending might can be larger than the estimates of the RAND study that were revealed.
The ability of consumer-directed designs to generate savings by diminishing prices depends partially on how efficient the present attempts of conventional insurers are. Reimbursement of costs by third parties, I mean insurers, weakens the motivation for enrollees to negotiate over prices or look for lower-cost providers. However, those payers of third party have consequently firm reasons to do two things—to control their own prices and sustain competitive advantage in the insurance market—and may also be better presented and positioned than individuals to bargain the necessary price with hospitals and doctors. As a result of this, enrollees will definitely prefer to delegate those tasks to their health insurance plan. Compatible with that assessment, it appears that approximately all consumer-directed health plans, which are being offered at the present time, have preferred provider networks and plan-negotiated payment rates, so they may not differ drastically from conventional PPO plans upon this issue.
When the customer chooses what care to get and where he can get it, individual clients are looking for more than just the costs involved, and both opponents and proponents of consumer-directed health plans commonly agree that enrollees just have to receive more and better information regarding the benefits of various treatments and the different providers service quality. The restricted amount of information that is available nowadays regarding the quality and the prices of health care services present a significant hindrance to encouraging more cost-effective use of services, not taking into consideration the nature of an insurance plan’s design. Wider changes in the health care system that may promote the availability of information about providers’ quality could make it easier for enrollees in consumer-directed plans to estimate their treatment options, even though for some enrollees this task will be still very challenging. At the same time, such changes can also be helpful for conventional health plans to evaluate and choose which treatments to propose, which providers to include in their networks, and how to establish the effective system of reward for best quality services. Therefore it is not easy to predict how more and better information about the quality of health care services may influence the comparison of total spending under consumer-directed and conventional insurance plans.
As I have already mentioned, some supporters of consumer-directed health plans claim that enrollees should negotiate with providers to establish prices for the care they get. For lower-cost or routine services, enrollees in consumer-directed plans would have a firm financial motivation to get the best prices they can. But for some other kinds of care—for example, for emergency services or expensive hospitalizations — the plans will need to set prices. With the case with expensive procedures, enrollees would have not much motivation to negotiate once they had exceeded their deductible or if they are planning to exceed it after some time in the future, and with the case of urgent care, negotiation at the level of enrollee will be infeasible in general cases.
There are several factors that make it almost impossible that individual-level negotiations result in prices for health care services lowering than those that are currently being paid. Conventional health plan administrators also have strong motivations to bargain lower prices with providers, seeking to enlarge their plan’s profits in the short run or to hold down premiums and compete for other enrollees in the long run. Although third party reimbursement by health insurers make enrollees to stay away in conventional plans from considering the prices paid for their care, such third parties have a firm interest to keep those prices the lower they can. Insurers definitely have the stronger bargaining position than individuals can have. Insurers particularly can use more efficiently threat of exclusion from the health plan’s network—with correspondent loss of patients and profits—to ensure lower payment rates from providers. The success from this threat depends on its credibility, which is partially a function of the insurer’s share of the local market and the providers’ degree of competition.
Another important hint is the time it may take providers and individuals to make price bargains. Some additional costs to providers from negotiating over rates with each patient separately would probably be passed on in the form of higher prices. The costs to individual enrollees will not be counted as an explicit health care expenditure, but there would still be an opportunity cost for the involved time. On the contrary, a health plan can conduct make the one bargain for all of its enrollees.
For those reasons, most enrollees will definitely prefer to contract out the task of negotiating a provider fee schedule to their health plan. Correspondent with the study of preferences of enrollees, the industry research found that more than 90 percent of enrollees with health savings accounts in plans used a preferred provider organization; in common, enrollees were paying the same prices that was negotiated for care as enrollees in the insurers’ other PPO offerings. To compare with prices of health maintenance organizations, there is the evidence that the rates that HMOs pay to their providers are less than the rates that PPO plans pay. Therefore the HMOs prices can be to some extent lower than those of consumer-directed plans. For PPOs and HMOs, discounts in price that health insurers can get from providers will completely depend on the competition degree among providers in the particular region—but that is a factor that will also have influence upon individual-level negotiations.
