Squeeze the Consumer or Squeeze the Prescriber? Conflicting Ideologies and the Rise of High Deductible Health Plans

If you were designing a program to lower healthcare costs, would you direct your efforts at the medical consumer, or the medical prescriber?  Do you create a system where an informed and empowered consumer drives the market, or one which regulates providers and holds them accountable for the services they deliver? The answer, I think, would depend on your economic philosophy: your understanding of medicine as a free market, and particularly whether you believe consumers can make rational, best-evidence decisions about their own healthcare consumption.

Some background: As I have discussed before, many economists believe that a root cause of medical inflation is misalignment between the goals of healthcare payers, prescribers and users.  And, that in the traditional (fee for service) system, few prescribers or healthcare consumers feel accountable for managing either healthcare costs or utilization.

Avg Fam Premium Full

Rise in insurance premiums- the Commonwealth Fund

Many healthcare economists feel this misalignment– along with the staggering cost of developing regulated medical science for a risk-averse population– accounts for significant medical inflation.

But, there is far less agreement on how the system should approach this misalignment. As with all basic economic problems, solutions to medical inflation differ on one’s political viewpoint.

In one camp, we find proponents of managed care who argue that the solution to high cost and utilization is a system where efficient, forward looking practice is the key and where managing prescribers through regulation and contracting is the strategy.  Consumers are incentivized to receive the “right care” through participation in narrow networks and by needing referrals for expensive care.

In the other camp are proponents of consumer accountability, who feel that medical consumers need to be exposed to financial risk in healthcare and that by being more exposed to cost, they will be more judicious in accepting care while holding their providers accountable for the bill.

This philosophical dispute is best demonstrated by looking at the change in US insurance models over the past few years.

Across the country, there has been dramatic shift as consumers move from expensive open-network and loosely managed preferred provider (PPO) and point-of-sale (POS) insurance plans to lower cost high deductible (HDHP) and managed care (HMO) insurance products.  These two products- HMO plans and HDHP plans (often tied to tax-advantaged medical savings plans) offer two competing visions for the future.

Let’s look at the implications here:

To start, there’s no question that the significant year on year increase in the cost of health insurance has been pushing consumers and employers toward lower-cost insurance options. As the above graph from the Commonwealth Fund illustrates, the average health insurance premium now represents close to a quarter of the median family income, with steady year on year growth. These costs are forcing consumers to relinquish unrestricted access and choice in the healthcare market in favor of lower cost health insurance.

Screen Shot 2014-06-11 at 8.33.51 AMAcross the country we are (generally) seen a move of consumers out of more expensive preferred provider organizations (PPOs) and into lower premium programs. More notably, there has been a dramatic rise in consumers choosing high deductible health insurance plans and also some more modest rise in HMO enrollment.







Price Waterhouse found rapid growth in HDHPs:

According to the 2013 PwC Touchstone survey of major US companies, 44% of employers are considering offering high-deductible health plans as the only benefit option in 2014. Already, 17% of employers offer high deductible plans as the only options, a 31 % increase over 2012.

Each of these two options presents a different value proposition to the consumer. High deductible plans generally preserve access to a range of providers, but ask the consumer to absorb the first several thousand dollars (up to $10k for a family) of health care costs. These plans are often tied to a health savings account where tax-advantaged money can be used by the consumer to pay for health services up to threshold at which point insurance company takes over payment. The idea behind these plans is to have consumers making healthcare decisions using “their own money”, ostensibly making them more cost conscious, at least for consumer facing products such as physicians visits, outpatient imaging, and the like.

High deductible plans create a situation where the consumer “takes risk” on health care decisions, but also create an incentive for patients to skip certain preventive care, routine health maintenance in cases of chronic disease, and to avoid seeking care at an early stage of disease– all potentially driving up cost later on. (Certain “free” preventive care is mandated by Obamacare). There is also the risk of fragmenting healthcare, with consumers receiving bits of service across multiple systems, choosing those fragments of care which are most aggressively priced in one system versus another.

Screen Shot 2014-06-11 at 8.30.19 AM

In contrast, managed care (HMO) type programs tend to be more affordable than traditional PPO insurance because they restrict access to more narrow networks, often times risk share with providers, and control utilization through referrals. Consumers generally don’t have significant deductibles, but face restrictions that they may not see in HDHP programs. The HMO programs, in contrast, tend to pass the risk onto healthcare providers. There is a greater incentive for early diagnosis and management, but a disincentive for patients to be sent outside of the system.

