More choice, at a cost
Expecting their first child last year, Danielle and Joe Padula got down to work, estimating how much money they could spend on obstetrician appointments, hospital and delivery fees and pediatrician visits.
Most insured couples wouldn’t spend much time worrying about the costs involved, focusing first on nursery colors or strollers. But the Padulas’ health plan is different from most. It requires them to manage the costs of their own care.
Instead of requiring the Padulas simply to meet a modest deductible before covering most of their costs, the couple’s plan creates a large deductible -- which, in their case, is partially funded by the employer -- and provides incentives for them to spend their healthcare dollars wisely.
For example, the plan gives the Padulas $2,000 each year to spend on their choice of doctors and services. After that money is exhausted -- as it quickly was during Danielle’s pregnancy -- the couple must pay the next $1,200 in expenses out of their own pocket. After that, insurance kicks in to cover any remaining expenses.
Of course, some plans already give consumers greater control over how their healthcare money is spent, offering more physician or drug choices in exchange for greater out-of-pocket expenses. However, the Padulas’ plan, like a growing number of others, takes those choices a step further by doubling or tripling the deductible and providing incentives and support to help people manage their healthcare.
Such responsibility turned the couple into careful healthcare shoppers but gave them freedom as well, says Danielle, who gave birth earlier this year to son Jake.
For example, she opted to have ultrasound pictures taken during her pregnancy, although the pictures weren’t a medical necessity. “That is something I didn’t need but I wanted,” she says. “A lot of people don’t get that choice under their health plans.”
Learning what a treatment or procedure costs -- then deciding whether to pay for it -- is a new step for most Americans with health insurance. Even traditional fee-for-service plans, in which consumers pay 20% of a bill, don’t prompt most people to analyze a procedure’s cost or their actual need for it, experts say. But when consumers are held solely responsible for a medical bill, they tend to think twice.
Having patients assume responsibility for such costs is the centerpiece of this increasingly popular type of insurance, called consumer-directed healthcare. Now a small part of the insurance market, about 2%, consumer-directed plans are expected to become much more common in the next few years as a way to potentially curb employers’ rising healthcare costs. The plans could account for 7% of health insurance by 2007 and one-quarter in about five years, according to Forrester Research, an independent technology research company.
Eventually, about 40% of consumers who now use preferred provider organizations or point-of-service plans will likely opt for consumer-directed plans, predicts Brad Holmes, vice president and research director of Forrester, who has studied the trend.
The strategy, which takes some of the control over spending away from employers and insurers, typically allows people to select their own physicians and hospitals, avoiding “gatekeepers” who might limit their care.
In turn, consumers pay more up front -- such as the first $1,000 to $2,500 per year spent on healthcare -- and bear the responsibility to spend those funds wisely. Consumers can then find themselves considering whether to have that ingrown toenail treated or whether to choose a generic heart medication over a more expensive brand-name product.
“I think there is hardly an employer in the country who isn’t considering some version of this approach,” says Greg Scandlen, director of the Center for Consumer Driven Healthcare at the Galen Institute, a nonprofit health policy research organization in Alexandria, Va. “The notion that consumers can take charge of their own healthcare is what puts the sizzle behind this.”
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Financial incentives
The trend has both proponents and critics. Proponents say people will be more careful and cost-conscious if they have a stake in how far their money goes. Critics say such health plans simply foist a larger share of costs on consumers.
“Financial incentives are the key to these plans, whether they are spending accounts, tiered plans or plans with co-insurance,” says Peter Lee, president and chief executive officer of the Pacific Business Group on Health, a healthcare purchasing coalition based in San Francisco. “Every one of those is a financial vehicle to help consumers understand that health care dollars are their dollars.”
Interest in such plans got a jump-start last year with the creation of health savings accounts.
As with existing health-spending accounts, consumers can use the new accounts to set aside money annually, tax-free, for medical costs. Unlike spending accounts, however, the savings accounts earn interest and can be rolled over from year to year if the money goes unused.
According to a recent survey of 270 companies by Hewitt Associates, a national human resources consulting firm, 60% of large employers are likely to soon offer the new accounts. Aetna and Blue Shield of California announced last month that they will offer high-deductible plans with health-savings accounts. Many large employers are considering such plans, says Pam Kehaly, general manager of special accounts at Blue Cross of California.
A typical plan, for example, has an annual $2,000 deductible that must be met before insurance will kick in; the insurance company then pays 90% of costs, she says. Although the deductible is high, the consumer can use a health savings account to pay for those initial expenses.
“Plan designs in the past have insulated people from the cost of healthcare. The concept now is that maybe people will think about their choices and the impact of their choices,” Kehaly says.
