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Driven to Extremes

by Emily Friedman

First published in Hospitals & Health Networks OnLine, February 2004

More employers are considering "consumer-driven" health insurance, but it won't be the consumers who will drive coverage.

It is said that truth is the first casualty in war; it is often an early casualty in health policy as well. It is not so much that policy-makers lie, but rather that they choose language that is intentionally misleading. One example is the use of the word reform, which in common parlance means to change for the better, as in "reform school" or the Reformation in Christian history. In health policy in recent years, reform has instead been used as a code word for efforts to cut or even destroy public programs.

Similarly, we are now hearing more and more about "consumer-driven" health insurance, sometimes known as "self-directed" coverage. Playing on the popular notions of consumerism and choice, this concept represents a fundamental recasting of employer- and government-subsidized health coverage. At its heart, this notion shifts third-party health care coverage from a defined benefit (the services that are covered, such as hospital and physician care and prescription drugs) to a defined contribution (the consumer/patient/employee is given a set amount of money with which to buy coverage, and is then sent out into the marketplace to try to obtain it).

It is a controversial concept. Those who like the idea argue that the reason health care costs are so high is that workers are insulated from those costs by third-party insurance chosen by their employers. If employees were out in the market themselves, trying to buy coverage with a limited amount of money, they would either make more efficient choices, or else feel the pain of having to augment their employer's contribution with their own funds. Furthermore, advocates say, this approach gives employees greater choice of health plans, which means they can tailor their coverage to fit their personal preferences. It also supposedly means that insurers would be subject to stronger competitive forces--and competition is always alluring in our culture.


It's an appealing concept for those who believe that the market should be the arbiter of all things. However, in order for it to work, several conditions will have to be met. First and most important, insurers must be required to market to everyone and to accept all those who choose their plan, regardless of their income or health status. Second, those insurers who attract a sicker-than-average population would somehow have to be compensated for the higher costs of that population. Third, employees would have to be highly knowledgeable about the ins and outs of insurance, be able to judge the quality and cost-effectiveness of different plans, be able to avoid shoddy or deceptive coverage and carriers, and be expert at reading the fine print ...

... oh, and they should also be able to predict what diseases they and their family members will develop in the future, and what accidental injuries they might suffer.

There's the rub. The problem with market solutions in health care is that health care isn't a normal market. Handing a worker a check and sending him or her off into the competitive jungle of health insurance with a smile and a wish of caveat emptor (let the buyer beware) assumes that the worker can negotiate that jungle and that the market will ensure that competition for the worker's trade is fair.

But that isn't how it works. Insurers have long since learned that the way to make the most money the fastest is to avoid the sick. In the individual market, which at best is on the verge of collapse in most states, a person with a history of allergies or a decades-old biopsy can be denied entirely or else offered coverage that excludes the suspect condition or body system or is priced at a level that would give an oil baron pause. Defined-contribution approaches essentially send employees into such a market.

Choosing the Applicants

There are also myriad ways to discourage applicants who are "bad risks" from even applying. In the early years of the AIDS epidemic, many insurers didn't market their products in certain ZIP codes where large numbers of gay men lived. Carriers who sell Medigap policies market heavily in areas where wealthy retirees live--but often hold their informational soireÚs on the second floor of buildings that have no elevator. That takes care of the wheelchair crowd.

Even health insurance "report cards," which are supposed to be a consumer aid, can be used to discourage the sick. Just show that your coverage and performance with regard to diabetes is poor, and guess who won't apply? A colleague of mine was told by an insurance executive that his firm never wanted to place first in comparative rankings when it came to care for HIV, diabetes or COPD; he said the ideal placement was third. That way, the plan didn't look all that bad, but was unlikely to attract people with those conditions.

