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The Job of Patients

Health savings accounts can spur consumers to shop for the best care at the lowest price. But these insurance plans also carry a lot of risk.

Whole Foods has gone wholesale. Not with its pricey organic pears or whole-grain breads but with health care for its employees. The national grocery chain is providing health insurance for almost everyone who works for the company--from corporate division heads to part-time grocery baggers--and those employees don't have to pay a dime for the coverage.

It is not, however, ordinary insurance: The coverage is a consumer- directed health plan. The natural foods company is sending its workers out into the medical marketplace with cash to buy the treatment they need at the best price they can find. To that end, Whole Foods puts money in a health savings account for each employee every year (unspent money rolls over from year to year in the employee's name); the employee then uses those funds to pay for such routine medical expenses as doctor visits, MRIs or medicines. Each account is paired with a high-deductible health insurance plan that can help defray unexpected costs from a catastrophic illness or horrific accident.

For Whole Foods, which started the program in 2003 for its 30,000 employees, the approach has translated into a bottom-line bonanza: The company's health costs are currently half the national corporate average.

With health insurance premiums rising and health care costs growing at nearly four times the rate of inflation, employers throughout the country--including state and local governments--are scrambling to tame insurance costs. Most are taking the usual tacks: increasing the employee share for premiums, adding co-pays for doctor visits and prescription drugs or reducing the menu of benefits. Some are dropping coverage entirely. But they are also keeping a close eye on the Whole Foods model, and not surprisingly, consumer-driven plans are gaining traction: One in five of the largest U.S. employers offered such plans in 2005, twice the number that did so in 2004.

That may ratchet up radically in 2006. President Bush, in his State of the Union address in January, promised to push Congress for additional incentives to boost the use of health savings accounts.

Meanwhile, a number of states and localities are joining the private sector in giving their employees the HSA choice. Florida, for instance, began offering the plan last year: The state will contribute $500 for an individual, $1,000 for a family account and pair that with a $1,250 (individual), $2,500 (family) deductible plan. More than a dozen other states have enacted or are considering legislation so that they can offer their employees the HSA option, and a legislative task force in Oklahoma is recommending that the state's Medicaid program try HSAs. In addition, a handful of municipal governments have moved forward with such plans. Cranston, Rhode Island, for instance, recently sold two of its employee unions on a contract that includes HSAs as an option for health care coverage.

Under the deal the city struck with the unions, the employee share of premiums for conventional insurance will increase each year--from 10 percent of the cost the first year to 20 percent by year three. (Union members had not been charged at all for premiums.) What that means in dollar terms is that, by year three, union members will be paying $3,600 annually for family coverage. The workers' alternative is to choose the consumer-driven plan, whereby the city will (for a family plan) put $2,000 per beneficiary into a savings account and cover the employee and his family with a high-deductible ($4,000) insurance plan. The employee has the option of using pre-tax dollars to put another $2,000 into the account to cover the remaining deductible.

Although the city did not have to make a contribution to the savings accounts, it chose to do so as a "sweetener" to ensure worker participation. "It was structured to be a no-brainer," says Paul Grimes, director of administration. When the HSA option became available this winter, 10 percent of the employees eligible for the program signed up. Grimes expects a higher sign-up rate in years two and three as the co-share for conventional coverage increases. With a more substantial sign-up will come more fiscal certainty. That is, the city will know how much it will have to contribute for each employee and will be less vulnerable to escalating premiums. "The incentive for the employee to actually earn and build an asset," says Mayor Stephen P. Laffey, "and the city's objective of slowing the untenable growth in health care costs are both met by the health savings accounts."


With only a minimal track record, it is far from clear how good an idea consumer-driven health plans are--for employers and employees or as a public policy. The core selling point is that such accounts can turn patients into better consumers by encouraging them to shop around for the best price and ask whether certain procedures are necessary. That is, if a doctor suggests a $1,000 MRI to diagnose a sore knee, the patient could question whether a $100 X-ray might do. As patients become more responsible for paying for their care, the argument goes, they will be a force in squeezing extra costs out of the system.

And there is evidence that this is happening. In a recent Wall Street Journal column, a physician noted that several maternity patients in consumer-driven plans had declined optional blood tests or screening ultrasounds. Most of these procedures, he wrote, "are done because of 'risk management' by doctors" and not necessarily because there is a true medical need. But he also had to convince the mother of a child with pneumonia that her child needed a chest X-ray and blood tests.

Consumer pressure on overall health care expenditures is not HSAs only strong suit. On the fiscal side, the company or government offering the plan can save money, although not necessarily to the extent Whole Foods does. Whole Foods has a relatively young work force and does not offer its employees any other health insurance option. Most other employers offering HSAs--including Cranston and Florida--do so as part of a menu of choices. To the extent a significant portion of employees sign up for the program--20 percent or more is considered the tipping point--the employer reaps savings and may also gain a critical flexibility: In bad economic times, it might be able to reduce the amount of money per employee going into the account. While the federal law creating HSAs sets a maximum for contributions--$2,700 for individuals, $5,450 for families--there is no minimum. Of course, an employer doesn't have to contribute at all: Employees could be asked to fund it themselves out of pre-tax earnings.

While employers stand to benefit from HSA programs, so do employees-- if they are fit and healthy. Unspent money stays in their account, they can take it with them if they change jobs, the money accrues tax- free and, at age 65, they can convert it into a 401(k) retirement plan.

