Lucido 1 Mark Lucido Dr. Forney Fleming HMGT 6320.

501 December 13, 2012

Behavioral Economics of Consumer Driven Health Plans and Price Transparency Introduction
I first became an early adopter of Consumer Driven Health Care in 2005 when I was looking to further reduce my taxable income after having fully contributed to my employer sponsored 401(k) plan. My employer at the time introduced this new plan type after several years of continuous premium increases. As a young and healthy individual that leads a healthy lifestyle, the odds were statistically in my favor of utilizing little health care and capitalizing on these new tax deductions available to me. That is all I needed to know; if I was in need of infrequent health care services, I would pay from my Health Savings Account and still come out ahead. More recently however, my family has grown to include a wife and child therefore my consumption of health care services has naturally increased as well. I find myself questioning whether Im still receiving the full value of my plan at a time when employer benefit coverage options are declining so as to encourage more participation in Consumer Driven plans. In short, Im moving from a passive participant to a more active participant in my health care decisions which is precisely the intention of Consumer Driven Health Care. Im finding however that the

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Lucido 2 incentives are diluted due to poor system infrastructure and design necessary to support a consumer model and my ability to choose is insulated by my employer and insurance carrier.

1. Employee Cost-Shifting
Over the last decade, American workers have seen a lethal combination of stagnating wages and an increasing share of the health care burden. Since 2002, wages have grown 33% and inflation has grown at 28% (Kaiser Family Foundation and Health Research & Educational Trust). During that same ten year period, workers have seen their share of insurance premiums for family coverage increase by 102% while total premiums, both employer and employee portions, have increased only 97%. This is an indication that employers have been shifting those costs on to workers, probably in an effort to increase awareness of service utilization. Even more alarming are the aggregate numbers for all plan types. Since 1999, workers contributions to premiums have increased 180% while premiums have increased 172%. Yet wages have slightly outpaced inflation 47.4% to 38.4% over that same period. As employees are becoming responsible for a larger portion of their health care costs, it is clearly a burden that is unsustainable and eventually will collapse upon itself.

2. Trends in Consumerism
While some of the cost-shifting to employees is certainly attributable to the general increase in health care premiums and higher health care costs, a growing portion of that increase is attributable to the heightened enrollment in High Deductible Health Plans. According to the Employee Benefit Research Institute, the percentage of individuals covered by Traditional health plans has declined from 89% to 78% of the privately insured population. Since the inception in 2003 of the Health Savings Account, a primary component of CDHP,

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Lucido 3 participation growth in High Deductible Health Plans and Consumer Driven Health Plans has grown to between 17% - 23% depending on which survey you are analyzing (Blakely) (Kaiser Family Foundation and Health Research & Educational Trust). Although I am an advocate for it, what is concerning about this trend towards Consumerism is the unanswered question surrounding unintended consequences. To better understand these trends, growth opportunities and the implications to our existing system, one must first decipher the alphabet soup of acronyms to appreciate exactly what is meant by Consumer Driven Health Care, its history and the various elements associated with these plan types.

3. History of CDHP
Rising Health Care costs is nothing new and has plagued Medicare with the threat of bankruptcy for years. In 1984, a group of individuals at the National Center for Policy Analysis recognized the need to address the spiraling costs of Medicare which could eventually lead to insolvency. These individuals published a report titled Solving the Problem of Medicare advocating an opt-out alternative to Medicare which would be financed via a self-managed Health Bank IRA in lieu of the standard Medicare deductions (Ferrara). The report reasoned that there is a great deal of waste and inefficiency in the system due to the design of payment incentives. The thesis of payment disincentives was explored further in two subsequent publications by report authors Dr. John C. Goodman and Gerald Musgrave. In Controlling Health Care Costs with Medical Savings Accounts and Patient Power, basic economic theory is explored postulating that when services are virtually free there are no incentives to limit spending therefore prices will increase (Goodman). This is the case with our current incentive model for health care insurance and service utilization. The consumer of health services may