Beyond the basic insanity of trying to avoid providing health insurance to sick people, there are two other problems with the "consumer-driven" approach. First, insurance fraud is hardly unknown in the United States, and an unsophisticated buyer strolling innocently through the market, check in hand, is an easy mark. Just take the premium money and run; you'll be in South America before the first claims are filed. Forget to mention exclusions and limitations. Accuse the consumer of lying on his or her application form. Promise a vast network of physicians and hospitals and then kick most of them out of the program once the employees have signed up. An insurer in New York City several years ago was found to have dropped almost all pharmacies in low-income minority neighborhoods from its network. Accused of discrimination, it responded that its research showed that most people fill their prescriptions while at work downtown. And maybe most healthy, employed middle-class people do. The chronically ill, the unemployed and the working poor probably do not.


And if the consumer can manage to avoid being defrauded or discriminated against, why should he or she be expected to make the right choice? Most coverage is obtained when a person is young and healthy enough to be working, which means that price is likely the most popular criterion. For tens of millions of low-income workers, who do not have discretionary income to put toward a more lavish plan, price is the only criterion.

And then there's the issue of being able to see into the future. If a plan offers skimpy mental health coverage but is cheap, why would a healthy person not choose it? If a plan does not have a lot of pulmonary specialists in its network, why would an employee who does not have lung disease care? A young man who likes to race motorcycles still believes that nothing will happen to him; belief in one's invincibility is a gift of youth. The great conundrum of insurance is that it is obtained by healthy people, but used by sick people. The sick me has to live with the choices made by the healthy me.

And what happens if the coverage chosen has a $25,000 cap on organ and tissue transplants, then the worker develops leukemia and needs a $150,000 bone marrow transplant? Or the young man runs his motorcycle into a tree? Or chronic mental illness strikes an employee's family when the insurance has a cap on that benefit? Rightly or wrongly, the employee will still expect the hospital or physician to provide the needed service, even if his or her insurance will not pay for it. And woe betide the provider who tries to say no; the papers and television will have a field day lambasting their hard-heartedness.

As for getting the patient to pay the difference, good luck! Nationally, hospitals are able to collect only 10 percent of required co-pays and deductibles.

A Tempting Proposition

As of this writing, very few employers have implemented defined-contribution plans (let's not use the "consumer" label; this is employer- and insurer-driven). However, 14 percent of employers identified the approach as "very effective" in the Kaiser Family Foundation/HRET 2003 survey of employer health benefits.

The idea may become even more appealing. Employer health insurance premiums in 2003 rose an average of 13.9 percent, making it the third consecutive year in which increases were 10 percent or higher, according to the Kaiser Family Foundation/HRET survey. For smaller employers, the increase was 15.5 percent. Towers Perrin predicts that premiums will rise another 12 percent in 2004. The Center for Studying Health System Change predicts that premiums will go up by 50 percent between now and 2006.

Managed care was supposed to be the magic bullet that would reduce health care costs. It enriched some individuals--one managed care executive is reportedly worth more than half a billion dollars personally--but its impact on costs, whatever it was, turns out to have been transitory. It was also the last possible means of keeping premiums in check for many employers. The most common mechanisms being used now are ever greater co-payments and deductibles, reductions in coverage, slashing of dependent benefits, and, sadly, firing of disabled or chronically ill employees.

The Kaiser Family Foundation reports that employee cost sharing has increased 48 percent in three years. The Bureau of Labor Statistics (BLS) reports that workers are paying 75 percent more in insurance costs than they were 10 years ago. It should surprise no one that the BLS also reports that 45 percent of private-sector workers had employer-subsidized coverage in 2003, down from 63 percent in 1993.

Driven to extremes, some employers are dropping coverage entirely; after all, it is a voluntary system. But those who wish to protect their employees are running out of options fast. Defined-contribution plans, heavily supported by market-oriented advocates and policy-makers, could become the mechanism of choice. My colleague Ian Morrison, who also writes for H&HN OnLine, predicts that if health care costs continue to rise at double-digit rates, there will be an employer stampede toward defined contribution plans.

And if employees are educated about coverage, participating insurers are screened and watched, inequities in the market corrected, and decent oversight exercised, it could induce greater cost consciousness on the part of workers, which could in turn induce the same consciousness in insurers and providers. Without such protections, all it will induce is nightmares for employees and providers alike.

First published in Hospitals & Health Networks OnLine, February 2004

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