Comparative Analysis of Consumer-Directed Health Plans vs. Traditional Cost Sharing

1. Comparing the Effectiveness of a Consumer Directed Health Plan with Traditional Cost Sharing in Controlling Medical Care Use and Cost Roger Feldman/Steve Parente University of Zurich, Switzerland June 21, 2006 This research was supported by a grant from Pfizer, Inc. The authors have no conflict of interest with the grantor. School of Public Health

2. Outline • What is a consumer directed health plan? • General introduction and preliminary research findings • Theory of consumer behavior • CDHP cost-sharing design creates a budget constraint with 2 kinks • Contrast with ‘standard’ health insurance that uses coinsurance or deductible • Determine expected effects on enrollee behavior • Empirical model and results School of Public Health

3. Health Toolsand Resources Health Coverage $$ Annual Deductible Definity HealthCareAdvantage Web- and Phone-Based Tools Preventive Care 100% Annual Deductible ‘Classic’ CDHP Model – Definity Health in Minneapolis • Health Reimbursement Account (HRA) • Employer creates tax-advantaged account • Member directs HRA • Account rolls over at year-end • Account does not contain ‘real’ money and does not belong to employee • Health Coverage • Preventive care covered 100% • Annual deductible in $1,000s • Expenses above deductible covered at 80-100% HRA • Health Tools and Resources • Care management programs • Internet tools to manage HRA, find providers and services School of Public Health

4. Health Coverage $$ Annual Deductible Preventive Care 100% Annual Deductible The Health Savings Account (HSA) An HSA account is owned by the individual and used to pay for current and future medical expenses Both employee and employer can make tax-free contributions to HSA Used with a high deductible health plan HSAs were enabled by the 2003 Medicare Modernization Act Bush Administration has proposed refundable tax credits for individuals to purchase plans with HSAs HSAs are offered by UnitedHealth, the Blues, Aetna, Cigna, Humana, and Kaiser HSA School of Public Health

5. Who Chooses a CDHP? • Strongest and most consistent conclusion: CDHPs are preferred by highly-paid employees (Parente, Feldman, and Christianson, 2004) • A large employer that offered a PPO and POS plan introduced Definity Health 2001: • 38% of employees choosing Definity had income above the firm’s 75% percentile • 19% of POS and 29% of PPO enrollees were above the 75th percentile of income School of Public Health

6. Do CDHPs ExperienceFavorable Selection? • When the University of Minnesota offered a CDHP in 2002, there was no evidence of favorable selection (PFC, 2004) • In the large employer previously mentioned, CDHP enrollees had lower baseline illness burden than the PPO but about equal to the POS plan • In our largest sample of 80,000 covered lives in 3 employers, there is evidence of mild unfavorable selection against the CDHP School of Public Health

7. Potential HSA Take-up • Medicare Modernization Act of 2003 lets individuals and employers contribute to tax-free health savings accounts up to the lesser of the deductible (at least $1,050 for an individual or $2,100 for a family) or a maximum set by law ($2,700 for a single person or $5,450 for a family) • 2006 State of the Union (SOTU) proposes to eliminate all taxes on out-of-pocket spending through HSAs • Low-income families would be offered refundable tax credits to purchase health insurance policies with HSAs • We project that tax credits would increase HSA enrollment from 3 million to 7 million (Feldman, et al., 2005) with much of the increase coming from previously uninsured School of Public Health

8. Price-elasticity* of uninsured take-up with respect to HSA premium subsidy * = % change in uninsured / % change in premium School of Public Health

9. CDHP Effects on Cost and Use • Evidence is very preliminary, but it suggests that CDHPs with small gap between HRA and deductible do not control cost & use (PFC, 2004) • CDHP disadvantage is most striking for hospital cost versus POS cohort • CDHP pharmacy cost trend is most favorable School of Public Health

10. Hospital Costs 2000-2002 Note: costs are adjusted with 2-part model for age, gender, case-mix, income, number of covered lives in contract, and use of flexible spending account School of Public Health

11. Why is Today’s Talk Different? • Our prior work simply compared costs or use for all enrollees in each cohort, e.g. did the CDHP cohort spend more on average than the PPO cohort? • This research recognizes that the effects may differ within the CDHP cohort • Key insight: CDHP creates a budget constraint with 2 kinks • Kinked budget constraint has different incentives for ‘low’ vs. ‘high’ users of services School of Public Health

12. Goods Deductible Budget e b a fCo-Insurance Budget c d CDHP Budget Medical Care HRA Deductible The Kinked CDHP Budget Constraint School of Public Health

13. Goods FSA Budget Medical Care FSA If I Only Lived One Year… FSA = Flexible Spending Account With an FSA, You ‘Use It or Lose It’ at the end of the year School of Public Health

14. Key Difference Between FSA and CDHP • HRA lasts more than one year if you stay with the employer and HSA is owned by enrollee • Both versions of CDHP provide ‘insurance’ against cost of possible serious illness in the future • Risk-averse, far-sighted consumers in good health may conserve medical care in a CDHP School of Public Health

