“Consumer Driven” Health Care Not A Solution

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Testimony on “Consumer-Driven” Health Care
Before the Joint Economic Committee
Gail Shearer, Director of Health Policy Analysis
Washington Office
February 25, 2004
So-called “consumer driven” health care plans, which have defining features of high-deductible coverage and (possibly) tax-advantaged employer contributions to health reimbursement or savings accounts, may create serious problems for the U.S. health care system. Consumers Union believes that this coverage is misnamed, misguided from a policy perspective, and a dangerous distraction from the need to solve the health insurance crisis that faces 43.6 million uninsured consumers and tens of millions of underinsured consumers. Our testimony also addresses issues raised by health savings accounts, as included in the recently enacted Medicare bill and the President’s new proposals. These proposals are likely to accelerate the erosion of current coverage by adding tax benefits for high-deductible coverage.

We take issue with the growing use of the term “consumer-driven” to refer to the transformation of the health care system to one characterized by high-deductibles. “Defined contribution” health care would be a more accurate shorthand way to refer to a health care approach that essentially increases deductibles and shifts costs to sicker employees. Many employees with chronically ill or seriously ill family members will not view this transformation as consumer-friendly, despite the name.

The recent expansion and renaming of medical savings accounts and the President’s proposal for a new tax deduction are more likely than previous efforts to transform the health insurance marketplace to one characterized by high deductibles. The Economic Report of the President makes it clear that this is the intention; the Administration frames the problems in the health insurance marketplace as too much rather than too little insurance. The Report establishes the ideal health insurance marketplace as one in which high-risk consumers face health insurance premiums consistent with their risks, explicitly rejecting the current goal of health insurance markets of spreading risks broadly across the community. At the same time, the Report ignores the reality that the uninsured and underinsured face severe health consequences, even bankruptcy or death, because of the lack of adequate insurance. The Administration’s proposals, which boost “consumer-driven” health care, will shift more costs to those who are sick.

While the Administration proposals will undermine employer-based health insurance and shift more to the individual insurance market, that market underwrites risks carefully and does not make affordable, comprehensive coverage available to individuals who have pre-existing conditions. The underlying nature of the population’s health status – in which risks vary widely – makes the health insurance market different from other markets such as the market for cars or toasters. Individuals with underlying health risks benefit from employer coverage or other large pooling arrangements (e.g., public programs), since this spreads risks broadly. For those covered by employer health plans now, the average cost (in 2000) was about $2,600, but those in the top tenth of spending had average costs of about $16,700.

Because of the combination of variation in risks (which lead to different health insurance selections), and higher tax brackets and ability to meet high deductibles, HSAs will appeal disproportionately to the healthy and wealthy. Many economic analyses, including the American Academy of Actuaries, have reached the conclusion that this type of high deductible health insurance will fragment the risk pool, shift costs to the sick, and ultimately drive low-deductible coverage out of the market since it can not exist side-by-side in the marketplace with high-deductible coverage because of the underlying nature of the health insurance market.

“Consumer-driven” health care is likely to aggravate the problem of the underinsured since individuals with moderate income are likely to face out-of-pocket health care costs (and premiums) that exceed ten percent of their income.
The focus on transforming our health care marketplace to one characterized by high-deductible policies is a dangerous distraction from the urgent national goal of extending affordable, quality health coverage to all.
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