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Quote of the Day

CDHP-induced death spiral in Indiana

Indiana places a big bet on consumer-driven health insurance

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By Christine Vestal
Stateline, November 17, 2011

One thing Mitch Daniels believes with absolute conviction is that consumers need to pay more of the cost of their health care.

“The prevalent model of health plans in this country,” the Republican Daniels argued recently in a Wall Street Journal commentary, “signals individuals they can buy health care on someone else’s credit card.” He called today’s health care system “a machine perfectly designed to overconsume and overspend.”

No one can say Daniels isn’t practicing what he preaches. Indiana has been using a version of consumer-driven health care for state employees since 2006. Starting next year, 90 percent of Indiana state workers will be covered by a consumer-driven plan with low premiums and high out-of-pocket expenses for actual care.

Indiana has attracted customers to its consumer-driven system by adding quite a few sweeteners. Starting in 2006, Indiana state employees were given the option to sign up for a consumer-driven plan with no monthly premiums. The plan paid 80 percent of all doctor bills, but only after a $5,000 deductible was met. The maximum out-of-pocket exposure was $8,000.

The traditional plan — with a $1,500 deductible and $2,000 total exposure — remained available at a cost of $3,500 in annual premiums for family coverage.

To make the consumer-directed plan even more attractive, Indiana did other things that most states haven’t done. It paid 60 percent of the $5,000 deductible through a contribution to an employee-owned health savings account. The entire $3,000 contribution was deposited on January 1, reducing much of the risk that a catastrophic event early in the year would leave an employee with a huge medical bill and not enough money set aside to pay for it.

At first, state employees were slow to adopt the scheme; only 4 percent signed up the first year. But it gradually caught on — partly through word-of-mouth and partly through an intensive education program. By the third year, 30 percent of the state’s 28,000 civil servants had signed up, and the numbers have steadily increased.

As more of the state workers opted for a consumer-driven plan, premium costs in the traditional plan started rising. An employee’s annual premium for family coverage in the traditional system started out at $3,500 in 2006, rose to nearly $5,000 within three years, and next year will exceed $9,000. The consumer option generated something of a snowball effect.

The reason for the premium increase in the traditional plan is what is known as “adverse selection.” When an insurance pool shrinks, fewer healthy people remain to cover the costs for those who have high medical bills. At this point, the math on the traditional plan no longer makes sense for anyone. “It defies logic that anyone would continue to stay in the traditional plan,” says Indiana’s personnel director, Daniel Hackler.

In Indiana’s case, the state contribution for health insurance is about $15,000 per employee for both consumer-driven and traditional plans. The savings come from reduced use of the health care system and from cheaper prescription drugs.

In part, it is Indiana’s intensive education and outreach program that has overcome the barriers to acceptance that most states face.

But Indiana’s generous health savings account contribution is likely the biggest reason for the plan’s extraordinary growth.

So is it time to declare Mitch Daniels’ experiment a success? Possibly. Experts say that the state’s traditional plan is close to what they call a “death spiral,” in which the cost of covering a small pool of subscribers exceeds the price any given employee is able to pay. Once the remaining traditional plan subscribers are added to the consumer-driven pool, the price tag is likely to go up, and customer dissatisfaction is likely to go up with it.

For now, though, it seems to be working. In addition to other advantages, each of Indiana’s current consumer-driven subscribers has a sizeable health savings nest egg to fall back on. Overall, the savings account fund exceeds $49 million, and many individual subscribers have more than $10,000 in their accounts.

http://www.stateline.org/live/details/story?contentId=614068

Comment: 

By Don McCanne, MD

Although there has been continued slow growth in consumer-driven health plans (CDHP) – high-deductible health insurance plans (HDHP) paired with health savings accounts (HSA) – the take-up by public employees in Indiana has been phenomenal – 90 percent of state workers. What drove this success? Or is it a success?

It is easy to understand why CDHPs would appeal to healthy, wealthy individuals. The high-deductible plans have significantly lower premiums than traditional plans. The money saved by purchasing these lower cost plans can be placed in an HSA, using pre-tax income. If the person remains healthy, the funds that accumulate in the savings account, including any tax-deferred earnings, can be drawn out in retirement without paying a penalty. It’s a great plan for those who stay healthy and have the extra funds to deposit into these accounts.

But what about those who rapidly deplete their savings accounts because of significant medical problems? They must then rely on a high-deductible plan that potentially subjects them to financial hardship because of high out-of-pocket expenses. Thus CDHPs are a poor choice for those who need more health care. This defeats the purpose of pooling risk in which the many who are healthy pay the bills for the few with greater needs.