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Lucido 4 be insensitive to their level of health care consumption and act irrationally since there are no consequences to their decisions. The solution according to Goodman, Musgrave and others is to put patients back in control of their own health care decisions. These publications by Goodman and Musgrave established the framework for what became known as a Medical Savings Account or MSA and were promoted by the CATO Institute in response to the Clinton Administrations reform proposals in the early 90s (Lindsey). In order to reestablish the consumer as the decision maker, Patient Power suggests lower premium, higher-deductible insurance coverage for unexpected catastrophic events with the premium savings being deposited into a Medical Savings Account owned by the patient for use on routine services. Through these early concepts, Dr. John C. Goodman is now recognized as the Father of Health Savings Accounts. Consumer Driven Health Care formally came to life with the passage of two congressional bills, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and The Balanced Budget Act of 1997. Prior to their passage, HSA like accounts only existed at the state level. HIPAA and The Balanced Budget Act ushered in a federal demonstration project that created a limited number of Medical Savings Accounts (Bunce) (United States Congress). Widely known for Congressman Bill Archer who sponsored the amendment to HIPAA, Archer MSAs were the predecessors to our current Health Savings Account. In 2003, congress passed the Medicare Prescription Drug, Improvement, and Modernization Act which not only extended the MSA demonstration project but also created the Health Savings Account as we know it today (United States Congress).

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4. What is Consumer Driven Health Care?

The term Consumer Driven Health Care is used to describe the system by which individuals are financially responsible for a greater portion of their health care expenses through a combination of private insurance coverage with high deductibles and a designated taxpreferred payment account. To dissect this in greater detail, there are two primary components which define Consumer Driven Health Plans: 1. High Deductible Health Plan (HDHP) A private health insurance plan that requires higher annual deductible amounts than typical health plans. To qualify as an HDHP, the plan must also require a maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses (U.S. Department of the Treasury, Internal Revenue Service). These plans are further qualified by the Internal Revenue Service through annual inflation adjusted limitations on deductible and maximum out-of-pocket amounts. For 2013, the minimum Deductible amounts are $1,250 for single coverage and $2,500 for family coverage while the maximum out-of-pocket limitations are $6,250 for single coverage and $12,500 for family coverage (U.S. Department of the Treasury, Internal Revenue Service). 2. Tax-preferred payment account a restricted account designated for the funding of qualified medical expenses in exchange for certain tax preferences. The two most common account types include: a. Health Savings Account (HSA) As defined by the IRS, a Health Savings Account is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur (U.S. Department

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Lucido 6 of the Treasury, Internal Revenue Service). Funds can be directly contributed to an HSA either by you, on your behalf, or by your employer. Tax benefits apply provided they are used for qualified medical expenses as outlined by the IRS. All contributions by you, on your behalf, or by your employer are exempt from income taxes and excluded from Gross Income. Contributions are subject to annual contribution limits to qualify for deductions. For 2013, the maximum allowable amount is $3,250 for single coverage and $6,450 for family coverage. Interest and earnings on the assets in the account grow tax free. Funds remain in the account for future years. You own the account and account holdings; therefore the account is portable or transferrable if you should change jobs or employers. b. Health Reimbursement Arrangement (HRA) this account type is very similar to an HSA with the exception of account ownership and portability. HRA accounts are employer-established benefit plans and are funded solely by the employer with no annual limits on contribution amounts. Employee contributions are not permitted with this account type however the same tax treatments apply. Contributions are excluded from Gross Income and reimbursements are distributed tax-free. Unused assets may be carried forward to future years depending on plan design however assets are forfeited by the employee upon termination of employment.