My own thoughts on this philosophical chasm:  the successful model of the future with have elements of both, but will lean heavily in favor of the HMO model of care.  The HDHP vision has too many holes and inconsistencies.  Here are my concerns:

1) I don’t believe that healthcare is a truly open market and the assumption that markets will be nimble enough to respond to consumer’s demands for low prices is overstated.  Most health systems today are still trying to figure out what things cost, how to allocate expenses, move to cost accounting systems and figure out pricing. Its a stretch to assume that these systems will offer transparent pricing, especially for big ticket items, anytime soon.

2) I don’t believe that consumers always understand what they do + don’t need.  An analogy is having a mechanic tell you you might need a $2000 pump widget for your car, and then feeling like an empowered consumer by shopping around for the best price.  But, who has any idea whether the widget is needed in the first place? Shopping around is only part of the needed economic analysis, and without aligning the mechanic’s interests the risk of being oversold services is high.

3) Consumer temptation to save for the short term while neglecting long-term investments in health is real.

4) Fragmentation of care is costly and neglects the fact that healthcare needs to be delivered as a “system” of services working together to be most efficient.

Finally, a few thoughts on the impact of HDHPs on HMO plans in the market:

1) The proliferation of HDHP is bad news for HMO plans in that they create terrible self-selection problem, where those sick with chronic and costly illnesses will enroll in HMOs, while the young and healthy stay in HDHPs until they get sick.  This runs the risk of putting real pricing pressure on the HMO premiums.

2) I can foresee a situation where HMO plans become more expensive, wrap-around” premium plans for the more affluent while HDHPs serve the less affluent consumer.  HDHPs may be less expensive, but the inevitable problems of uncoordinated care will push near-boomers toward HMO and then Medicare Advantage plans.

This is a shame, because HDHPs are really best suited to affluent populations who are prepared to absorb the deductible and who are less “tuned” to under-treat to save money.  These “catastrophic plans” are best suited to the affluent demographic.

One study, in Health Affairs, found that people of high socioeconomic status who enrolled in high-deductible health plans cut their use of emergency department visits for lower-severity conditions by 15-20%.

Less affluent patients who were enrolled in high-deductible plans reduced their ED use for serious health conditions–like flare-ups of congestive heart disease–by 25-30%. Hospitalizations in this group declined in the first year of the study (by 23%) but jumped in the second year indicating they delayed care.

An analogy I’ve used in the past, in describing these HDHPs is the rise of cheap short-term mortgages just before the great recession.  These slick specialty mortgages were really designed for property developers who understood the risks in relation to the interest rate savings.  Instead, they were sold by cynical bankers to consumers with no ability to pay more when the short mortgage term expired and rates had increased.  The low rate was too compelling for consumers who decided to gamble.

We know a similar thing is taking place in healthcare, judging by the massive increases in bad debt that health systems are incurring from patients in HDHP plans who simply didn’t have the funds to cover the deductible when they got sick:

“The number of accounts that we’re seeing that relate to these high-deductible plans has been building, and it has been putting pressure on our bad debt levels,” stated Daniel Cancelmi, CFO for Tenet Healthcare, quoted in a story published by Kaiser Health News (KHN).

In the end, I suggest that HMO plans, with their attention paid to the efficiency of the system of delivery, will be the long-term play here.  I’m more leery about the market’s ideologic assertion that consumers will be able to successfully navigate healthcare savings beyond narrow, short term wins for low-ticket items. And, aside from the financial discussion, we will need to recognize that economic ideology– belief in the open market, empowering consumers as opposed to regulating the market– is very much in play here.

The near term priority will be ensuring that HMO plans remain viable and affordable through ongoing growth of (young and well) members.  This will require a lot of intelligent conversation with employers about benefits extending well beyond the immediate.



  1. I don’t know if I’m the typical healthcare consumer, but I am willing to do my part to keep healthcare costs down, if I can be sure that I’m receiving top-quality care. However, in order to do so, I need to be provided with the information necessary to make cost-conscious decisions. If I have a specific health issue, and real, unbiased data tells me that the doctors in my network will take care of me as effectively as some hotshot at an academic medical center in a big city, I’m more than happy to stay in-network. I think educating consumers about where value can be found in healthcare, without sacrificing care quality, is paramount. Fortunately (and surprisingly, perhaps), there are many, many areas where this low-cost/high-quality combination exists within the world of healthcare.


    1. Great point Mike. High quality, transparent data on quality and performance is still rare. One has to trust that the organization is keeping on top of this.


      1. I think this is a real opportunity for someone to use technology to do something great. Unbiased data about provider-specific care quality, presented in a way that allows the average consumer to draw conclusions about the best value. Reviews aren’t enough. HealthGrades.Com and the like help people learn whether a physician is likable, not whether they’re a good value.

        With that said, is “value” something most people are willing to consider? Do diminishing returns as cost increases not matter in high-risk situations? When my life is on the line, do I care about what’s the best value?

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