As I wrote earlier, most people think that the only thing they pay for is their share of the premium and their out-of-pocket costs (deductibles, copays, and the like). This is incorrect. Employees pay the full premium through reduced wages.
Lamentable as factual misunderstandings may be, this is actually a helpful one as far as consumer directed health plans (CDHPs) are concerned. To illustrate, let’s use Avik Roy’s example.
[Imagine] a plan […] designed so that of every $100 that the insurer spends on the beneficiary’s health care, the beneficiary has to spend $18, through a combination of deductibles [and other cost sharing].
What CDHPs do is transfer control of much of that $100 to the beneficiary. Instead of the individual paying $18 and the insurer paying $82, in a CDHP, the individual (by way of lower premiums) or his employer (by way of a direct contribution) puts a portion of that $82—say $30—in a tax-free health savings account. The degree of actual cost-sharing, at $18, can remain the same. So in a CDHP that is actuarially identical to our traditional plan, there might be $18 of cost-sharing, $30 in a health-savings account, and $52 paid out directly by the insurer.
The key here is that the individual now has control over the $18 in cost sharing plus the $30 in the health savings account (HSA). The hope is that the individual will use that $48 as a prudent shopper. Since that $48 under his control is much higher than the $18 in cost sharing, the individual is commensurately more inclined to use it wisely. That makes total sense.
But wait! If the individual knows his health economics, he knows that the $30 was his to begin with. It had been taken out of his paycheck by his employer (not literally that week, but on average, over time, the employee’s pay is lower by $30 than it would otherwise be). Another option for the employer is to simply put the $30 back into the employee’s paycheck, rather than contribute it to an HSA. That would give the employee even more freedom to spend his money as he wished, though at the expense of losing an employer-based health insurance tax deduction (a loss we should encourage since that deduction is the source of many problems).
Why is it preferable that the employee receive the money in an HSA, a paradox also raised by Joe Newhouse in a 2004 Health Affairs article? His answer was that employees appear to be less resistant to high-deductible plans when it seems their employer is willing to pay for some of the deductible via an HSA contribution. This only makes sense if the employee is duped, if he doesn’t understand whose money it is in the first place. The only other possible benefit to an employer HSA contribution is that it may mitigate cash flow issues. It’s forced savings.
Yet, if the employer pays either way, why would the individual’s prudence change when the employer switched to an HSA/CDHP-type plan? The difference is whether the $30 comes back to the individual in an HSA or whether the employer just spends it “behind the individual’s back,” so to speak.
The fact of the matter is, when an individual has control over some money it feels more like his own. An HSA is closer to one’s own funds in the sense that one can invest the money, roll it over, use it later for oneself, things one does with other savings vehicles, just dedicated to health spending. And this is precisely what an HSA/CDHP advocate should want. (Though maybe they should prefer the greater freedom of providing the employer contribution in the form of wage, as described above.)
The goal is to take what is a fictitious distinction–between individual and employer health spending–and make it more real. Only if that distinction is perceived as real will individuals be more prudent with their HSA dollars than they would otherwise. If an employer deposits $30 into an individual’s HSA, that individual will only change his behavior if he now views that $30 as more his own than he did when the employer took it from his paycheck and used it to pay for health care directly. However, in reality, that $30 always came out of the employees paycheck.
If individuals really feel like they are spending their own money–and that is the only way they will act like prudent purchasers, so it is what we want them to feel–it strikes me as unlikely they will accept higher-and-higher personal responsibility, even if it seems like their employer is contributing some of the dollars (which were really the employees’ to begin with).
Put it this way, my employer contributes to my 401(k) with dollars that could (would) otherwise be paid out as wages. I sure as hell would not be happy to have to spend more of my 401(k) funds to buy the same thing today as I did in the past. It’s my money, and I want to save it for future consumption of new goodies, not current consumption of the same old goodies.
Thus, CDHPs could one day appear to be part of the solution to the health care cost problem only to suffer consumer and provider backlash, victims of their own success–the same fate as managed care in the 1990s. That will happen if consumers ultimately reject spending more of what they perceive to be (and really is and always was) their own money on health care. That will happen if providers start to lose income because CDHPs start to work and reduce consumption volume and increase price competition. If CDHPs succeed on the cost front, I have no doubt providers will make the claim that patient welfare is suffering (which it very well could in some cases). Time will tell if consumers and providers really act that way. My prediction is they will. Otherwise, how do you explain popular concern over health care costs? How do you explain the longstanding resistance by providers to anything that lowers their income, especially if an argument based on patient welfare is at least plausible?
On the other hand, I could be proven wrong. If I am I’ll admit it and breathe a big sigh of relief that we finally tackled the health care cost problem.
