Policymakers, employers, and insurers have a growing interest in an insurance approach named “consumer-directed health care.” This term applies to a broad range of health plan designs such as Health Savings Accounts (HSAs) or Health Reimbursement Accounts (HRAs), but is most commonly used to describe the combination of a high-deductible health insurance plan with a tax-preferred savings account used to pay for routine health care expenses. While HSAs and HRAs are both tax-preferred health accounts, they have different legal requirements and incentives. This brief summarizes the policy debate surrounding consumer-directed health arrangements (CDHAs), particularly Health Savings Accounts (HSA) and high-deductible health plans, which are growing in popularity and are a key element of the Bush Administration’s proposal to control health costs and expand coverage to the uninsured.
In order to have an HSA, individuals must have a high deductible health plan. In a typical CDHA model, individuals with an HSA pay for routine health care expenses out of their savings account. After the accounts are depleted, individuals pay directly out-of-pocket until they have reached the relatively high deductible amount in their health plan. Because the plan has a high deductible, monthly premiums are often lower than traditional health insurance. Consumers may keep any unspent dollars in their account, creating an additional incentive to be cost-conscious when purchasing their health services. Employers or individuals can contribute to the HSAs.
Proponents of CDHAs argue that in the current health care system, insured individuals have little perception of the true cost of services because out-of-pocket costs are primarily limited to a share of insurance premium costs, copayments and other cost sharing. Proponents of CDHAs argue that if consumers pay for services directly with funds from an HSA, they will be more cost-conscious of services, and will take initiative to research and make more informed and prudent choices when they purchase services. This would reduce unnecessary health care spending and thus reduce costs. Proponents also argue that CDHAs will reduce the number of uninsured, because the lower premium costs associated with high deductible health plans will be more affordable for the uninsured to purchase. Proponents also posit that the expansion of CDHAs will be an incentive for providers, insurers, and employers to improve health care quality, promote competition, improve consumer knowledge, and make the health system more transparent. To help equip consumers for purchasing decisions, many insurers have developed web-based tools that provide information about common medical treatments as well as basic information about the relative quality and cost of different treatment options and providers. Additionally, health care professionals would also have more incentive to release reports on quality of care and to make quality improvements to attract consumers.
Some are concerned about whether CDHAs guide health care financing in the proper direction. They warn that CDHAs may adversely affect risk selection and increase out-of-pocket costs for people who are currently insured through traditional insurance. For example, CDHAs may attract a disproportionate share of healthy enrollees with low health spending. This in turn, would leave traditional, comprehensive health plans with a relatively less healthy population who will need to pay more. The potentially high out-of-pocket liability in CDHAs also could deter lower income and chronically ill people from obtaining health services that they need. Furthermore, it is well-documented that a relatively small, disproportionately ill segment of the population accounts for a large share of health care spending. There is little evidence suggesting that this population could reduce expenditures, given their substantial health needs. In fact, individuals with expensive health needs often spend beyond the deductible and out-of-pocket maximum levels. As a result, the incentives in HSA/high deductible health plans may not affect a large share of health care spending.
Another area of concern involves how well people can shop for health care services given their health literacy and the state of information technology at this point. Consumer-directed plans presume that people can obtain sufficient information about the price and quality of their health care to make good decisions. However, it is not clear whether the proposed web tools and technologies would be sufficient to help consumers make such complicated decisions. Furthermore, there is little in the way of good information about the costs of different health care services and provider charges.
These concerns leave many questioning if and how HSAs will affect rising health care costs and the growing rate of uninsurance. So far, enrollment is low and research is limited. However, that may change as enrollment has been growing in both the individual and employer-sponsored health insurance markets. The President has proposed committing $25 billion to expanding HSAs in the FY 2007 Federal Budget, and many states have already revised their tax laws to accommodate HSA utilization. Given the implications for the health care system of expanding CDHA, there will be much at stake in their implementation and expansion.
Discussion Questions
- What are the goals of consumer-directed health arrangements?
- What does research suggest for the impact of CDHAs on the uninsured population? On health care costs?
- What are the implications for giving consumers more responsibility for making health care decisions given the low rates of heath care literacy in the U.S.
- How might you design a consumer-directed health plan to improve the utilization of preventive services and healthy behaviors?
- How might giving consumers more responsibility about health decisions affect health liability?
- How will CDHAs affect consumers with high health costs? Low incomes?
- What are the strengths and limitations of CDHAs as a mechanism to expand coverage options to the uninsured population?
Acknowledgements: Prepared by Allison Woo, Usha Ranji, Alina Salganicoff, and Gary Claxton of the Kaiser Family Foundation.
Updated: June 2006.