Saturday, August 27, 2005

Consumer Driven Healthcare

This post is only for people who consume healthcare services.

It is well understood that our nation's healthcare delivery system is in crisis, but you may not realize the degree to which it is about to impact families. Health insurance costs per employee are rising between 10% and 20% every year, and healthcare spending per capita is 16.3 times 1970 levels, bringing us to more than twice the average for western world countries. As the costs per employee rise above a certain threshold, employers pass on the deficit to employees, and so the inflation rate of out-of-pocket health costs is even higher. The US Census Bureau forecasts a stunning picture: out-of-pocket expenditures per US family has risen from 13.1% of median income in 1999 to 21.1% in 2003, and heading north of 30% by 2006. According UCLA's Center for Health Policy Research, in just two years between 2001 and 2003, the average California worker's contribution for family coverage plans rose 79% -- from $114 to $204 per month.

We all recognize, from first-hand experience, the root of the problem. Insurance companies control which doctors we can see, when we can see them, what treatments and medicines they can prescribe, which hospitals we can use, how long we can stay, what tests they can run, how much we pay, etc. As a result, the whole system is, well, completely fucked up.

The ability for consumers to make rational decisions in a free market normally governs the rate of inflation to a reasonable level. Even expensive, complex purchases, such as real estate, taxation, estate planning, investments, home renovation, etc. can be made so long as the consumer has access to professional counsel from practitioners who compete on price, service, and a reputation for dispensing quality advice. But consumers do not have access to an open, freely competitive market for medical services. Our employers choose our plan, our PPO or HMO chooses our doctors, and to keep the PPO patients flowing, doctors comply with the PPO guidelines rather than dispense unencumbered advice. You rarely even have the choice of paying for preventive medicine today to avoid expensive, dangerous treatments later (at which point, figures your insurance company, you are highly likely to be Someone Else's Problem).

But whatchya gonna do? No one wants to start picking up the tab for medical services. Is the whole mess just a necessary evil of the third-party payor system? No!

In fact, there is a promising movement afoot to fix the system that is quickly gaining ground. It is known as Consumer Directed Healthcare (aka Consumer Driven Healthcare, CDH). The goal of CDH is to put the consumer in the driver's seat, so that (s)he is motivated and able to make free, rational choices, while still relying on one's employer to cover the expense using pre-tax dollars. The idea is for employers to purchase very high-deductible (and inexpensive) plans for employees, and to set aside the savings for the consumers to spend themselves on any expenses below the deductible. In the event of grave illness, the old third-party payor system kicks in, but for most families, the healthcare decisions reside in the hands of the consumer. Critically important, whetever you don't spend this year remains available for future years, even if you change employers, so you're motivated to factor in costs as well as quality and service.

Fortunately, in an extremely rare show of wisdom, the Republican US Congress passed a Medicare Modernization Act that legalized CDH funding plans known as Health Savings Accounts (HSA). Employers can buy high-deductible plans, and contribute as much as the deductible itself into the employee's HSA tax-free (federal, soon state). Since the act became effective on Jan 1, 2004, HSA adoption has exploded. By March of this year the number of HSA-covered lives exceeded a million with a 250% annual growth rate.

This comprehensive study on CDH reveals some promising results among early adopters. Employers are saving 20% on healthcare costs, and premiums for high-deductible HSA-elgibile plans rose only 4-6% or, by some estimates, even dropped 15% this year. Over half of the consumers have money left over after 12 months, accumulating wealth for future years. A McKinsey study found that HSA account holders are 20% more likely to comply with treatment regimens for chronic conditions. HSA account holders are 50% more likely to inquire about cost, 100% more likely to inquire about drug costs, and 30% more likely to get physical exams. And most importantly, health outcomes are equivalent or better.

Contrary to concerns that HSA's would appeal only to the young, rich and healthy, a study by the consortium America's Health Insurance Plans found that most of the million HSA account holders among its members' insured lives were over 40, 73% of them had children, and 29% had family incomes below $50,000.

So what's the catch? Some people worry that consumers NEED insurance companies telling them and their doctors what to do. Ridiculous. It's certainly hard to make the best decisions about healthcare, but a decision reached by a consumer advised by a licensed doctor of choice has to be at least as good as the same decision constrained by the one-size-fits-all, cost-cutting guidelines of an insurance company.

