Consumer-Driven Health Plans Offer Employers a Promising Strategic Direction for Health Care
by Ed Murphy
Universal Advisor, 2007 Issue No. 1

Please also read the companion piece, "One Client's Perspective: Why Citizens First Has Embraced Consumerism"


You don’t have to look far to understand why executives often cite health care as the single biggest issue that impedes cost competitiveness and, subsequently, slows business growth and expansion. There are a variety of surveys each year that suggest that the costs of health care plans will continue to inflate at near double-digit levels. Early returns from Mercer’s 2006 Survey of Employer-Sponsored Benefit Plans reveal that costs are up by 7.0 percent for employers with fewer than 500 employees and are projected to rise by 6.1 percent in 2007. It’s pretty hard to get excited when the good news in health care comes down to the following sound bite: “Trends for medical plans are inflating at a declining rate!”

As we continue to be confronted with health care cost issues, two questions come to mind: (1) Why do costs continue to rise at these levels? and (2) What can we do to mitigate the continued increase? The answer to the second question actually lies in understanding the cost drivers addressed in the first.

What Factors Drive Health Care Costs?

Although costs are driven by many different factors, the primary ones include:

• The aging of the population. By 2008, one person will be turning age 65 every eight seconds!
• Technological advances. In the article, “The Unsurprising Surprise of Renewed Health Care Cost Inflation,” economist Henry Aaron says, “Rapid scientific advance always raises expenditures, even as it lowers prices. You need only look at history with development of automobiles, airplanes, television, and computers. In each case, massive technological advance drove down the price of services, but total outlays soared.”
• Consumer insulation. As buyers of health care, we’re very much insulated from both the cost and, therefore, the decision making relative to the timing, place, amount, and type of health care services consumed. This has created a consumer complacency approach to behavior with respect to purchasing and lifestyle: “Why worry about the fat content in that double cheeseburger when I can just take one pill a day to resolve my cholesterol problems?”

There are obviously many more factors that drive health care costs both from the micro and macroeconomic sense. However, if we look at these issues, we can perhaps begin to better manage health care trends.

Why Shift to Consumerism?

In a recent article in Benefits & Compensation Review titled “Current Efforts to Reform Health Care Financing,” experts such as David Gibson, MD, a senior partner and chief medical officer at Illumination Medical, Inc., and Jennifer Gibson, a health care economist, outlined three different strategies to address health care cost management and financing: expanding coverage to the uninsured, converting to a single-payer system, and consumer-directed health care. While each method offers its unique pros and cons, the authors conclude that the latter strategy offers the opportunity for the most profound effect on health care as fueled by consumer behavior. That said, here’s some of the supporting rationale for a strategy centered on consumer-driven health plans (CDHPs).

Most benefit plans today effectively eliminate the consumer from any decision making with respect to health care. At its core, this is because most consumers don’t have enough economic risk to warrant becoming engaged in a dialogue that’s Greek to them. If we continue to believe that health care costs are $5, $10, or $15 for an office visit, we’re living a sheltered life.

In contrast to more traditional plan designs, CDHPs require that the employee finances the first $1,000 or more of medical expenses before the benefit plan makes any payments. As a result, consumers begin to directly feel the economic consequences of their behaviors and choices regarding certain treatment regimens. This encourages consumers to:

• Engage in lifestyle modification that may result in improved health and mitigate/eliminate the need for certain types of treatment.
• Educate themselves on the best clinical setting for the delivery of care.
• Seek out the most cost-efficient care providers.

Under the present system, consumers are insulated from any real-cost consequences. In fact, the system has a built-in disincentive to seek out alternative therapies, care, or change lifestyles.

In contrast, CDHP’s consumer-centric orientation forces consumers to become drivers of a revolutionary change in health care. Having “skin in the game” supports personal accountability through:

• Financially responsible purchasing behavior.
• The need for clear, concise, and accurate consumer-oriented medical information regarding treatment protocols and efficacy.
• Provider pricing transparency, particularly in the pharmaceutical arena.
• Improved population health through behavior change.
• Reduced dependence on “middlemen or specialists” that are currently required to sort through the complex maze of the health care delivery and financing systems.

The Consumer Lies at the Core

In the end, technological advances will continue, and with them, cost creep. However, the real problem lies in a combination of poor health, sub-par lifestyles, and an aging population seeking the most advanced treatments without any personal financial consequence that fuels the cost explosion. Real change demands market-based solutions. At the core of the market is the consumer. If we start from the center with the consumer, market change will follow.