But more restrictive types of health insurance programs, such as preferred provider organizations and even some HMOs, are moving toward higher deductibles and a greater emphasis on consumer decision-making, experts say. Tiered health plans, in which consumer costs are based on the network of providers from which they choose, are considered a form of consumer-directed care. And many pharmacy benefit plans already require consumers to choose between a brand-name drug with a higher co-pay or a generic that costs less.
“Employers are slowly moving toward this model because they don’t have any good alternatives,” says Thomas Rice, professor and chairman of the department of health services at UCLA’s School of Public Health. “Tightly managed care turned out to be very unpopular with consumers.”
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‘Our own research’
Joe and Danielle Padula say they were eager for a health plan that put them in charge of their health. While members of an HMO a few years ago, the couple chafed at having to see a primary care doctor to get a referral to see a specialist.
“I don’t have time to be running around to these appointments,” Danielle says. “To me, time is money. And I could never get in to see someone. To get my eyes tested, I had to wait months.”
In contrast, she could choose any pediatrician she wanted with her current plan, Definity Health. After getting recommendations from friends, Danielle used Definity’s website to obtain information about various doctors’ education, background, and any history of lawsuits or disciplinary action.
“Choice and control are the biggest things,” says Joe, who is employed by Textron Inc., a company with offices in Santa Clarita that operates aircraft, automotive, industrial products and other businesses. “When you have a baby, it’s terrifying. You want to make sure you have the best hospital, the best treatments.”
But, says Danielle, “we have to do our own research.”
The couple keep tabs on their spending via the Definity website. Definity Health, a leading company in providing consumer-directed plans to employers, has also contracted with large national companies, including BellSouth, ConAgra and Wells Fargo.
The Padulas have learned a lot in the last year about such things as the cost per day of a hospital bed. “It’s shocking to see what healthcare costs,” Danielle says. “You learn how horribly expensive it is.”
An insurance plan that makes people hesitate before opening their wallets could have unintended consequences, however, some experts say. People with chronic conditions, such as diabetes or asthma, might be tempted to cut corners on their healthcare to stretch their dollars. Consumers might decide to forgo physical therapy to ease back pain, for instance, to avoid spending money, Rice notes.
“Instead of the insurance plan saying no, this is consumers saying no to themselves,” he says. “When you make people pay more, they are going to use less. They’ll get less of things they didn’t need, but they’re also going to get less of things they need.”
A recent study by Aetna Inc. found that employees in the first year of a consumer-directed plan reduced their use of some services, such as visits to primary care doctors and emergency rooms, and increased others, such as preventive care and visits to specialists. (Some consumer-directed plans cover preventive care to ensure that people don’t skip those services.)
“The challenge for any new plan design is to make sure we don’t end up discouraging people from getting the right care,” Lee says. “If you increase co-payments for drugs too much, for example, you might discourage people with chronic illnesses from getting those drugs.”
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Interactive websites
To help people obtain appropriate care, health plans need to provide more information and support than they have in the past, says Ed Howard, executive vice president for Alliance for Health Reform, a national nonprofit group that focuses on access to healthcare. Some consumer-directed plans have created interactive websites to provide information on doctors, hospitals and various health conditions. Other plans staff nurse hotlines or sponsor patient support groups to encourage consumers to share information.
But specific information, such as particular doctors’ or hospitals’ performance and fees, is typically lacking.
“Who knows how much it costs for different procedures among different doctors or hospitals?” Howard says. “It’s impossible to know. We’ve got to get a whole lot better data and put it in people’s hands.”
And in California, where HMOs are more popular than in other regions of the country, consumer-directed care may be too labor intensive for some people, says Scandlen.
“I do believe there will be some people who prefer HMOs,” he says. “In HMOs you can be totally passive, walk through the door and people will tell you where to go. People who don’t have the time to invest in finding out more about their healthcare should probably avoid these consumer-directed healthcare programs.”
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The trend, and some key terms
Consumer-directed healthcare is broadly defined as a way to give people more control over their medical decisions and their costs by having them pay more, a trend that will eventually encompass many types of health insurance plans, experts predict. Some consumer-directed plans include health spending or savings accounts, while others simply offer wide choices of providers and deductibles. Here are some forms of consumer-directed healthcare:
Health spending accounts
An employer or employee puts a specific amount of money in the employee’s account to pay for certain types of services, such as doctors’ fees and drug costs. These accounts are usually accompanied by a high-deductible insurance plan.
Health savings accounts
Enacted as part of the Medicare bill signed into law last year, these plans allow anyone younger than 65 to set aside money tax free for healthcare expenses. The accounts, which are controlled by the consumer and can be rolled over from year to year, must be accompanied by a high-deductible health insurance policy.
Tiered plans
In this system, hospitals and doctors are stratified based on cost and quality. Co-payments and deductibles to consumers vary depending on whether the provider is in a higher or lower tier.
Defined contributions
Plans with this feature require employers to make a fixed contribution toward the employee’s premium; the employee chooses among various plans with different prices.
