A New Model for Controlling Health-Care Costs

July 20, 2001

onsumer in the same phrase as health care? Right up there with jumbo shrimp on your list of favorite oxymorons? Perhaps it shouldn't be. Perhaps putting the consumer in the driver's seat is exactly what our health-care system needs.

     Look at where we are today. Health plan purchasers -- employers and others -- are confronted with a significant resurgence of health-care inflation, with increases coming into 2001 nearing if not exceeding the double-digit barrier. HMO rates are far from immune to these cost increases, as they and other managed-care programs have been hit by soaring prescription drug costs and increasing provider fee pressures. A managed-care program is only as good as its provider network, and providers have strengthened both their resolve and negotiating power in their financial dealings with network managers.

     Increases in the cost of care are compounded by growth in utilization and all of the other usual "trend" factors -- expensive new technology, heightened demand from an aging population, and so on. Many of the much-ballyhooed care- and cost-management techniques have proven powerless against these trends, and have been abandoned by employers and some managed-care companies alike, because of a combination of questionable results and poor PR in the provider and patient communities.

     Adding to cost pressures stemming from the health plans themselves, employers spend millions administering their complex structures of offerings, negotiating multiple sets of rates and benefits, and managing a myriad of network and plan rule variations. As for employees, well, they generally find more to hate than like about their health-care programs. And all of this comes at a time when a) the labor market is still tight, and b) corporate financial results are not what they once were.

     How did we get here? It's the result of a series of efforts to "fix" what was perceived as "broken" in the health-care system (see chart below). In the 1970s, we began to move away from health "insurance" to health-care "management," abandoning most cost-sharing in favor of managed-care techniques. As each solution has generated its own set of issues, we have applied new fixes, ending up with the current array of plans, rules, and benefit expectations.

Health-Care Breaks and Fixes


Issues "Fixes"


 Base + major medical
  -- "insurance" on
  high cost items
  -- cost-sharing on

 -- Excess in-patient
 -- Utilization review
 -- Comprehensive
Early 80's  Comprehensive
  -- co-insurance on all
  -- in-patient utilization
 -- Price inflation

 -- HMOs
 -- Provider networks

Late 80's/
Early 90's

 "Managed" indemnity/

 Co-pay based HMOs

 -- Cost shift to
 -- HMO selection
 -- Push for provider
 -- Point of Service
 -- Capitulation
Late 90's  Co-pay based HMO
 and POS
 -- Renewed inflation
 -- Plan proliferation
 -- Employee
 -- Provider "pushback"
 -- Questionable results
 -- Managed RX,
 -- Some shift to PPO
Early 00's  Co-pay based HMO,
 POS, and PPO
 Same old, same old
 -- managed care benefits
without managed care
 -- high administrative
 -- legislative pressure
for patients' rights
 -- demand increases
 -- Our current
The Job of Managing Care
 Employees today actually exercise choice and control one time each year -- at open enrollment. By enrolling in a given managed-care plan, employees agree to submit to that plan's rules, with a trade-off of extremely high benefits (e.g., $10 co-payments for office visits and drugs, modest or no cost-sharing on other in-network care) that help make the rules palatable. Unfortunately, it has only recently dawned on us that much of managed care is not up to the job of managing care, particularly when the user is completely divorced from the financial consequences of use.

Our Current Challenge
 Where do we go from here? Our current challenge is to change the demand curve for health care. It is generally accepted that about 65 cents of each health-care dollar is spent on "non-discretionary" care -- treatment of heart disease, cancer, broken limbs, chronic disease. In these situations, most patients can exercise, and should generally be asked to exercise, very little control. The remaining 35 cents can be fairly considered "discretionary." This does not mean unnecessary; rather, it means that it is care over which the patient can and should exercise control. For this to begin to happen, we have to create a health-care consumer, at least partly by reinstating cost-sharing into the equation of health-care consumption. For a consumer model to work, the consumer must have some skin in the game, to have a reason to ask, "What will this cost?" "Is this really necessary?" and "What alternatives are there that might cost less and be equally effective?"