Having said that, consumers are unaccustomed to shopping for medical services, and there are no available data on the price, quality and service of competing providers. McKinsey's study concluded that "this is the huge challenge of the CDHC movement. If consumers are to welcome new incentives to manage their health care and spending, they must have better information to support their decisions." (source)

This sounds like a job for "the Internets". Shopping portals have simplified all kinds of complex purchases. And healthcare expenditures are certainly high enough and important enough to drive consumers to whatever comparable data are available.

Meanwhile, get your company, or your family, an HSA and an HSA-eligible plan. I did, and now my family is saving anywhere from $2,000 to $4,000 per year on healthcare, depending upon whether we hit the deductible. And until we hit the deductible, we decide for ourselves which doctors, tests, treatments, drugs and hospital to use.

My next post will point you where to go for an HSA plan, and also tell you how Bessemer hopes to play a critical role in the CDH movement.


  1. I should insert a smug comment about our medicare system in Canada, but it has its problems as well. In particular, we have a shortage of family doctors, especially in rural areas, and long waits for some kinds of non-emergency surgery. There is a lot of debate about moving to a two-tier system, where people can pay to use private clinics when they would otherwise have to wait, say, six months or more for a hip replacement.

    In reality, we've always had a two-tier system, since when there is a long waiting list, affluent people can pay to go down to the U.S. The real danger of a two-tier system is that we'll kill the one huge advantage we have over the U.S.: in a single-payer system, there is much less administrative overhead, so we're paying proportionally for much more front-line staff and much less back-office paper pushing. We also don't have the indignity of being told what doctors we can and cannot use, since (of necessity) every doctor already belongs to the system.

  2. On a related note, see Gladwell's very interesting article in a recent New Yorker about health care and the moral hazard myth:

  3. Anonymous3:06 AM

    sooo, the opportunity's in novel insurance policies and comparison engines?

    i don't get it


  4. You write:

    Critically important, whetever you don't spend this year remains
    available for future years, even if you change employers, so you're
    motivated to factor in costs as well as quality and service.

    I thought the catches with HSA's are a large minimum annual contribution ($2K?),
    no year-to-year carryover and any funds left in the account at the end of the year are lost.
    Is this belief wrong? Or do these stipulations apply only to my employer's plan?

  5. Anonymous5:55 PM


    Flexible Spending Accounts (FSAs) suffer from year-to-year carryover and use-it-or-lose-it provisions.

    HSAs are quite different from FSAs. From Healthia's site:

    What is a Healthcare Savings Account (HSA)?

    A healthcare savings account is medical and retirement planning savings account that can be used on a tax advantaged basis. HSAa were created in Medicare Modernization legislation that was passed in December 2003. To be eligible for an HSA, a consumer must be covered by a high deductible health plan (HDHP).

    All qualified contributions into an HSA are tax-free. If the employer makes the contributions, then such contributions are not treated as income for the individual in the year of contribution.If the consumer makes the contributions, these contributions can be deducted from the income when tax returns are filed.

    All withdrawals (distributions) from an HSA for qualified medical expenses are tax-free. Any money that is not used in a given year for medical expenses may be rolled over to the next year and may be invested in the vehicles of the consumer?s choice.Like an IRA, a HSA belongs to the individual and is portable.

    Distributions made for non-medical purposes after the age of 65 are treated as income and taxed accordingly. Distributions for non-medical purposes made before the age of 65 are treated as an early distribution and subject to an early withdrawal penalty of 10% plus regular income tax for the year of the distribution

  6. This issue touches on a couple points near to my heart. As a small business owner and employer of 130 people I've watched with disgust the rocketing costs of our company's healthcare insurance - costs that get passed on through higher deductibles and fewer benefits offered each year.

    The second point of interest to me is how deeply related this is to the impending crisis in eldercare costs and the age-wave that's coming. There is simply no way we will be able to afford the healthcare costs of the baby boomers as they begin to need eldercare services, given the way Medicaid is set up today.

    On the finding services front - my company, A Place for Mom, specializes in helping families find eldercare. I've also got a blog on eldercare issues at

  7. Christy5:09 AM

    I switched from a strict HMO to Healthnet (a PPO?) this year after struggling for over four years with misdiagnosed chest pain. Once I was able to choose my doctor (an orthopedist specializing in sports medicine) I was diagnosed with a shoulder instability and bursitis in -- literally -- five minutes. I can't believe that my HMO was spending less money on my repeated visits to my primary care physician, who kept taking shots in the dark and ordering expensive tests, than they would have had they not put pressure on the staff not to make referrals to specialists. I know that the general idea is that HMOs are cheaper and that people don't really need specialists as often as they think, but is there really any good data that support that view, from well-controlled studies?