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5. Requirements to make CDHP work

As Patient Power first proposed in 1992, the premise to reducing health care costs lies in basic economic theory of empowering the patient to make rational and informed decisions for their health care needs thus incenting competitiveness among providers. In practice however, this becomes more difficult to affect price due to the multitude of variables at work such as plan designs, market powers at work, infrastructure support, and other pricing transparency constraints. 5.1 Plan Designs At the heart of most Consumer Driven Health Plans are the provider networks which are nothing more than a legacy holdover from managed care. As some industry experts have noted, Consumer Directed Health Plans have morphed into a hybrid between the original vision for Health Care Consumerism and our existing model of Managed Care (Robinson) (Herzlinger). Patients therefore are insulated from truly making free choices that would influence prices. Instead, they are limited to a subset of eager providers, selected based on negotiated pricing which stifles their incentive to fluctuate within competitive market ranges. Another aspect of plan design relates to ensuring that sufficient incentives are in place to encourage and facilitate consumerism. The cornerstone of Consumer Driven Healthcare in todays market is the High Deductible Health Plan which has traditionally insulated the consumers exposure to poor decisions through a manageable deductible amount that can be planned for. Often times, this deductible amount is still lower than the cost of most procedures which provide low or no incentive to shop for pricing. As an example, earlier this year my son required a very common procedure for tympanostomy tubes. The amount billed my insurance

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Lucido 8 company was $8,626.46 however this amount was discounted down to $3,850.33 due to the contractual obligations of the provider. My family deductible amount is only $3,000 and since this procedure was in May, I had already met a portion of my deductible. Therefore my responsibility was only $2,881.36, hardly motivation to compare other providers and facilities and no incentive for the provider to lower their pricing since they are already performing at the network rates. My behavior was unchanged. 5.2 Payer & Provider Market Power Since Provider Networks are still predominantly at the heart of Consumer Driven Health Plans, one needs to consider the drivers of pricing under Managed Care. Network inclusion is determined by a providers service pricing which is strongly influenced by factors related to the external environment such as market capacity and negotiating power. In rural and critical access environments where access to care and capacity are scarce, health plans have less influence over a providers pricing terms. Under a consumerism model of care, the same negotiating power would hold true for patients in these regions since supply is limited. There is a better chance for consumerism to succeed in urban areas where competition is more likely to thrive due to greater capacity and access. 5.3 Research Tools In order for patients to make informed decisions, their needs demand clear, easily accessible and easily navigable research tools designed for the lowest common denominator. Most of the tools in existence today are hosted by the patients insurer and are often dissimilar in both information and navigation across payers. If an employer changes insurance carriers, employees must then learn to navigate new tools and the information provided. Some head-

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Lucido 9 way has been made at the local level with state-backed research tools however they lack in public awareness. The level of information provided by these tools also varies from source to source. Some insurers may use contractual information to illustrate patient estimates; others may use historical claims data. Regardless of informational source, the research tools often stop short of providing complete bundled estimates typically only illustrating facility pricing. The frustration experienced by patients when trying to use these tools often leads to a diluted incentive to perform the necessary due diligence in selecting cost efficient health care services. Using my earlier example of my sons ear tube procedure to illustrate the frustration in pricing comparisons; in preparation for his procedure I contemplated researching the pricing using various methods. As a Healthcare IT professional that travels frequently for work, I realized I was at a disadvantage trying to determine a reasonable price for this procedure, primarily due to time constraints, and instead relied on tried and true standards such as asking for doctor recommendations from a variety of sources. Borrowing from the concept of Robert Fromberg, Editor-in-Chief for HFM Magazine, I did however attempt to price this procedure after the fact to illustrate my point (Fromberg). The claim history from my carriers website reports four distinct claims for this episode of care: 1) Initial consultation and exam by ENT specialist, 2) ENT procedure for tube openings, 3) Facility charges for procedure, and 4) Anesthesiologist. In advance of the procedure, I would not have thought to consider either the initial consultation or the anesthesiologist in my estimate even though I consider myself a wellinformed consumer. My insurers online patient estimator only illustrates facility charges for several facilities in the area of which none were accessible to the ENT specialist due to his credentialing and admitting rights. The tool also states that pricing is based on episode of care

