The discussion of how Americans and their employers pay for increasingly costly health care coverage will likely be stoked by this recent study appearing in the journal Health Affairs that concludes consumer directed health plans — high deductible, catastrophic coverage combined with Health Savings Accounts (HSAs) — could achieve $57.1 billion savings annually if half of non-elderly U.S. population had them. That’s because they operate as true insurance plans, covering medical costs for unexpected, catastrophic events with people paying out of their own pocket for routine care and prescriptions. The study predicts the potential savings of such together with additional incentives in the Patient Protection and Affordable Care Act will encourage their growth.
Widespread adoption of this scheme would return the nation to something akin to the “major medical” coverage model of health insurance that existed in the post World War II period until pre-paid plans such as health maintenance organizations (HMOs) became prevalent starting in the 1970s and 1980s. Their growth created an expectation of no or minimal out of pocket costs for routine care and preventative screenings, leading the study’s authors to caution those in consumer directed health plans may forgo them, potentially leading to higher health care costs over the long term.
The authors also suggest that wider adoption of consumer directed health plans could be disruptive to the traditional health insurance and HMO markets and promote adverse selection in these product lines since healthier people may opt for consumer directed plans since their premiums tend to be lower. A major challenge facing health insurers and plans, however, is setting premiums for consumer directed plans low enough to jibe with consumer expectations of lower, more affordable premiums in exchange for taking on first dollar exposure up to a high deductible limit. Older albeit generally healthy people in the individual market have experienced sticker shock at rates for high deductible plans, deterring them from buying the coverage even though the premium rate reflects the actuarial risk of a catastrophic medical event.
The interim high risk pool created as part of the Patient Protection and Affordable Care Act (PPACA) to provide a market of last resort for people who buy their own health insurance but who can’t meet medical underwriting standards has become a catastrophic risk pool serving people with very high cost conditions.
According to a federal government report issued this week, those covered by the Pre-Existing Condition Insurance Plan (PCIP) are averaging annual costs more than double the $13,026 actuaries estimated in November 2010, The Washington Post reports.
A review of the report shows nearly 80 percent of claims costs are attributable to five medical conditions: cancer, cardiovascular disease, rehabilitative care and aftercare, and degenerative joint diseases. The higher than expected costs indicate that after getting off to a slow start in 2010, the PCIP could spend all of the $5 billion the PPACA appropriated to it by 2014 when insurers must accept all applicants regardless of medical condition or history. However, several factors are likely to moderate future enrollments. They include high premiums, the requirement that applicants be medically uninsured for at least six months as well as pre-existing state run high risk pools already serving those deemed medically uninsurable by private insurers and health plans.
The increased use of catastrophic health insurance coverage could get a boost from the U.S. government’s fiscal woes as it looks to pare down deficit spending including potentially eliminating the tax break employers get for employee health insurance costs. High deductible catastrophic coverage is increasingly a mainstay among the self-employed in the individual health insurance market and is now moving into employer paid insurance. It’s already becoming prevalent among smaller employers with 100 or fewer employees.
Catastrophic coverage works similarly to what was known decades ago as “major medical.” As the name suggests, it covers only high cost care such as hospitalizations and surgeries. Routine doctor visits are paid out of patients’ pockets.
“The idea isn’t to just raise revenue, economists say, but finally to turn Americans into frugal health care consumers by having them face the full costs of their medical decisions,” an Associated Press story today notes. Health care policy wonks have long observed that as long as people’s medical care is largely paid by others — employers, health care service plans and insurers — there is little incentive for patients to be parsimonious when using medical services.
This logic would work if the market for health services functioned as a truly competitive market. Inasmuch as there are many sellers and buyers of health services, the market is nominally a competitive one. But it doesn’t behave as a competitive market. In fact, just the opposite. People tend to remain loyal to their doctors for routine care. And for emergency or non-routine care, the motive is to get treatment quickly and not shop around for treatment options and prices.
Bottom line, the rise in catastrophic coverage isn’t emerging as a remedy to make the health care market more competitive in the hope doing will will drive down prices and bend the cost curve. Rather, it reflects the fact that health care costs have reached a tipping point such that it’s no longer feasible to cover most routine services.