  8. This system has to support several categories of healthcare comsumers.

    The basically well consumers of preventive health care do best with a high deductible catastrophic health care policy and an HSA.

    The catastrophically ill patient with a curable but expensive illness needs access to the best that medicine can offer.

    The aged with Diabetes Mellitus, Hypertension, Obesity, and complications needs frequent visits to a good Primary Care provider and occasional Specialty care.

    The insurance coverage needs are different for each group and no one knows ahead of time which group they might have the misfortune to fall into.

  9. Anonymous8:44 AM

    Isn't what you are describing what we used to call: Major Medical?

    That was before my time but I agree with Primary Care Physician when I say it all sounds well and good until life happens at the least opportune time.

  10. Blue Cross of California is a great health insurance provider. Health insurance is a major aspect to many and blue cross can help everyone get covered.

  11. Sounds good for your average healthy family. My daughter is handicapped, has had three near fatal episodes of bacterial meningitis requiring long hospitalizations followed by home care with expensive intravenous drugs. She has speech therapy, physiotherapy, occupational therapy, social work. Both my husband and I see a psychiatrist and are taking medication for depression. Our family would have used up our quoto the first year Sara was born. Thank goodness my other daughter is perfectly healthy...oh there was that broken arm, sprained ankle, and other sports related injuries-she's an athlete. Ouch. Luckily we live in Canada and my insurance company covers just about everything not covered by OHIP. Including the 6 or 7 ambulance rides Sara has had to the Hospital for Sick Children in Toronto, Ontario.

  12. While the HSA is a step in the right direction, it is still a study in mis-aligned incentives. Employers being required to foot any amount of the bill separates choice and its financial consequences.

    If we simply do away with this nasty regulation, health insurance companies will then have to compete for business, which in turn will mean that health care providers will have to compete for business. And suddenly prices will drop to affordable levels.

    We need to stop lying to ourselves. Socialism, to any degree, just does not work. Even a slightly mis-aligned incentive will quickly snowball into increased cost and decreased consumer satisfaction.

    If you don't want to take my word for it, I applaud your skepticism. Please do make an informed decision for yourself.

    My e-mail address is I am happy to field any questions.

    The following is an article you may find interesting:

  13. Anonymous1:19 PM

    While this is a step in the right direction, it is still a study in misaligned incentives. We need to stop lying to ourselves and realise that Socialism and government regulations, to any degree, will only hurt the consumer in the end. The solution is not less regulation, or a re-structuring of incentives, it is simply the complete abolition of all regulations.

    Even the smallest mis-aligned incentives separate choices and their financial consequences, and it will quickly snowball into increased costs and inefficiencies.

    Don't want to take my word for it? I applaud your skepticism. Please do make an informed decision based on facts and reason. And here's an article for starters:

    Also, I am happy to field any questions: thesinisteronion AT gmail DOT com.

  14. Health insurance is a personal issue. Employers should have minimal or no say in the decision made by the individual. Reducing this dependency on the employer is key. Workforce mobility and realignment (caused by shifts in where corporations will want to get the work done) will be hampered so long as we feel that health insurance is a benefit and not a necessity

  15. I agree with Anonymous citing The current situation is far from consumer/patient friendly. It is all about big corporations/insurance companies, drug companies, and huge health organizations, all in bed with the big government, and their regulations. The regulations are carefully crafted not to hurt the major players, that is, the government, and the large companies.

    Instead, the major players should be the physicians and the patients!

    Whenever there is talk about consumer driven health, some commentators argue against the consumer driven healthcare, based on the assumption that people do not want to take responsibility to educate themselves sufficiently to be able to make their own health decisions. This clearly is a huge assumption, based on little data. Fact is, we, (US or the world) never had consumer or market driven healthcare. Never. If you want to call high-deductible insurance plans combined with an HSA or similar attempts in dentistry like market driven health care, you ain't seen nothing yet. So basically, we never had consumer really make decisions so far. So there is no data. Get seriously started with it, collect your data, and then create opinions. Otherwise its all hot air and keyboard clicking. Also, keep in mind, in a true market driven health care, an average Joe does not need to take care of the health system, just of his own health, and his own choices for healthcare.