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Lucido 10 however it wasnt until after having called my carriers help line to clarify that I discovered pricing did not include bundled services. In order to derive a fairly accurate estimate, I would have needed to call no less than three different business offices assuming I knew in advance who the Anesthesiologist would be. Even attempting to call the ENT specialist directly for price quotes, they were unable to provide a reliable estimate, only broad ranges because pricing is affected based on how the claims are coded (SouthWestENT). Its safe to reason that each subsequent comparison would have required the same level of effort to perform, certainly a disincentive to comparison shop or in economic terms, the opportunity cost of not comparing prices. 5.4 Pricing Transparency Constraints The quality of pricing comparison tools is highly dependent on the hosting source. Tools hosted by Insurance plans are typically built in-house leveraging either historical claims data or contracted rates to derive published pricing. It is generally believed that health plan tools are more accurate for a number of reasons. First, using contracted rate or claim data reflects current negotiated pricing with providers. Secondly, health plan carriers represent the largest market share of privately insured patients. Third, Insurers are under the most pressure and have the greatest resources available to develop these tools. Unless a third-party vendor is developing a tool on behalf of an insurer, it is reasonable to assume that the vendor is constrained by the data sourcing and funding available to it from private contributors. Payer and Provider willingness to share pricing information creates a certain amount of adversity to publishing price comparisons. Providers for example believe publishing negotiated rates will expose a certain amount of competitive pricing advantages while Health Plans fear

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Lucido 11 they will lose the little negotiating power available to them. If adversity was not an issue however and published pricing comparisons were reliable and accurate, would consumers really adopt these tools? In a personal interview with Julia Hood, HIT Business Solutions Process Manager for Humana, she states: The use rate is relatively low. Many consumers select the High Deductible Health Plan because from a premium perspective it is the lowest or at least on the lower end. They are banking on the concept of pay as you go as opposed to paying a lot up front in the event of being sick (Hood). Further, according to the California HealthCare Foundation and a Forrester Research survey, such use is limited to informational only (Henrickson). About 10% of consumers have researched cost and/or quality of providers in the last 12-months either online or offline. Of those who had performed some form of research, more than half utilized online sources and 22% used both online and offline mediums. Of all the tools offered from a Health Plan website, the tool most often used was for selecting a primary care physician and fewer than half believed the cost and quality tools were useful. Both vendors and health plans agree that adoption rates would increase if there were more marketing, better communication with plan members, and emphasis were given to user friendly designs.

6. Unintended Consequences
In Economics, the law of unintended consequences states that when one interferes with the status quo, unanticipated and often undesirable outcomes can occur. The more complexities exerted upon the status quo, the more likelihood of unintended consequences and I cant think of a more complex design than our current system of health care. Additionally,

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Lucido 12 one cannot discuss the topic of Consumer Driven Health Plans without also considering the question of unintended consequences. One important and hotly debated unintended consequence of Consumer Driven Health Plans is the Economic concept of adverse selection in which high risk groups are naturally drawn to over-insurance as is the case with smokers and non-smokers. One study of CDHP growth found that as new consumer-directed plans are offered by employers, healthier individuals are attracted to the CDHP type plans with a disproportionate share of less-healthy individuals remaining in traditional HMO and PPO managed-care plans. Subsequently, the traditional plans experience rate increases thus leading to a spiraling effect of more attrition towards the consumer-driven plans and even higher premiums culminating in the poorest and least healthy individuals becoming priced out of the market (Haviland) (Cords). Consumer Driven Health Plans also attract a specific demographic of affluent, urban, and computer literate consumers. Research shows that the average annual household income for consumers who compare provider costs online are $69,257 vs. $56,030 for those who do not. With affluence comes a level of educational attainment and computer literacy which are prerequisites to navigating the web-based research and pricing comparison tools attached to High Deductible Health Plans. Of those individuals with a college degree, 43% are more likely to perform provider research and price comparisons while 29% do not perform research. These trends are similar for Technology Optimists with an overwhelming 70% indicating they would perform research and price comparisons (Henrickson). According to the U.S. Census Bureau, roughly 28% of Americans have attained a college degree (Ryan). From these numbers it is easy

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Lucido 13 to reason that the adoption of Consumerism in Health Care does a disservice to the majority of Americans, particularly those in rural communities with limited or unreliable access to computers and the Internet.