The funds from the HSAs that are drawn out in the retirement years of the many who are healthy have been omitted from the collective pooling of funds that are needed to take care of the sick (i.e., the lower premiums of the high-deductible plans underfund the collective need of everyone, and the difference is made up by shifting the responsibility for payment directly to the patients who need more health care). It is not only the HSA money that has been diverted from the pools, but also the money that was saved by paying lower premiums yet was never deposited into the HSAs (the most common circumstance).

It is interesting what Indiana Gov. Mitch Daniels did with the state employees’ health benefit program. Most employers that switch to a CDHP do so to save money by paying the lower premium of the HDHP. Some employers will even use a portion of the savings, but not all, to provide seed money for the HSAs. Gov. Daniels decided to put all of the savings in the HSAs so that the cost of the CDHP (HDHP plus HSA contribution) was about the same as the traditional health plan. His ideological drive to make employees sensitive to health care costs was greater than his desire to save the state money.

Imagine the response of the healthy employees, which is most of them. In exchange for agreeing to change to a high-deductible plan – a plan that they probably wouldn’t use much anyway because they are healthy – they are given a cash contribution of $3,000 each year for their own savings accounts, which can be used for health care now or for their retirement later on. If they were to stay healthy and didn’t draw on these accounts, they could have perhaps another $100,000 for retirement!

The healthy employees were sold on the concept, and made the transition. Employees with medical problems in their families were more reluctant to change. They did not want to give up their established health care relationships, plus they didn’t want to be exposed to high-deductibles with depleted HSAs. They stayed in the traditional plan.

Most who have been following health policy recognize that this is ”
adverse selection.” The healthy leave the insurance pool and the sick stay in. That can only drive premiums up. The employees share of the premium for a family plan went from $3,500 to $9,000. Ouch!

Many of you recognize this as the “death spiral” of premiums. With higher premiums, more leave the plan, and then it eventually has to shut down because nobody could pay the even higher premiums that would have to be charged.

So now this concentration of employees and their families with higher health care needs moves into the CDHPs. What will the insurers do when they have a large influx of expensive patients signing up with the high-deductible plans? Obviously, they’ll have to jack up the premiums to levels that will displease everyone.

Those hurt the most will be those with health care needs, who have depleted HSAs, who will have higher premiums, and who will have greater out-of-pocket costs because of the high deductibles – the very people who have the greatest need for insurance protection. This is hardly a “success.”

By now, you can write your own closing lines about how we can do it right.

CDHP-induced death spiral in Indiana

Share on FacebookShare on Twitter

Indiana places a big bet on consumer-driven health insurance

By Christine Vestal
Stateline, November 17, 2011

One thing Mitch Daniels believes with absolute conviction is that consumers need to pay more of the cost of their health care.

“The prevalent model of health plans in this country,” the Republican Daniels argued recently in a Wall Street Journal commentary, “signals individuals they can buy health care on someone else’s credit card.” He called today’s health care system “a machine perfectly designed to overconsume and overspend.”

No one can say Daniels isn’t practicing what he preaches. Indiana has been using a version of consumer-driven health care for state employees since 2006. Starting next year, 90 percent of Indiana state workers will be covered by a consumer-driven plan with low premiums and high out-of-pocket expenses for actual care.

Indiana has attracted customers to its consumer-driven system by adding quite a few sweeteners. Starting in 2006, Indiana state employees were given the option to sign up for a consumer-driven plan with no monthly premiums. The plan paid 80 percent of all doctor bills, but only after a $5,000 deductible was met. The maximum out-of-pocket exposure was $8,000.

The traditional plan — with a $1,500 deductible and $2,000 total exposure — remained available at a cost of $3,500 in annual premiums for family coverage.

To make the consumer-directed plan even more attractive, Indiana did other things that most states haven’t done. It paid 60 percent of the $5,000 deductible through a contribution to an employee-owned health savings account. The entire $3,000 contribution was deposited on January 1, reducing much of the risk that a catastrophic event early in the year would leave an employee with a huge medical bill and not enough money set aside to pay for it.

At first, state employees were slow to adopt the scheme; only 4 percent signed up the first year. But it gradually caught on — partly through word-of-mouth and partly through an intensive education program. By the third year, 30 percent of the state’s 28,000 civil servants had signed up, and the numbers have steadily increased.

As more of the state workers opted for a consumer-driven plan, premium costs in the traditional plan started rising. An employee’s annual premium for family coverage in the traditional system started out at $3,500 in 2006, rose to nearly $5,000 within three years, and next year will exceed $9,000. The consumer option generated something of a snowball effect.