Finally, supporters tout the policy advantages: Namely, that HSAs could make a dent in the number of people who are uninsured. Small businesses and individuals may find them more affordable than most other insurance plans, although they do not offer the comprehensive coverage of traditional insurance.


That, however, is a sticking point. Clearly, consumer-driven health plans are not for everyone, particularly not for anyone with a chronic illness or who is aging into a body that will be prone to a variety of health woes. The concern is that the less-than-healthy will deplete their savings accounts quickly and be stuck with hefty out-of-pocket expenses. Even the relatively healthy, critics say, will end up spending more of their own money on health care than they expected. According to a survey by the Employee Benefit Research Institute and the Commonwealth Fund, between 30 and 40 percent of those in consumer- directed plans spent 5 percent or more of their income on out-of- pocket costs and premiums, compared with 12 percent of those in comprehensive health plans. Moreover, the Rand Corp. found that when individuals pay a higher share of medical costs out of pocket, they cut back on necessary as well as unnecessary health spending.

It's one thing to muddle through a cold without checking in with a physician but quite another to ignore an infectious cough or a potentially cancerous mole. The EBRI-Commonwealth Fund survey found that those with consumer-driven plans were more likely than those with comprehensive health insurance to avoid or delay needed care and to find when they did get care that there were large financial burdens.

Both advocates and critics of consumer-driven health plans agree that this approach makes sense only if patients have access to adequate information on quality and care. And that piece of the puzzle is not ready for prime time. In the EBRI-Commonwealth Fund survey, employees with consumer-driven plans were found to lack the information needed to make decisions about doctors and hospitals based on cost and quality. Buying health care services, it turns out, is not as simple as purchasing a car, nor is a consumer who is feeling unwell in the best position to evaluate the choices.

While patients can influence the cost of simple procedures--an X-ray or a doctor visit--most health care services are part of larger packages that are more difficult to price and, as Robert Reischauer, president of the Urban Institute, has pointed out, "the costs of really expensive treatments would be largely unaffected because those needing major interventions are usually in no condition to 'shop around,' and their incentives to do so may be quite limited because, at the margin, their costs would be picked up by their catastrophic policy."

From a policy perspective, skeptics say consumer-driven coverage poses special dangers. If widely adopted, the plans would leach healthy people from the conventional insurance rolls, thus dismantling the shared-risk concept that lies at the heart of health insurance. With HSAs, "you're on your own," health care economist Rashi Fein noted in an online interview with The Conference Board. "It's wonderful if you're young and are not in an automobile accident. But if the younger person withdraws from the collective market, then the rate for the 55-year-old has to go up. Instead of sharing risks, it pulls out the better risks."

There are also questions of fairness. Uwe Reinhardt, an economics professor at Princeton University, thinks that HSAs--particularly if additional tax incentives are included--would make the after-tax cost of health care higher for low-income families than it would for high- income families. "The implication of this policy for distributive ethics should be clear to anyone: The idea is to ration health care by income class, more so than now," he says.

President Bush makes a strong case for the need to bring market sensibilities to the provision and consumption of health care services, but at this point, the HSA approach raises as many questions as it answers. "I have no problem with the concept that the patient ought to have--ought to seize--more control over his health," Fein says. "I do have a problem in assuming that empowerment in terms of the patient-doctor relationship comes out of the nature of the health insurance policy."


Ron Sims, the executive of King County, Washington, also wants health care consumers to drive change. But he has a different idea. He wants quality of care to be the incentive that forces down costs and guides consumers' decisions about where they go for their care and who provides it.

Sims' talking points start with a 2004 Rand Corp. study that found that, nationally, patients received the wrong care, or too much or too little care, from their doctors 55 percent of the time. (The figure for the Seattle area was 41 percent.) Such haphazard care results in wasteful testing, unnecessary medical procedures and preventable errors, all of which add billions of dollars in costs to the health care system.

In an effort to change that dynamic, Sims formed the Puget Sound Health Alliance. The group is made up of representatives from many of the region's largest employers--including Boeing, Starbucks and, of course, King County--as well as unions, consumers, health insurance plans and health care experts. To improve the quality of care provided in the region, the alliance will adopt evidence-based clinical guidelines for the way common health conditions should be treated. Initially, it is targeting treatment for heart disease, lower back pain, diabetes and depression, as well as looking at prescription drug formularies.

As the treatment plans are adopted, performance measures will be put in place to assess how well various providers are doing--based on health data from across the state to ensure that the reports are accurate and useful. The alliance will then help purchasers and others apply the information in these reports to decision-making, which could result in incentives to pay providers based on quality and value.

Within his jurisdiction, Sims envisions incorporating the performance results into the health insurance program offered to county employees. Those who use the highest-quality providers might, for instance, pay less for service than those who use poorer-performing providers. "We've got to have standardized measures and apply market forces," he says. "We're not talking about buying pipes and tiles. We need to know what excellence looks like and cost-shift away from mediocrity."

Sims claims there will be no finger-pointing. And right now, as the alliance gets organized, sets priorities and works on adopting acceptable treatment protocols that will apply to all members of the alliance, the approach appears sound. It also dovetails with pay-for- performance protocols that are being pushed by the Bush administration and the Medicare program. But whether the Puget Sound Health Alliance can actually work as designed and make a real difference in the health care system remains to be seen.

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