Debating the Impact of High-Deductible Health Plans

Debating the Impact of High-Deductible Health Plans

By Albert B. Crenshaw, Washington Post

Sunday, April 30, 2006; F08

The current Next Big Thing in controlling health-care costs is "consumer-driven" medical insurance.

These plans combine a high-deductible insurance policy with a tax-preferred savings/investment account. The theory is that the insurance will protect you against catastrophic medical costs -- and pay for most preventive care -- while the savings account can be used to pay for health-care items not covered by the policy.

And if you don't spend the money in the account, you get to keep it, allowing it to accumulate against the day when you really get sick and need it to pay the deductible and perhaps some related costs.

The plans are already spreading rapidly. If you have employer-sponsored health insurance, you will likely find one of these offered to you in the next year or two, if you haven't already.

The plans are also available in the individual health-insurance market.

Proponents of these plans argue that they give you an incentive not to use health care you don't really need and to shop carefully for the care you do need. This newfound cost-consciousness, the thinking goes, puts downward pressure on prices throughout the system.

The theory seems to make sense. It's the reality that's a problem.

In the real world, a very small percentage of the population accounts for a very large percentage of health-care spending. By contrast, a large majority "consume" relatively little health care each year.

A recent study by benefits consultants Watson Wyatt Worldwide found that among a group of large employers, which Watson Wyatt has followed closely over the past 11 years, 72 percent of workers and their families account for only 11 percent of employer health-care expenditures annually. At the same time, a tiny group -- 4 percent -- account for almost half (49 percent) of the employer costs.

What this means, said Ted Nussbaum, Watson Wyatt's director of health-care consulting in North America, is that while a large share of the population -- the low-cost three-quarters -- could be influenced by economic incentives to curb health-care spending, that would affect only a small portion of costs overall.

Meanwhile, the high-consuming 4 percent "are really sick people, and a $1,000 or $2,000 deduction is not going to change their behavior very much," Nussbaum said. Parents of a premature baby, for example, aren't likely to be doing an economic analysis of their infant's care.

The conclusion, he added, is that "in and of themselves, the high-deductible health plans have a zero impact on health-care [cost] trends. Clearly, if you ask people to pay more money, you will get a one-time reduction in the base cost. But they have a zero impact on annual trends."

"This is not to suggest we think these plans are bad," he added. It's just that "these plans are not enough" to rein in health-care costs.

Merrill Matthews Jr., director of the Council for Affordable Health Insurance, which favors consumer-driven plans, said he disagreed with some of Watson Wyatt's findings.

The very sick who have big claims on their high-deductible policies indeed do "move back into the same old insulation from cost, but that's what you wanted insurance to do," protect you from catastrophes, Matthews said.

But he said there is more opportunity to influence outlays by individuals in the middle -- the remaining 24 percent who account for 40 percent of costs -- than the study suggests.

However, in Watson Wyatt's view, the greatest impact on costs comes from other changes in employers' approach to health care. This means using a number of programs and focusing them on the segments of the workforce where they will be most effective.

At one end of the scale, it means looking at health improvement and productivity together. Many employers view issues such as absenteeism as separate from health care, "and we know those kinds of things are related," he said.

It also means trying to keep healthy workers healthy -- encouraging smoking cessation, weight loss and other steps toward healthier ways of living.

At the other end of the scale, it means health plans that guide sick workers to cost-effective doctors, hospitals and other providers.

It also includes directing those with severe illness or injury to high-quality treatment facilities.

Nussbaum noted that high-quality treatment can often bring about major cost savings even though such providers' fees may seem high. This is because such treatment typically results in lower rates of infection, fewer readmissions to hospitals, and the like, and shorter recovery times. When all this is taken into account, seemingly expensive doctors and hospitals often produce big savings.

"In some areas of the country, using high-quality care centers may cut [insurance] plan expenditures for the most expensive cases in half," Nussbaum said.

Among the companies in the study, the two-year growth in health-care costs ranged from 3 to 11.5 percent, with the average coming in at 8 percent. The firms with the lowest rise tended to be the ones that were applying all the different strategies and adjusting them as they go along.

For a worker in today's environment, the study's findings argue for a reexamination of the approach to health care. Health care is now so expensive for employers that many doubt they will be able to continue providing it many years hence.

So it's in your interest to keep costs down. This doesn't mean skimping on necessary treatment -- that's often counterproductive -- but it does mean working to improve your own health.

Preventive care is usually cheap or even fully covered by insurance, including high-deductible plans, so get that physical exam, those inoculations, mammograms and the like.

If you have a chronic ailment such as diabetes and your company has a case-management program, take advantage of it. Your first thought might be, oh, they're just trying to save money, but since keeping you in better health is the best way to do that, you have a convergence of interests.

It's getting to be a new world out there, with workers shouldering ever more responsibility. But in the case of health care, if more responsibility means you take better care of yourself, perhaps it's not all bad.

* * *

The Bush administration insists that it's not trying to kill the traditional defined benefit pension system, but some of its actions suggest otherwise. Last week, the Department of Energy announced it will no longer reimburse contractors for the expenses associated with traditional pensions. Instead it will reimburse only for costs of 401(k) and similar plans. The change affects only new hires; costs for pensions for existing workers and retirees will continue to be reimbursed, the agency said.

"The new policy recognizes the contributions of current and retired contractor employees and, at the same time, ensures that future costs for pension and medical benefits are more consistent with market trends," the department said.

Sylvester J. Schieber, director of U.S. benefits consulting at Watson Wyatt Worldwide, said, "The fact that a government agency is forcing private employers to provide only do-it-yourself, 401(k)-style plans is outrageous. For decades, public policy has supported the notion that the best way to ensure Americans' retirement security is through guaranteed pensions. We find it curious that a government agency is threatening the retirement security of workers outside their department."

Thanks to June Hughes for submitting this article.