15. Model (1): Basics 2 periods and 2 states of the word: ‘good health’ and ‘serious illness:’ Known probability p that healthy consumer will become seriously ill next period Fixed money income Y and employer contribution of C in each period C1 can only be spend on medical care; C2 can be spent on medical care or goods Insurance policy has deductible D and no coinsurance School of Public Health

16. Model (2): CDHP Equilibrium Healthy consumer’s objective function: Solution involves finding optimal M2 given good health, then recursively choosing how much to save in the first period: School of Public Health

17. Goods b a c d CDHP Budget Medical Care HRA Deductible CDHP Equilibrium School of Public Health

18. Model (3): Deductible Plan • Deductible plan (D-plan) has same F.O.C. but different equilibrium value of M1 compared with CDHP • Suppose the D-plan enrollee had the same value of M1as the CDHP enrollee • That would imply equal H1 but less saving • Less saving implies a higher value of E(W2 ) • That contradicts the F.O.C. • The D-plan enrollee cuts back M1 until H1 = E(W2 ) School of Public Health

19. Model (4): Coinsurance plan • Assume the coinsurance plan (C-plan) has c % coinsurance up to a maximum limit on out-of-pocket expenditure • At c = 1, the C-plan is identical to D-plan • At c = 0, medical care in the C-plan is ‘free’ so there is no reason to conserve • The demand function is continuous, so there must be 0 < c* < 1 at which M1 in the C-plan and the CDHP are equal School of Public Health

20. Predicted Spending by Budget Region School of Public Health

21. Data • Large employer added a CDHP to previously-offered PPO and POS Plans in 2001 • Quasi-experimental pre/post design • We selected 3 cohorts of workers continuously employed from 2000-2003: • Always in PPO • Always in POS • PPO or POS in 2000, switched to CDHP in 2001 and stayed in CDHP 2002 and 2003 School of Public Health

22. Plan Characteristics School of Public Health

23. Empirical Model – Step 1 • Predict employee’s 2000 spending region on the basis of cohort, contract-level, and employee demographic data • Cohort stands in for unmeasured variables that affect spending • Control for health status using indicators for 34 ‘adjusted diagnostic groups’ (Starfield and Weiner, 1991) School of Public Health

24. 2000 Cost Model Dependent variable = ln(2000 total medical expenditure in contract); regression controls for 34 ADG categories School of Public Health

25. Predicted 2000 Spending Regions by Cohort School of Public Health

26. 2001-2003 Cost Models • We estimated 2-part models for total $, physician $, Rx $, and proportion of Rx $ on brand-name drugs • 1st part = probit analysis of any $ • 2nd part = ln($  $>0) • Models include predicted region x Cohort • Will present ‘key’ results School of Public Health

27. Total Expenditure Regressions control for year, age, male, income, covered lives, FSA use, concurrent ‘health shock’; omitted category = POS x REGION1; NA = ‘not applicable’ because all observations = 1 School of Public Health

28. Physician Expenditure Regressions control for year, age, male, income, covered lives, FSA use, concurrent ‘health shock’; omitted category = POS x REGION1; NA = ‘not applicable’ because all observations = 1 School of Public Health

29. Rx Expenditure Regressions control for year, age, male, income, covered lives, FSA use, concurrent ‘health shock’; omitted category = POS x REGION1 School of Public Health

30. Brand Name Rx Proportion Regressions control for year, age, male, income, covered lives, FSA use, concurrent ‘health shock’; omitted category = POS x REGION1 School of Public Health

31. Summary of Empirical Findings (1) • CDHP enrollees predicted to be ‘low spenders’ consistently spent less in following years than a comparison group with conventional cost sharing • This difference was found in all probit equations and for cases with positive total expenditure and Rx expenditure • This finding is striking because CDHP enrollees had no cost-sharing in this region • HRA account provides insurance against future expenses School of Public Health

32. Summary (2) • CDHP enrollees predicted to be in Region 2 or 3 spent more than the comparison POS group • This finding is similar to our previous cohort study in 2001 and 2002 (PFC, 2004) • CHDP enrollees in Region 3 have used their accounts and face no cost-sharing at the margin  no incentive to conserve on medical care • The maximum out-of-pocket limit is too low • Problem could be addressed by raising the limit and introducing modest coinsurance above the limit School of Public Health

33. Summary (3) • Tiered pricing steers POS enrollees away from brand name prescription drugs • More results will be forthcoming (Parente, Feldman, and Song, 2006) School of Public Health

34. Final Thoughts • Both CDHP and deductible plans represent return to ‘demand side cost-sharing’ in US health care • Is consumer directed health care just ‘deductible-lite’? • Our models suggest that CDHP is welfare-inferior to deductible plan because it imposes an additional constraint on enrollee • But we ignored the tax subsidy for HRA School of Public Health