Tuesday, August 03, 2004
Consumer-directed health care: an actuarial view
[Ian Duncan, "Does a High-Deductible Plan Lead to Good Purchasing Decisions?," Contingencies, July/August 2004.]
Using one of the employees of his company as an example, Ian Duncan provides a short explanation of how HSAs are likely to bring about more rational consumer behavior and lower health care costs:
Are consumer-directed health plans, in fact, incentives for the type of behavior their designers expect?
Early results indicate they are. Here’s an example that shows how a particular high-deductible plan member evaluates health care decisions and makes choices that include a thorough cost-benefit analysis of different treatment options and purchasing decisions.
Susan and Clark Furlong own a small organic farm outside Phoenix. They supply local markets with fresh produce and sell their products on the Internet. They have three children: Tucker, 6, Will, 4, and Tess, 2. Susan has a background in diabetes and lactation education, and works part time for Lotter Actuarial Partners.
As a part-timer, she’s not eligible for benefits, so she and Clark shopped around for a high-deductible policy, eventually buying one from Fortis. Their policy covers 100 percent of medical costs after a $4,800 family deductible. The quarterly premium is $753, before contributions to the optional medical spending account. The Furlongs decided to forgo the optional drug rider, self-insuring their drug benefits because they’re not on any maintenance medications.
As parents of young children, the Furlongs have their share of emergency room visits. Recently, Will fell while playing a recorder, which scraped the back of his throat, resulting in a fair amount of blood and discomfort. The Furlongs wanted to have Will examined by a doctor. The first decision they faced was: hospital emergency room or walk-in medical center?
The walk-in medical center was closer and likely to be cheaper, so that’s where they went. Because the Furlongs didn’t have comprehensive first-dollar insurance, the medical center wanted payment in advance before the doctor would see Will, so they paid the $200 fee. But the doctor decided that he couldn’t help, and told the Furlongs they should go to the emergency room. Before they left the walk-in center, Susan negotiated her advance payment back.
Two things immediately differentiate the Furlongs’ response under the highdeductible plan, compared with a typical insured’s response: first, a cost-benefit evaluation of the clinic vs. emergency room setting, and second, getting their money back from the clinic.
In the emergency room, the Furlongs faced a decision about having an X-ray, which they decided to do after discussing cost and benefits with the physician. Will was checked out and given a clean bill of health, although he was uncomfortable and couldn’t swallow. His physician prescribed Augmentin (a name-brand antibiotic) and Lortab elixir (a brandname painkiller). Susan checked both of these carefully, particularly the antibiotic, which cost $94.99 per prescription. The painkiller cost $27.39. In the end, she chose a generic antibiotic (Amoxicillin) at $69.69 and a generic painkiller ($14.79).
There wasn’t much the Furlongs could do about the emergency room costs, but every other expense associated with the accident was checked carefully and evaluated. They made each decision before incurring the expense.
How carefully would an indemnity, plan member evaluate similar expenses? Susan is the first to admit that she feels more comfortable with the health care system than the average consumer because of her professional background. Nevertheless, armed with good information and tools, most consumers could have made the same evaluations and come to the same good purchasing decisions, provided they had the appropriate incentives to make the effort.
Health plans are beginning to provide consumers with tools to help them make more economically affordable choices, including deciding about procedures or providers. Humana, for example, provides an attractive set of tools for members to model their use of prescription drugs and choose the “right” benefit design. Other plans offer services such as those of Health Dialog, a company that provides education and information about alternative treatment methods to members facing options and choices.
Every year, millions of consumers confront the same kinds of decisions the Furlongs face. In the typical insurance model, the purchasing decision is left to the provider and the insurance company, with little input from the consumer. The potential for systemwide savings from consumer involvement is huge. But the devil is in the details, and the proper combination of financial incentives and consumer information must be built into products to yield both savings and good health care buying decisions.
[Ian Duncan, "Does a High-Deductible Plan Lead to Good Purchasing Decisions?," Contingencies, July/August 2004.]
Using one of the employees of his company as an example, Ian Duncan provides a short explanation of how HSAs are likely to bring about more rational consumer behavior and lower health care costs:
Are consumer-directed health plans, in fact, incentives for the type of behavior their designers expect?
Early results indicate they are. Here’s an example that shows how a particular high-deductible plan member evaluates health care decisions and makes choices that include a thorough cost-benefit analysis of different treatment options and purchasing decisions.
Susan and Clark Furlong own a small organic farm outside Phoenix. They supply local markets with fresh produce and sell their products on the Internet. They have three children: Tucker, 6, Will, 4, and Tess, 2. Susan has a background in diabetes and lactation education, and works part time for Lotter Actuarial Partners.
As a part-timer, she’s not eligible for benefits, so she and Clark shopped around for a high-deductible policy, eventually buying one from Fortis. Their policy covers 100 percent of medical costs after a $4,800 family deductible. The quarterly premium is $753, before contributions to the optional medical spending account. The Furlongs decided to forgo the optional drug rider, self-insuring their drug benefits because they’re not on any maintenance medications.
As parents of young children, the Furlongs have their share of emergency room visits. Recently, Will fell while playing a recorder, which scraped the back of his throat, resulting in a fair amount of blood and discomfort. The Furlongs wanted to have Will examined by a doctor. The first decision they faced was: hospital emergency room or walk-in medical center?
The walk-in medical center was closer and likely to be cheaper, so that’s where they went. Because the Furlongs didn’t have comprehensive first-dollar insurance, the medical center wanted payment in advance before the doctor would see Will, so they paid the $200 fee. But the doctor decided that he couldn’t help, and told the Furlongs they should go to the emergency room. Before they left the walk-in center, Susan negotiated her advance payment back.
Two things immediately differentiate the Furlongs’ response under the highdeductible plan, compared with a typical insured’s response: first, a cost-benefit evaluation of the clinic vs. emergency room setting, and second, getting their money back from the clinic.
In the emergency room, the Furlongs faced a decision about having an X-ray, which they decided to do after discussing cost and benefits with the physician. Will was checked out and given a clean bill of health, although he was uncomfortable and couldn’t swallow. His physician prescribed Augmentin (a name-brand antibiotic) and Lortab elixir (a brandname painkiller). Susan checked both of these carefully, particularly the antibiotic, which cost $94.99 per prescription. The painkiller cost $27.39. In the end, she chose a generic antibiotic (Amoxicillin) at $69.69 and a generic painkiller ($14.79).
There wasn’t much the Furlongs could do about the emergency room costs, but every other expense associated with the accident was checked carefully and evaluated. They made each decision before incurring the expense.
How carefully would an indemnity, plan member evaluate similar expenses? Susan is the first to admit that she feels more comfortable with the health care system than the average consumer because of her professional background. Nevertheless, armed with good information and tools, most consumers could have made the same evaluations and come to the same good purchasing decisions, provided they had the appropriate incentives to make the effort.
Health plans are beginning to provide consumers with tools to help them make more economically affordable choices, including deciding about procedures or providers. Humana, for example, provides an attractive set of tools for members to model their use of prescription drugs and choose the “right” benefit design. Other plans offer services such as those of Health Dialog, a company that provides education and information about alternative treatment methods to members facing options and choices.
Every year, millions of consumers confront the same kinds of decisions the Furlongs face. In the typical insurance model, the purchasing decision is left to the provider and the insurance company, with little input from the consumer. The potential for systemwide savings from consumer involvement is huge. But the devil is in the details, and the proper combination of financial incentives and consumer information must be built into products to yield both savings and good health care buying decisions.
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