Understanding "' Consumer Choice" in chosing healthcare insurance plans.
Gearing up for consumer choice
By Scott Carswell, for HealthLeaders.com, Nov. 9, 2001
Roughly a year ago, "defined contribution" programs were being touted by many as a rapidly emerging way that employers could manage rising healthcare costs and employees could gain greater choice of benefits and customized provider networks.
Under such plans, the theory went, employees could make selections similar to those in self-directed 401(k) or defined contribution retirement plans. Employers would designate a specific amount per employee--the "defined contribution"--to provide for a baseline level of health benefits that would differ depending on the employer's need to attract and retain employees. Employees could then "buy up" to obtain richer benefits or amenities.
Employees had accepted similar changes to retirement plans previously. Why not apply the same logic to healthcare benefits?
The trouble is, society wasn't ready for such a fundamental change in how healthcare benefits are provided. Widespread implementation of defined contribution programs has not occurred because of four main barriers: a full-employment economy, tax law disincentives, the potential for adverse selection, and broad societal concerns that many Americans may lose health coverage under such a system. Even so, healthcare providers should continue to prepare for an era of self-directed healthcare. The shift to defined contributions has been delayed, but not derailed.
Nonetheless, significant barriers remain. Although it is now slowing, the robust U.S. economy of recent years has created the tightest labor market in recent history, giving employees increased negotiating leverage with their employers. This has slowed the adoption of the defined contribution model, because defined contribution programs are viewed by many workers as a reduction in overall healthcare benefits.
Current U.S. tax laws also create a disincentive for employees to participate in these plans. If an employer chooses a base benefit package for its employees, for example, and agrees to a defined contribution of $100 per employee per month, and the employee opts for a higher benefit package (let's say $125 per month), the employee must pay for the additional $25 benefit on an after-tax basis. Assuming a 25 percent tax bracket, this means the employee must earn an additional $33 a month, or almost $400 more per year, to pay for the additional $25 monthly benefit. While new "self-directed" plan designs reduce the negative tax consequences, they do not eliminate them entirely.
Some insurance experts, fearing that selected benefit packages will become prohibitively expensive as only high utilizers, generally the very ill, choose this option. Health insurance works by spreading risk across large numbers of covered lives. While a small number of workers with catastrophic conditions may select enhanced benefit packages suited to their needs, healthier employees may opt for services that are covered by their employer's contribution. This kind of adverse selection will cause premiums for the high user group to rise, since their risk is now isolated and is no longer subsidized by the healthier workforce.
Finally, government regulators and many consumers have been cautious about defined contribution programs because they fear that some will lose benefits under such a system. The common fear is that employers will shirk their fiduciary responsibilities and leave employees to make their own health insurance choices without adequate information or negotiating clout.
Despite these concerns, the broader trend toward giving healthcare consumers greater choice is gaining steam. Employers are demanding accountability for double-digit premium increases, and health plans are responding by developing products that expose the true costs and quality of various providers. Just as tiered pharmacy benefits (with low co-pays for generic drugs, medium co-pays for pharmaceuticals on a health plan's formulary, and higher co-pays for pharmaceuticals that are not on the formulary) are now considered mainstream, health plans are beginning to design similar benefit structures for provider networks. Consumers will soon be asked to select a provider network based not just on reputation, but on differential costs as well. An era of self-directed consumer healthcare could propel the entire healthcare industry into a new round of product differentiation and true price- and quality-based competition.
In this new scenario, providers could soon be forced to compete on demonstrable ease of access, customer service and quality as well as price. High-priced providers who now offer a high level of "perceived" quality will be forced to justify their higher cost in the light of publicly available comparative quality data. On the other hand, many provider networks will have a new opportunity to publicly market their quality measurements and win higher levels of reimbursement.
To prepare for an era of self-directed healthcare, providers need to differentiate themselves from their competitors and communicating those differences to consumers, selecting technologies that enhance customers' experience while delivering cost-competitive outcomes. In an era of defined contributions and customer choice, healthcare will start to look a lot more like other markets, where consumers make choices based on cost, quality and service.
Scott Carswell is a principal with BDC Advisors, LLC (www.BDCAdvisors.com
), a San Francisco-based healthcare consulting firm. He can be reached at (415) 247-1014 or by e-mail at email@example.com