How would an extra $5000 or $10,000 in additional expenses fit into your family budget? The consumer driven healthcare plans that were created as part of the Medicare overhaul legislation in 2003 by the Bush administration can result in high out-of-pocket expenses for medical care which is equivalent to a tax increase.
Consumer driven healthcare has two financial parts: High Deductible Health Plans (HDHP) and Health Savings Accounts (HSA).
High Deductible Health Plans (HDHP) tend to be less expensive than traditional health insurance coverage, but the out-of-pocket expenses are higher. People may obtain HDHP through their employers or buy them independently from insurance companies. HDHP have a minimum self-only deductible of $1050 and family deductible of $2100 and maximum out-of-pocket expenses of $5250 for self-only coverage and $10,500 for family coverage for 2006. These high deductible plans compare to the most common type of managed-care plan offered by employers that has an average annual deductible of $323 for a self-only policy and $679 for a family policy, according to the Kaiser Family Foundation, a health research group. Traditional health insurance plans, on average, also have much lower out-of-pocket expenses (copayments and coinsurance that you pay after the deductible has been met).
The second part of Consumer Driven Healthcare is Health Savings Accounts (HSA) that can be set up through banks, insurance companies or other financial institutions. People can invest each year up to the amount of their health plan’s deductible, and some employers contribute to their workers’ accounts.
Unless employers contribute to an employee’s HSA to cover these high deductibles, these accounts result in a huge cost shift from the employer to the employee for most people with a traditional health insurance plan that includes a lower deductible. In addition, these HDHP may have higher out of pocket expenses (copayments and coinsurance). According to the Kaiser Family Foundation, among employers who offer HDHP, relatively few (19.5%, or 3.9% of all offering employers) also make a contribution to a HSA.
Critics of these HDHP such as Karen Davis, president of the Commonwealth Fund (a private healthcare foundation) states that high deductible, consumer driven plans may undermine the two basic purposes of health insurance: to reduce financial barriers to needed care and protect against high out of-pocket burdens for patients.
We cannot blame the employers for providing these HDHP because they are trying to provide healthcare coverage for their employees while healthcare costs continue to soar. A 2005 Kaiser Family Foundation survey revealed health insurance premiums increased an average of 9.2% in 2005, down from the 11.2% average found in 2004. However, since 2000, premiums have gone up 73%, and the annual premiums for family coverage reached $10,880 in 2005, eclipsing the gross earnings for a full-time minimum-wage worker ($10,712).
Many companies cannot afford to offer health insurance and are dropping this benefit for their employees. The North Carolina Institute of Medicine found in its Safety Net Task Force report that the number of people in North Carolina with an employer-based healthcare plan dropped between 2000 and 2003 from 67.4% to 58.5%, a huge drop in a short period of time.
Accompanying High Deductible Health Plans (HDHP) are Health Savings Accounts (HSA) that includes an annual tax deduction for money deposited into these accounts which function like a 401-K Retirement Plan allowing the funds to grow tax free. These funds may be used to pay for medical costs and will level the playing field between those who buy their own insurance and those who get it tax-free from their employers according to the American Enterprise Institute, a Washington think tank.
These HSA would be most attractive to the healthy and wealthy, extracting the healthy and lower cost employees from group insurance plans and drive up costs for traditional health insurance plans that cover the less healthy people who need healthcare coverage the most. According to MIT economist, Jonathan Gruber, adding a tax deduction for buying high-deductible health insurance to the tax advantaged HSA would result in 1.1 million currently uninsured people obtaining coverage who are mainly the more affluent people that would enjoy the tax breaks these HSA provide. However, the changes would lead to 1.4 million people losing their employer coverage including the less affluent.
According to the Center on Budget and Policy Priorities, for a family making $180,000, a $1000 contribution into a HSA would reap a $433 tax subsidy. However, if that family makes only $15,000, the subsidy would total only $153. In addition, low income families are not likely to have spare money to deposit into these HSA or be able to afford expensive insurance policies, and consumer driven healthcare (HDHP) and (HSA) will, therefore, not solve the problem of the 46 million uninsured people in the Untied States.
The idea of these HSA is to encourage Americans to assume more of the responsibilities and risks of their financial security instead of relying so much on government- and employer-sponsored health plans. Because people are paying for medical care out of their pockets, these plans are supposed to encourage people to become better medical consumers, purchasing only care they need.
Another problem with consumer-directed care is that the evidence indicates that people do not make wise decisions when paying for medical care out-of-pocket. A study by the Rand Corporation found that when people pay medical expenses themselves rather than relying on insurance, they cut their consumption of health care, but they cut back on valuable and questionable medical procedures.
Perhaps the biggest objection to consumer driven healthcare is that it misdiagnoses the problem because in healthcare 80% of the healthcare costs are consumed by only 20% of the patients. The 2004 Economic Report of the President condemned the fact that insurance currently pays for many events that have questionable value such as routine dental care, annual medical exams, and vaccinations, and for low-expense procedures such as an office visit for a sore throat. However, excessive consumption of routine care or small-expense items cannot be a major source of health care costs because these do not account for a major share of medical costs. The problem with healthcare costs is not routine office visits for a sore throat and other small-expense items. The problem with high healthcare costs is for the high cost procedures such as coronary bypass operations, dialysis, diabetes, and chemotherapy. These high cost procedures are driving up healthcare costs, and nobody is proposing a consumer directed healthcare plan that would force individuals to buy a large share of extreme medical expenses, such as the costs of chemotherapy, out-of-pocket. This means that consumer-directed healthcare cannot promote savings on the treatments that account for most of what we spend on healthcare.
Perhaps President Bush and his healthcare policy advisors are taking target practice from Vice President Cheney because they are not even aiming at the target. Controlling healthcare costs means addressing these high cost procedures, controlling excessive utilization, and implementing disease management programs. Disease management programs target high cost patients with medical conditions such as heart disease, diabetes, and kidney failure. In addition, employers are adopting wellness programs to encourage healthy lifestyles including attacking the obesity problem.
Alternative programs include a national reinsurance plan by the US government that would cover 75% of any employee’s medical bills that are in excess of $50,000 in one year. Other proposals to deal with our healthcare problems include expanding Medicare for everyone, insuring everyone and requiring everyone to pay into the system.
Getting everyone to pay for healthcare would tackle the huge cost shifting problem in healthcare and should help to control health insurance premiums for those people that currently have health insurance. Cost shifting occurs when patients do not have health insurance coverage to pay for their medical care, and their healthcare costs are shifted to those patients with health insurance. You may have seen an example of cost shifting on a hospital bill that includes a charge of $7 for an aspirin or a band aid.
The Bush administration’s plans for consumer-directed healthcare are a diversion from meaningful reform and provide a tax haven for the most affluent Americans. These plans are like having an air conditioner that works when the temperature is 65 degrees, but are less effective as things heat up.
Jeff Fox is a healthcare consultant with 20 years of experience with major health insurance and healthcare consulting firms.
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