The Agenda

Will Consumer-Directed Health Plans Return Us to the Bad Old Days of Anti-HMO Hysteria?

Austin Frakt suggests that the proliferation of CDHPs might lead to a backlash as cash-strapped consumers choose HMOs due to the low sticker price. To make the case, he points to the anti-HMO backlash of the late 1990s — and he makes an important and often neglected point:

[F]or every consumer of health care there is a provider, and both participated in the HMO backlash. David Mechanic reminds us that much of the cost control of 1990s managed care came in the form of lower payment rates for hospitals, doctors, and other providers of health services and goods. Additionally, utilization reviews imposed other costs on practitioners. To put it bluntly, health care providers hated managed care as much or more than consumers.

Essentially, medical providers led a well-funded campaign to discredit HMOs for effectively imposing cost pressure. One is reminded of the left-of-center narrative that the Tea Party has in fact been orchestrated by the billionaire Koch Brothers. It turns out that an “anti-corporate” populist upsurge of an earlier time really was orchestrated, at least in part, by medical providers that benefit from the inefficiencies that plague Medicare’s fee-for-service structure. And many of the same medical providers, particularly large general hospitals, were similarly co-opted by the push for an approach to universal health coverage that relied heavily on subsidizing legacy private insurers. 

Frakt has a somewhat different view:


Since patients have greater trust in and sympathy for those providing care than those with the power to deny coverage for it, this was not a fair fight. Whatever reservations consumers had about managed care, it was leveraged, amplified, and exploited by those with the power, money, and motivation to do so.

In terms of cost control, managed care worked. Maybe it worked too well, fueling the fire that consumed it.

This much is not in dispute. 

Will the consumer-directed paradigm suffer the same fate? The history of health care cost control is that nothing works, or not for long anyway. The optics of high deductible health plans won’t be aided by the possibility that they may lead to increased rates of premium growth. Don’t be surprised if ratcheting up deductibles which, in turn, leads to lower health care utilization and provider revenue, succeeds to the point of failure too. [Emphasis added]

Frakt has discussed the idea that CDHPs might lead to increased rates of premium growth elsewhere:

Aon Hewitt’s 2011 Health Insurance Trend Driver Survey explained something I had not considered before: “deductible leveraging.” That’s the term for a phenomenon that can cause high deductible health plans to have greater relative increases in premiums than plans with lower deductibles.

Frakt quotes from the survey to illustrate the phenomenon:

Compare two nearly identical plans, the first with a $250 deductible and the second with a $1,000 deductible. For a $5,000 procedure, the first plan pays $4,750 and the second plan pays $4,000. The next year, the cost of the $5,000 procedure increases by 6% to $5,300. The first plan would pay $5,050 ($5,300 – $250), with an overall trend increase of 6.3%. In this instance, deductible leveraging increased the trend by 0.3%. The second plan would pay $4,300 ($5,300 – $1,000), with an overall trend increase of 7.5%. The high deductible plan experienced a 1.5% deductible leveraging impact in this example.

This certainly seems plausible. But of course part of what we might call the market-oriented reform thesis in that the cost of expensive procedures will tend to decrease as medical providers begin to specialize. Darius Tahir and Clayton Christensen discuss the basic idea in a column published last year:


Another problem with health care’s business model is that its services are generally housed together in a centralized setting. A hospital performs many services: it treats complicated and urgent cases, but it also has to handle simple treatments that are easy to diagnose and straightforward to cure. This is a critical distinction if health care costs are ever to come down: the former function indeed requires a lot of expertise and technology to manage, but the latter can be delivered elsewhere, in a lower-cost venue by lower-cost personnel.

But all too often, the use of new business models and technologies in health care is incentivized along fee-for-service lines, so that prices don’t fall as they have in most other industries. In Massachusetts, for example, digital mammography is 45 percent more expensive than non-digital mammography, even though it ought to be cheaper on a per-unit basis: it’s faster, and it neither requires film nor physical storage. But there is little incentive for hospitals and physicians to disrupt existing business models by undercutting their own prices.

Arguing over rate changes is only dealing with the end of a long chain of errors and problems. All that will likely be accomplished is more insurance vs. provider bickering over pricing, or worse yet, a reduction in services that leads to longer queues and less access to care–in essence, an intensification of the status quo.

Instead, achieving cost savings and better care by changing the delivery model should be the goal, because those benefits will travel up the chain of care. [Emphasis added]

Granted, this is only a thesis. But the broader point is that CDHPs need to be one component of a large set of health-system reforms that will include addressing market concentration in the provider space, and the many ways in which large hospital groups fight the “cannibalization” of profitable business lines that is the driver of delivery model innovation. Certain treatments should be outsourced to specialized providers, and for-profits will tend to gravitate towards the most profitable business lines. The more big incumbent medical providers fight this, and the more we allow them to win these fights, the more trouble we’ll find ourselves in.