Even without explicit bargaining, more reasonable motivation for enrollees to consider the prices of the services they are getting can put downward pressure on the prices—if sustantia part of consumers were willing to turn to lower-priced providers and if providers adequately responded by diminishing their prices to compete more aggressively for patients at the market. But it is still not clear enough whether such market pressure can make consumer-directed plans more efficient on practice than other kinds of designs in keeping prices low. Conventional health plans also have financial reasons to bargain low prices with network providers and to restrict the participation of providers who propose too high prices. Providers therefore have the motivation to compete on the basis of their prices to be included in the health plans’ networks.
In the near term at least, the restricted availability of data on prices of providers restricts the attempts of enrollees to look for the best value in their care. One the recent newspaper wrote in the following way regarding the issue “no source has detailed information comparing prices from provider to provider” that enrollees are able to implement. Plans with a consumer-directed design can give information about the general costs for treatment in the particular conditions. But currently people have no definite way to receive meaningful information, before they receive the provided health care, regarding the services that they have the necessity of and the net price of proposed services—information that they usually receive for other kinds of services, such as laundry or car repair. The confidentiality issues that are included in contracts between health insurance plans and providers may be one of the important factors that make such price transparency impossible on practice. After some time, probably in the future, if more information will be available regarding the prices charged by definite providers, enrollees in consumer-directed health plans would have more firm motivation than enrollees in conventional plans to think and decide whether the added cost of a particular provider is worth paying. For the reason that conventional plans are structured at the present moment, enrollees face that trade-off only when they choose between a non network provider and a network one. To correspond to the motivation that consumer-directed designs introduce when enrollees choose among network doctors, conventionally designed plans would have to apply a different approach and not the one they use currently—probably reimburse an amount for each procedure and make enrollees to pay any difference between that amount and their chosen provider’s charges, which is frequently called the reference pricing.
The structure of payment will be more complicated than the one that imposed a common co-payment or co-insurance rate for every service, but it will not be without precedent. Before the advent of managed care, health plans generally restricted their service payment to a percentage of a regional average of charges, and enrollees had to pay any excess sum that their doctor billed.
4.2 Health Care Quality
Both proponents and opponents of consumer-directed health plans agree that if all stated earlier is to work appropriately, enrollees will demand information not only regarding the prices but also regarding the quality of the care that different providers offer. The amount of the proposed information will definitely vary from the service and the provider, but in general terns it should include direct, objective measures, including survival rates of patients’ improvement, indirect measures that reflect the use of best medical practices, including the information that evaluates the extent to which certain “evidence-based” treatment guidelines are followed, or more-subjective measures, such as satisfaction of the enrollees and his future expectations. If consumers observe different prices among providers, they will demand the information about the quality of the care that providers offer to able to estimate and determine whether higher-cost providers are delivering better results for their patients and then whether the value of the added quality is worth the adding cost. But here is also a problem, as the notion of health care quality is very wide and it is difficult to provide the distinct description of it.
The development of more available information regarding the quality of health care services can have several positive outcomes. At first it will obviously discourage enrollees to use health providers that deliver services of low quality. Second, it will also make them stay away from getting care that does little to improve their health. What is very important, more structured comparative information on providers and treatments that they offer may also encourage doctors actually to improve the care they offer and make them to revision and update the treatments they apply and recommend. But it is still not clear whether spending for health care would rise or fall in the long run.
From on side, stronger emphasis on the quality of health care services can avoid some costly complications that are the result of the health care that was poorly provided. And on the other side, it can be the result of greater use of more-expensive providers that offer services of high quality. There is also an important problem that providers discuss, is that their patients do not do what they are recommended and do not take prescribed medicines and treatments. Therefore it is difficult to predict whether better information can lead to rise or fall in the care amount.
At present moment, many consumer-directed health plans give an opportunity to use online tools to assist enrollees search for network providers, and others also offer tools to assist enrollees choose among treatment options. However, the information on quality that presently can be found on plans’ web sites is comparatively sparse; and there is a small part of it for the reason that useful and widely accepted measures of providers’ services quality are not available to common public. I can say even more, that health insurance companies that give information regarding services’ quality and decision-support tools in their consumer-directed health plans to enrollees tend to provide similar information and tools to enrollees in health plans of conventional design. For example, insurance company Aetna, which provides plans that have health savings accounts and health reimbursement arrangements, offers information on t hospital services quality on its web site— and then offers just the same information to enrollees in all of the health plans that the company offers, as well as conventional plans.