     As we move forward, we need to retain that which is good about managed care, and discard that which has not worked. Among its many successes, managed care has been effective at removing a great deal of inefficiency from the system, including excess hospital use and unchecked pricing. At its best, it has also been good at promoting preventive care and identifying high-quality providers. We all know that employees love not having to stockpile receipts and submit claims.

     No new "fix" should abandon these gains, or create financial obstacles that hinder access to childhood immunizations, regular Pap smears, mammograms, and other desirable preventive measures. Any new fix should build on these gains. And any new fix should tap fully the power of the Internet to create the level of awareness -- a mind-set of questioning rather than of passive acceptance -- that is needed to turn patients into consumers.

Design Issues
  • Defining covered preventative services.

  • Establishing cost-sharing parameters.
    • Out-of-pocket exposure (deductible/account level/corridor/coinsurance limits).

    • Demographic variations in cost-sharing (family status, pay, employee group).

  • Establishing extent/nature of employee choice in deductible levels/gap between deductible and account.
    • Pricing of choices (deductible variations, more "traditional choices).

  • Determining account accumulations rules (handling of unused amounts at termination, retirement).

Rethinking Health Care
 We have been working with some of our clients -- and proselytizing others -- to rethink today's health-care model. The basic design concept we are exploring involves four pieces (see diagram above).

  • Forming the foundation of the pyramid, necessary preventive care is covered at a very high level (perhaps 100 percent) to ensure continued access to and use of these services.

  • At the top of the pyramid, "insurance" (from the patient's perspective, irrespective of the actual funding mechanism) takes over, providing full reimbursement of necessary health care when a targeted cost-sharing level (an out-of-pocket limit) has been reached.

  • The core of the pyramid is the core of the design concept: a high deductible combined with an employer-funded account that can be used toward satisfaction of that deductible. The high deductible creates the desired financial involvement on the part of the user; the account makes the high deductible acceptable in today's environment and budgetable for the user.

 Key to the financial viability of the model is that there be a significant gap between deductible and account, a point at which employees will be out-of-pocket for their use of care. Also key to the financial and theoretical viability of the model is that the account belong to the employee, and that any unused funds from a given year's account allocation may be carried forward into the next year. Thus, although the employer provides funding toward satisfaction of the deductible, the employee is spending his or her own money, whether the money is from the account or out-of-pocket. Unused funds in the account can be accumulated and applied toward a following year's deductible or perhaps toward expenses in the longer-term future (e.g., retiree medical costs).

     The design concept is analogous to the medical savings accounts that are currently available only to small employers and the self-employed. Here, the accounts are employer-funded and are earmarked specifically for health-care expenses. The "save it and keep it" idea behind the account is diametrically opposed to the "use it or lose it" idea behind today's flexible spending accounts. (The accounts in this model involve no employee pre-tax money and -- we and others believe -- are therefore exempt from cafeteria-plan rules that would require year-end forfeiture of unused amounts under current tax law.)

     And the design, which involves employee use of an accumulating account or out-of-pocket funds for significant up-front expenses, is diametrically opposed to today's co-payment design. As employees use their accounts, they will see what care costs, and they will begin to ask questions and change their utilization patterns.

     Changes in design must be supported with technology that enables health-care consumers to tap into information about recommended care, possible providers of that care, and options. Consumers should also be able to monitor in "real-time" the status of their accounts, and see how their own management efforts yield results. To retain the convenience of (from the employee's perspective) paperless reimbursement from accounts or insurance, card-swipe (effectively debit card) technology should be in place at offices of physicians and other providers.

Building a New Paradigm
 The design issues involved in a shift to this model are manifold, as are the implementation challenges.

     Perhaps the ultimate in consumer-based health care would be a shift to a "defined contribution" model, in which employees would use fixed allowances from their employers to shop for health-care insurance products from outside vendors. For a true DC model along these lines to become a reality, a great deal of change (in health-care markets, in employer and employee attitudes, in tax law) must take place. The model we describe here is a reality today, and we believe it can be a significant positive force in transforming today's health-care picture.

Workforce, July 2001, pp. 44-48 -- Subscribe Now!