Debating the Impact of High-Deductible Health Plans

By Albert B. Crenshaw
Sunday, April 30, 2006

The current Next Big Thing in controlling health-care costs is "consumer-driven" medical insurance.

These plans combine a high-deductible insurance policy with a tax-preferred savings/investment account. The theory is that the insurance will protect you against catastrophic medical costs -- and pay for most preventive care -- while the savings account can be used to pay for health-care items not covered by the policy.

And if you don't spend the money in the account, you get to keep it, allowing it to accumulate against the day when you really get sick and need it to pay the deductible and perhaps some related costs.

The plans are already spreading rapidly. If you have employer-sponsored health insurance, you will likely find one of these offered to you in the next year or two, if you haven't already.

The plans are also available in the individual health-insurance market.

Proponents of these plans argue that they give you an incentive not to use health care you don't really need and to shop carefully for the care you do need. This newfound cost-consciousness, the thinking goes, puts downward pressure on prices throughout the system.

The theory seems to make sense. It's the reality that's a problem.

In the real world, a very small percentage of the population accounts for a very large percentage of health-care spending. By contrast, a large majority "consume" relatively little health care each year.

A recent study by benefits consultants Watson Wyatt Worldwide found that among a group of large employers, which Watson Wyatt has followed closely over the past 11 years, 72 percent of workers and their families account for only 11 percent of employer health-care expenditures annually. At the same time, a tiny group -- 4 percent -- account for almost half (49 percent) of the employer costs.

What this means, said Ted Nussbaum, Watson Wyatt's director of health-care consulting in North America, is that while a large share of the population -- the low-cost three-quarters -- could be influenced by economic incentives to curb health-care spending, that would affect only a small portion of costs overall.

Meanwhile, the high-consuming 4 percent "are really sick people, and a $1,000 or $2,000 deduction is not going to change their behavior very much," Nussbaum said. Parents of a premature baby, for example, aren't likely to be doing an economic analysis of their infant's care.

The conclusion, he added, is that "in and of themselves, the high-deductible health plans have a zero impact on health-care [cost] trends. Clearly, if you ask people to pay more money, you will get a one-time reduction in the base cost. But they have a zero impact on annual trends."

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