In general terms, all types of plans tend to move in the direction of offering more information to their enrollees regarding the quality and benefits of the services of the provider to make enrollees to look for better care for their money. If such information is able to improve results for enrollees, as well as decreased health care costs and expenditures of the plan, or increased satisfaction of enrollees, conventional health plans will also obtain the motivation to monitor their providers and present the information that that has gathered to enrollees. And enrollees in those plans would have a strong motivation to implement such information: because they will pay only a small share of the costs for their care in general, their provider choice can be guided more by differences in the quality of the proposed services than by differences in the its costs.
Health plans are facing significant challenges in the development of the appropriate measures of the quality of providers’ care that enrollees can use efficiently. Plans should gather the information that is necessary, adjust it for obvious results differences that depend on other factors, and report the results in an accessible, useful way to final consumers. For instance, hospitals and doctors that provide services of higher-quality can also treat patient that are seriously sick and therefore it can appear that they have worse results—so the received unprocessed data demand the form of risk adjustment to present a more realistic picture.
There are definite situations when it can be challenging to simply achieve a consensus in the medical community about how to assess and evaluate quality. And in case when careful measures of quality can be discussed and developed, the extent to which enrollees would be able to understand and implement information on practice would vary; some enrollees can find it easy, and others find that the medical care complexity made it very difficult. Enrollees in conventional plans would face the same problems in providers’ comparison, but it may happen that consumer-directed health plans will be more preferable to individuals who feel more comfortable in estimating such information and making such decisions by themselves.
The thing that remains clear is whether the added financial motivation, that enrollees in consumer-directed plans have to use more information about quality of care will be enough to overcome the other challenges that appear in the attempts to provide that information. Technological advancements in health information and electronic medical records development can improve progress on those fronts. For instance, electronic medical records will make it easier to gather data regarding the care results, even there can be the ethical conflict between protecting patients’ privacy and gathering more information. But those developments would also gather information that can useful to conventional health plans for determination which providers to include in their networks and which treatments to cover for particular conditions. Therefore, the influence that improved information regarding the care quality can have on efficiency of consumer-directed and conventional health plans and on the relative costs is indefinite.
5. Consumer Directed Health Plans and International Community
HSAs are a comparatively new idea in the United States, so it is very surprising to find out that another nation already had experience in this sphere. HSAs have penetrated deeply into the market of South Africa for long enough period of time so that it was possible to examine some of the results. The major part of the population has publicly funded insurance, because it is able to pay for it. Around 15% of the population has private insurance, the main part of which is HSA-style plans. Discovery Health is the major HSA provider, had a huge success offering HSA plans and had the price of its stock almost doubled in a year. President Bush made the proposal to make HSA's easier to purchase, and therefore it is essential to look at the experience of other country with them. The example of South Africa is very vivid. The introduction HSAs lead to some results that were complete unexpected and that changed the structure of the insurance system of the country. David Adler from the New Republic that investigated the effect of HSAs in South Africa wrote the following: “The South African story, then, is a move from a noncompetitive insurance environment to a competitive one, but the competition wasn't by hospitals to provide the best or cheapest care, but rather among insurers to get the healthiest patients. Consumer-driven plans are central to this process, because they are ideal for "risk-selecting" the young and fit, who have flocked to the new plans. Not in need of expensive medical care, the healthy could watch their account balances grow, leaving the truly sick behind in traditional plans”.
Luckily, South Africa will make necessary steps to keep insurance companies from this practice. The Wall Street Journal wrote on this issue: “Starting in about a year, companies whose insured populations are disproportionately filled with the young and healthy will have to pay a penalty”. South Africa lost strategic control over the process. And the situation is getting worse, as health plans do not contain prices. The nation is experiencing rising costs, especially plan administrative costs.
6. Conclusion
In the conclusion I would like to summarize that even though the consumer directed health plans are relatively new, research results that they will decrease price and increase quality of the provided services, but the substantial period of time should pass to observe the results.
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