Conclusion
7. Growth and future of CDHP
Aside from challenges inherent to Consumer Directed Health Care, the public has been generally receptive to these new health insurance products albeit slow to adopt. According to Americas Health Insurance Plans (AHIP), the national trade organization for health insurance companies, Growth over the last 3-years has averaged a 19% run-rate and has grown from 1 million covered lives in 2005 to more than 13 million as of January 2012 however this still only represents less than 25% of employers offering an HSA or HRA qualified HDHP (Center for Policy and Research). From a carriers perspective, Blue Cross Blue Shield of Florida has 244,000 covered lives enrolled in CDHP which according to AHIP represents approximately 45% of all CDHP participants in the state of Florida (Mault) (Center for Policy and Research). Humana has indicated that roughly 42% of their book of business is covered under a HDHP. They have experienced first-year adoption rates of between 10%-25% dependent on employer contribution to the HSA (Hood). With this level of first-year adoption, this is a positive sign that we are reaching a point of mainstream critical mass. Assuming growth continues at the 19% rate, we are expected to reach 32 million covered lives by 2017 that will be insured under a HDHP most of which is highly dependent on employer adoption rates and what happens with HDHPs under state insurance exchanges.

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Lucido 14 Interestingly, it was difficult to find much information related to how the Affordable Care Act (ACA) would impact High Deductible Health Plans and Health Savings Accounts and thats likely due to the fact that the state insurance exchanges do not kick-in until 2014 so there is still time for laws to change. Under the current law however, there are two significant areas to watch for. The Medical Loss Ratio (MLR) determines what percentage of premiums an insurer pays in medical care. Under ACA, health insurers are required to maintain an MLR of 85% and for any given year in which they do not maintain that ratio for a given plan, the insurer is required to refund the subscriber the difference. Under a HDHP, the consumer is responsible for first dollar up to the amount of their deductible which for many healthy individuals is never met, therefore the insurer would never meet the MLR requirements, HDHPs would be unprofitable for the carriers and they will likely stop selling these products (Johnson). The flipside of that however is to watch the progression of minimum actuarial values for the plans offered within an exchange. There are five plan levels that would be offered each with a progressive actuarial value, Bronze, Silver, Gold, Platinum, or Catastrophic. The lower level plans such as Bronze and Silver would require as little as 60% MLR and therefore some HDHPs would qualify to be included in the state exchanges. If so, this could be the next phase of mass appeal for Consumer Driven Health Care. Unfortunately things are unclear at the moment for HSAs so we will have to take a wait and see approach. If the plans are included in the state exchanges however, there are other challenges that remain to be addressed such as building out the research infrastructure and insuring easy reliable access to information for all. As has always been the case though is enhancements will be driven by consumer demand which is sure to happen with the continued employer migration away from Defined Benefit plans to

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Lucido 15 Defined Contribution plans as Regina Herzlinger has envisioned (Herzlinger). Fortunately for those individuals whose professions are in health care related fields, with the amount of work to be done, there are significant opportunities to choose from and guaranteed job security for years to come.

