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The Promise And Limits of Consumer-Driven Health Care

I was interested in Michael Cannon's criticism of Mitch Daniels' health care policies.  Cannon levels two kinds of criticism. The first is that Daniels' Healthy Indiana Plan increases government dependency.  The second is that the effort by Daniels and other governors to get waivers from the Department of Health and Human Services undermines the effort to repeal Obamacare.  I think both criticisms are mostly off target.  I'll try to talk about the second criticism tomorrow.

First let's talk about the Healthy Indiana Plan.  Cannon fairly describes HIP as "high-deductible coverage combined with a taxpayer-funded health savings account."  Well, mostly fairly.  Most HIP clients contribute to the funding of their Health Savings Account.  The government contribution to the HSA is indexed to earnings so that people who earn at the high end of the eligible population (200 percent of the poverty level) provide most of the funding for their HSA.  

Cannon writes that " Health savings accounts are supposed to reduce dependence on government. Daniels is using HSAs to expand dependence on government."  Well Cannon is a little off there.  The purpose of Health Savings Accounts is to change how people pay for and consume health care.  Since people are paying for more of their routine health care costs out of pocket, they will be less likely to over consume and more likely to seek out cheaper and more productive providers.  Providers will then respond to these cost conscious consumers by offering lower cost options.  The combination of HSA's and catastrophic coverage might be offered by either the government or a private insurer depending on the population.  The Daniels administration offered an HSA/catastrophic coverage to state employees.  On one hand, the state employees are "dependent" on government for their health care .  On the other hand, they are more empowered as consumers than many people with private employer-provided plans that cover first dollar health expenses. 

So how well does this theory work?  Well it depends.  The HSA/catastrophic coverage plan for Indiana state employees has saved the government money, increased the take home pay of the workers and maintained their access to high quality health care.  That is a win-win-win situation and it would be a great idea to expand that system to government employees at all levels and in every state.  I'm less clear on how well consumer-driven health care will work for lower earning populations.

I spoke with Seema Verma who is a consultant with the state of Indiana.  I had one question for her.  Is HIP saving the government money versus traditional Medicaid (basically a government single-payer program for low-earners)?  The answer I got was yes but...  When you adjust for differing age and other demographic factors between the HIP population and the traditional Medicaid population (the HIP population skews older and older people consume more health care), HIP saves the government some money, but not much.  These savings persist despite HIP reimbursing health care providers at a higher rate than Medicaid for costs to the client after the client has exhausted their Health Savings Account.  HIP clients are more likely to get preventative care and less likely to visit the emergency room than before going on HIP.  The worst that can be said of HIP vs. traditional Medicaid is that HIP seems to incentivize better use of health care resources, and offers better access to care at only slightly less cost to the government than traditional Medicaid.  Verma told me that they are working on studies to examine the health outcomes of HIP clients vs. traditional Medicaid clients.  I would be interested in seeing how the health outcomes for HIP clients compare to the notoriously lousy health outcomes for traditional Medicaid clients.

Indiana's two different HSA/catastrophic coverage programs have had somewhat different outcomes. The HSA/catastrophic coverage program for state workers had been much more successful in holding down government health costs than has HIP.  I suspect that largely has to do with the differences between the two populations.  The client population of HIP is disproportionately old and sick.  No matter how smart they shop for their health care, many HIP clients are going to exhaust their Health Savings Accounts and need to have their catastrophic care paid for.  There appears to be a real, but limited, immediate benefit to putting such clients on a consumer-driven plan like HIP.  The direct benefit alone would probably be reason enough to try to move Medicaid in a more consumer-oriented direction, but there is more to think about than the savings of moving government employees and Medicaid clients toward consumer-oriented policies.  The more people are on consumer-driven plans (along with some major regulatory changes), the more medical providers will fight for this market by fighting to reduce costs.  The resulting business model innovation is our best hope for reducing the rate of medical inflation without imposing centralized rationing.  I'm not sure that we have seen the best outcomes that consumer-driven health care has to offer.  So far we have seen the kinds of benefits that come from improved decision making by fairly small populations (Indiana state government workers and the 62,000 or so on HIP.)  I don't think those groups are large enough to have produced a system-wide effect on Indiana health care providers.  If we can get a critical mass of people on consumer-driven policies, the long-term effect of liberalizing the health care market might save us even more money.  It seems worth trying. 

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