Comparing the Effectiveness of a Consumer Directed Health Plan with Traditional Cost Sharing in Controlling Medical Care

1. School of Public Health 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

2. School of Public Health 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

3. School of Public Health �Classic� CDHP Model � Definity Health in Minneapolis

4. School of Public Health The Health Savings Account (HSA)

5. School of Public Health 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

6. School of Public Health 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

7. School of Public Health 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

8. School of Public Health Price-elasticity* of uninsured take-up with respect to HSA premium subsidy

9. School of Public Health 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

10. School of Public Health Hospital Costs 2000-2002

11. School of Public Health 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

12. School of Public Health The Kinked CDHP Budget Constraint

13. School of Public Health If I Only Lived One Year�

14. School of Public Health 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

15. School of Public Health 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

16. School of Public Health 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:

17. School of Public Health CDHP Equilibrium

18. School of Public Health 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 M1 as 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? )

19. School of Public Health 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

20. School of Public Health Predicted Spending by Budget Region �

21. School of Public Health 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

22. School of Public Health Plan Characteristics

23. School of Public Health 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)

24. School of Public Health 2000 Cost Model

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

26. School of Public Health 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

27. School of Public Health Total Expenditure

28. School of Public Health Physician Expenditure

29. School of Public Health Rx Expenditure

30. School of Public Health Brand Name Rx Proportion

31. School of Public Health 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

32. School of Public Health 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

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

34. School of Public Health 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