The Rise of Consumer-Driven Care

Will ObamaCare put a stop to the most promising way of controlling health care costs?

The American health care debate occurs primarily between two factions: On one side are the centralizers. They prize equality of care and access, and believe that, to the extent possible, health risks should be spread proportionally amongst the populace. They argue that health care is sufficiently complex that most individuals cannot make decisions for themselves. And they say that the responsibility for making tough decisions about how to keep health care costs under control ought to be made by enlightened, well-intentioned policy elites.

On the other side are the decentralizers. This faction prizes the subjective preferences of individuals, and takes the line that centralized decision making does not account for individual variations in responses to care, and is a poor substitute for local, personal knowledge. Further, they argue that artificially redistributing risk obscures the true cost of care, and inevitably—and uncontrollably—drives up prices and spending.

Decentralizers' greatest weakness is health care anxiety, the entirely reasonable (if not always justified) fear that some great health care misfortune will befall an individual or her family.

Partly for this reason, decentralizers—and I count myself as one—have not had much success in recent years. The recently passed health care overhaul forcibly spreads risk, requires an up-front expense of more than a trillion dollars, and is likely to do little to contain costs long-term.

Yet the news is not entirely grim. According to a new study from America's Health Insurance Plans, a trade group representing the insurance industry, consumer-driven health care plans—which typically feature a high-deductible insurance plan paired with a health savings account (HSA)—are expanding rapidly. As of January 2010, they are used by more than 10 million people, up from 6 million in 2008.

Consumer-driven plans blend the decentralizers' individual focus with a lighter version of the centralizers' risk sharing. That means they harness the power of individual preference and decision-making, but without sacrificing stability and security. Patients make their own decisions about relatively inexpensive, routine care, but limit their exposure to expensive, unforeseen illnesses or injuries.

Because these patients are spending their own money—and can keep the remainder—they have an incentive to understand their individual care and cost options, and make prudent decisions. At the same time, they voluntarily pool their greatest risks, providing a measure of predictability and stability. The result is patient choice, but without anxiety.

Still, the news is not all good. Consumer-driven plans work in part because they are customizable and cheap. But under the new health care law, that may not be the case for long. The law doubles the penalties for HSA spending that isn't approved by regulators. And, according to John Goodman, a frequent Health Affairs contributor and the President of the National Center for Policy Analysis, "it opens the door to death by regulation." That's because it gives the Secretary of Health and Human Services the power to mandate health insurance benefits. As Goodman explains, that means "the Secretary could make the mandated health insurance plan inconsistent with the requirements of the HSA law, thus effectively outlawing any new contributions to HSAs."

That's a shame. Consumer-driven plans don't just work in theory; after a decade of use, there's strong evidence that they are the best known mechanism to achieve lower costs without sacrificing quality of care. A 2009 metastudy of high-quality research on consumer-driven plans by the American Academy of Actuaries (AAA) reported that "properly designed [consumer-driven health] plans can produce significant (even substantial) savings without adversely affecting member health status."

With traditional insurance plans, the only question is how much costs will grow each year. The AAA review of consumer-driven plans, on the other hand, showed first year drops of between 5 and 15 percent—putting total savings (when compared with traditional plans) between 12 and 20 percent. And although the evidence is less certain, the AAA metastudy even showed smaller cost reductions in subsequent years.

Critics of consumer-driven health care argue that, by allowing individuals to keep unused health care dollars, the plans create a financial incentive to skimp on preventive care. But the AAA report reveals this claim not only as baseless, but as the opposite of the truth: Every one of the studies reviewed reported a "significant increase" in preventive services.

This last point is especially important, for it speaks directly to the centralizers' idea that individuals cannot be trusted to make prudent decisions about their own health expenses. The reality is that most individuals are perfectly capable of making such decisions. And thanks to consumer-driven plans, many of them do.

Peter Suderman is an associate editor at Reason magazine.