June 17 2011
by Todd Hixon

Customer-Driven Health Care

We’ve made several health care related investments recently:  Qliance, Healthwarehouse, and Truveris.  Customer-driven health care is the theme that unifies them.  When customers (individuals and health plan payers) take charge, things change in good and important ways.  And customers are taking charge because the cost of health care has become unaffordable for everyone, even the U.S. government.

I recently came across data on health insurance that drives this point home. Our system, an accident of politics and history, causes most working people to receive health care from employer health insurance (EHI) plans.  Employers justify health benefits as necessary to attract employees, the tax system favors EHI, and governments use generous benefits as a way to pay for current services from future budgets.  There is strong evidence that this system is driving huge cost while delivering poor value.

Employees do not understand how much money is being spent for their benefits. MetLife found that employees’ estimates of the cost of their benefits average 55% of the actual cost.

Employees value cash compensation several times more than health coverage.  85% of employees would keep an otherwise attractive job if it dropped EHI.  And ~30% of money allocated to employee benefits is unspent because employees opt out.  These employees probably don’t put much value on their benefits.

When consumers buy their own health insurance, they buy more Spartan plans. Self-pay consumers choose average individual deductibles of $1,750 versus $460 for employer plans, family deductibles of $2,750 versus $1,040, and co-pays of $28 versus $15-$20.  Ten percent choose high-deductible health plans (HDHPs) with Health Savings Accounts (ie, consumers directly control $3,000-$7,000 of annual spending).  When it’s their money, employees value the money more than the benefits.

Self-pay consumers do value protection from the cost of major illness. Their average out-of-pocket maximum is much closer to employer plans: $4,050 versus $3,000.

Contrary to myth, self-pay consumers do not skimp on care they need.  (These data come from studies of people enrolled in HDHPs.)

  • They are more likely to have annual physicals and opt into wellness programs
  • They receive recommended care and take medications at equal or higher rates

Self-pay consumers realize significant savings:

  • They make significantly fewer emergency room visits and have lower hospital admission rates
  • They are more likely to enquire into medical bills
  • Medical costs for HDHP enrollees are 12% lower than typical PPO plans
  • Rate of cost increase is much lower:  5.6% versus 14% in one study, -4% versus 9% in another.

And self-pay consumers are not a self-selected group that is healthier for some reason.  They are demographically similar to people receiving employer benefits.  And, employers who move their entire workforce to high-deductible plans see results similar to those above.  Self-pay people are different because they have skin in the game.

Bottom line:  classic, paternalistic employer-sponsored health benefits are hugely wasteful.  New, customer-directed approaches unlock proportionate value.  They will grow fast in our health-poor society.

Sources: Studies done by MetLife, CIGNA, Humana, America’s Health Insurance Plans, McKinsey, Liazon, and ArrayHealth.  Thanks to Liazon for collecting much of this data in its white papers.


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