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Works Cited
Blakely, Stephen. "Consumer-Driven Health Plans Post Continued Growth." Fast Facts # 219 (2012). <http://www.ebri.org/pdf/FFE_219.26Feb12.CEHCS-1.pdf>. Bunce, Victoria Craig. "Snapshot: What Are Medical Savings Accounts?" CAHI Policy Brief. Vol. 4. 1. Alexandria: CAHI, 30 September 2000. <http://www.cahi.org/cahi_contents/resources/pdf/093000.pdf>. Center for Policy and Research. "Health Savings Accounts and Account-Based Health Plans: Research Highlights." 2012. <www.ahip.org/HSAHighlightsReport072012>. Cords, Danshera. "The Medical Savings Account Provision of the HIPAA: Is It Sound Health and Tax Policy?" Seattle University Law Review. Vol. 21 No. 4. 1998. <http://digitalcommons.law.seattleu.edu/cgi/viewcontent.cgi?article=1568&context=su lr>. Ferrara, Peter, John C. Goodman, Gerald Musgrave, and Richard Rahn. "Solving the Problem of Medicare." NCPA Policy Report no.109. Dallas: NCPA, 1984. <http://www.ncpa.org/pdfs/st109.pdf >. Fromberg, Robert. "Can We Talk?" Editorial. HFM Magazine 1 October 2012. Print. <http://www.hfma.org/Publications/hfm-Magazine/Archives/2012/October/Can-WeTalk-/ >. Goodman, John C. and Gerald L. Musgrave. "Controlling Healthcare Costs with Medical Savings Accounts." NCPA Policy Report no. 168. Dallas: NCPA, 1992. <http://www.ncpa.org/pdfs/st168.pdf >. Haviland, Amelia M., M. Susan Marquis, Roland D. McDevitt, and Neeraj Sood. "Growth Of Consumer-Directed Health Plans To One-Half Of All Employer-Sponsored Insurance Could Save $57 Billion Annually." HealthAffairs, 31, no.5. 2012: 1009-1015. Print. Henrickson, Katy, Lynne "Sam" Bishop, Jennifer Gaudet, and Caroline Hogan. Health Care Cost Comparison Tools: A Market Under Construction. Forrester Research. Oakland: CHF, 2006. <http://www.chcf.org/~/media/MEDIA%20LIBRARY%20Files/PDF/H/PDF%20HealthCare CostComparisonTools.pdf>. Herzlinger, Regina E. "Let's Put Consumers in Charge of Health Care." Harvard Business Review 2002. Hood, Julia. Interview. Mark Lucido. 19 November 2012.

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Lucido 17 Johnson, Whitney R. "The Impact of Health Reform on HSAs." Benefits Quarterly (2011). <http://www.ifebp.org/inforequest/0160537.pdf>. Kaiser Family Foundation and Health Research & Educational Trust. Employer Health Benefits 2012 Annual Survey. Survey. Menlo Park: Kaiser, 2012. <http://ehbs.kff.org/pdf/2012/8346.pdf>. Lindsey, Brink. "Patient Power The Cato Institute's Plan For Health Care Reform." Briefing Paper no. 19. Washington: CATO, 1993. Web. <http://www.cato.org/pubs/briefs/bp019.html>. Mault, Stasia. Interview. Mark Lucido. 14 December 2012. Robinson, James C. and Paul B. Ginsburg. "Consumer-Driven Health Care: Promise And Performance." Health Affairs, 28, no.2. 2009: w272-w281. Ryan, Camille L. and Julie Siebens. "Educational Attainment in the United States: 2009." Current Population Reports. U.S. Census, February 2012. <http://www.census.gov/prod/2012pubs/p20-566.pdf>. SouthWestENT. Interview. Mark Lucido. 10 December 2012. Phone. U.S. Department of the Treasury, Internal Revenue Service. "Health Savings Accounts and Other Tax-Favored Health Plans." IRS Publication 969. Washington: GPO, 2011. <http://www.irs.gov/pub/irs-pdf/p969.pdf >. . "Revenue Procedure 2012-26." IRS Rev. Proc. 2012-26. Washington: GPO, 2012. <http://www.irs.gov/pub/irs-drop/rp-12-26.pdf >. United States Congress. "Health Insurance Portability And Accountability Act of 1996." (Pub. L. no. 104-191). United States Public Law. 104th Congress. Washington: GPO, 1996. <http://www.gpo.gov/fdsys/pkg/PLAW-104publ191/pdf/PLAW-104publ191.pdf >. . "Medicare Prescription Drug, Improvement, and Modernization Act of 2003." (Pub. L. no. 108-173). United States Public Law. Washington: GPO, 2003. <http://www.gpo.gov/fdsys/pkg/PLAW-108publ173/pdf/PLAW-108publ173.pdf>.

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