Americans spent $3 trillion on health care in 2014, or about $9,523 per person. That’s up 5.3% from the previous year. That increase isn’t expected to slow down — for about the next decade, the U.S. government expects spending to grow 5.8% on average each year.
As policymakers look for ways to cut down this spending, one idea gaining traction is to incentivize consumer-directed health plans (CDHP). These high-deductible, low-cost plans are already growing in popularity. About 20 percent of people who are covered by employer-sponsored health insurance are enrolled in some type of CDHP.
In theory, CDHPs would reduce health care costs because consumers would choose less expensive health care when they pay for it themselves. But does that theory pan out in practice? M. Kate Bundorf, an associate professor of political economy, examines the benefits — and the trouble spots.
How do consumer-directed health plans work?
A CDHP is one type of plan offered by an insurance company. The main idea behind CDHPs was, instead of putting decisions about cost and quality tradeoffs in the hands of the health plan, we’ll put them in the hands of the consumers. There are three features that are generally associated [with CDHPs]: One is a relatively high deductible, the second is some type of a personal spending account, and the third is information tools for people to compare costs and quality when they’re choosing care.
People can make decisions that reflect their own preferences. Think about a person choosing between two different drugs to treat their condition. One drug is less expensive, but it has some side effects. Some people would be willing to pay the higher price for the drug without the side effects, and some people would prefer to spend less and be fine with the side effects. People might be very different in terms of the tradeoffs they’d like to make.
What’s the main benefit of enrolling in a CDHP, and how does it lower costs?
They usually have a lower premium, so you and your employer would potentially pay less for the health insurance plan.
The idea is that, by putting financial responsibility on the people who are using care, we create incentives for them to think about cost and quality. For example, higher cost sharing creates incentives for people to switch from branded drugs to generic drugs — that’s an easy way to reduce health care spending. By having people pay out of pocket, they also have an incentive to seek out lower cost providers.
What is the main detriment?
The main tradeoff is, once you’re enrolled in the plan, you have to pay more out of pocket. We expose the consumer to more cost sharing so they’ll make health care decisions more wisely, but it also exposes them to more financial risk. In addition, people often have a hard time making these decisions — they don’t always know the price of different procedures, the cost of drugs.
What does your research show?
Health care spending is very high in the U.S. and there are concerns over the quality of care people are getting. People are really desperate for interventions that can reduce the cost of health care. We can think of CDHP as one potential mechanism to address this spending problem, so it is important to understand how well they are working.
In this study, I reviewed more than 50 published articles based on the experiences of people actually enrolled in these plans. I found that CDHPs did reduce health care spending between 5% and 15%. The reductions in health care spending are generally concentrated among the more healthy enrollees.
Most of the reductions seem to be in the form of lower spending for outpatient procedures and pharmaceuticals. There’s no evidence that if you’re very sick, you’re less likely to go to the hospital because you’re concerned about your spending.
Now the trick is to look more deeply at those spending reductions and figure out what the implications are for people’s health. For example, when people are using fewer drugs, what’s ultimately the impact on their health?
We need to figure out the right solution for patients, providers, and managers, and this study is one piece of the puzzle. There are regulations that promote CDHPs, so understanding what the implications are for patients is really important — for encouraging these types of regulations or discouraging them.
What’s the history behind CDHPs? How have they evolved over time?
The term emerged during the dot-com boom era in the early 2000s, when internet startups were trying to think of new ways to finance and deliver health care.
People were unhappy about the idea of plans with restrictive provider networks that emerged in the 1990s. At that time, people were used to seeing the health care professionals they wanted, and one of the things HMOs did was limit that. So the CDHP was created as a response to this discontent. This was about putting decisions in the hands of the consumers.
Over time it has evolved to refer to a plan that has higher cost sharing — mostly in the form of a higher deductible.
How popular are CDHPs and who’s enrolling in them?
In 2006, about 4% of people with employer-sponsored health insurance were enrolled in this type of plan, and by 2014 it was 20 percent.
The data show that it tends to be higher income workers who are enrolled in these types of plans because you get tax advantages. But CDHPs have become more prevalent for both higher and lower income people. I think it’s a significant shift, and it affects a lot of people. It’s a trend toward the type of coverage that puts more responsibility on people to make decisions, to be informed.
M. Kate Bundorf is an associate professor of political economy, by courtesy, at Stanford GSB and an associate professor of health research and policy at Stanford School of Medicine.