The reason for the premium increase in the traditional plan is what is known as “adverse selection.” When an insurance pool shrinks, fewer healthy people remain to cover the costs for those who have high medical bills. At this point, the math on the traditional plan no longer makes sense for anyone. “It defies logic that anyone would continue to stay in the traditional plan,” says Indiana’s personnel director, Daniel Hackler.

In Indiana’s case, the state contribution for health insurance is about $15,000 per employee for both consumer-driven and traditional plans. The savings come from reduced use of the health care system and from cheaper prescription drugs.

In part, it is Indiana’s intensive education and outreach program that has overcome the barriers to acceptance that most states face.

But Indiana’s generous health savings account contribution is likely the biggest reason for the plan’s extraordinary growth.

So is it time to declare Mitch Daniels’ experiment a success? Possibly. Experts say that the state’s traditional plan is close to what they call a “death spiral,” in which the cost of covering a small pool of subscribers exceeds the price any given employee is able to pay. Once the remaining traditional plan subscribers are added to the consumer-driven pool, the price tag is likely to go up, and customer dissatisfaction is likely to go up with it.

For now, though, it seems to be working. In addition to other advantages, each of Indiana’s current consumer-driven subscribers has a sizeable health savings nest egg to fall back on. Overall, the savings account fund exceeds $49 million, and many individual subscribers have more than $10,000 in their accounts.

http://www.stateline.org/live/details/story?contentId=614068

Although there has been continued slow growth in consumer-driven health plans (CDHP) – high-deductible health insurance plans (HDHP) paired with health savings accounts (HSA) – the take-up by public employees in Indiana has been phenomenal – 90 percent of state workers. What drove this success? Or is it a success?

It is easy to understand why CDHPs would appeal to healthy, wealthy individuals. The high-deductible plans have significantly lower premiums than traditional plans. The money saved by purchasing these lower cost plans can be placed in an HSA, using pre-tax income. If the person remains healthy, the funds that accumulate in the savings account, including any tax-deferred earnings, can be drawn out in retirement without paying a penalty. It’s a great plan for those who stay healthy and have the extra funds to deposit into these accounts.

But what about those who rapidly deplete their savings accounts because of significant medical problems? They must then rely on a high-deductible plan that potentially subjects them to financial hardship because of high out-of-pocket expenses. Thus CDHPs are a poor choice for those who need more health care. This defeats the purpose of pooling risk in which the many who are healthy pay the bills for the few with greater needs.

The funds from the HSAs that are drawn out in the retirement years of the many who are healthy have been omitted from the collective pooling of funds that are needed to take care of the sick (i.e., the lower premiums of the high-deductible plans underfund the collective need of everyone, and the difference is made up by shifting the responsibility for payment directly to the patients who need more health care). It is not only the HSA money that has been diverted from the pools, but also the money that was saved by paying lower premiums yet was never deposited into the HSAs (the most common circumstance).

It is interesting what Indiana Gov. Mitch Daniels did with the state employees’ health benefit program. Most employers that switch to a CDHP do so to save money by paying the lower premium of the HDHP. Some employers will even use a portion of the savings, but not all, to provide seed money for the HSAs. Gov. Daniels decided to put all of the savings in the HSAs so that the cost of the CDHP (HDHP plus HSA contribution) was about the same as the traditional health plan. His ideological drive to make employees sensitive to health care costs was greater than his desire to save the state money.

Imagine the response of the healthy employees, which is most of them. In exchange for agreeing to change to a high-deductible plan – a plan that they probably wouldn’t use much anyway because they are healthy – they are given a cash contribution of $3,000 each year for their own savings accounts, which can be used for health care now or for their retirement later on. If they were to stay healthy and didn’t draw on these accounts, they could have perhaps another $100,000 for retirement!

The healthy employees were sold on the concept, and made the transition. Employees with medical problems in their families were more reluctant to change. They did not want to give up their established health care relationships, plus they didn’t want to be exposed to high-deductibles with depleted HSAs. They stayed in the traditional plan.

Most who have been following health policy recognize that this is “adverse selection.” The healthy leave the insurance pool and the sick stay in. That can only drive premiums up. The employees share of the premium for a family plan went from $3,500 to $9,000. Ouch!

Many of you recognize this as the “death spiral” of premiums. With higher premiums, more leave the plan, and then it eventually has to shut down because nobody could pay the even higher premiums that would have to be charged.

So now this concentration of employees and their families with higher health care needs moves into the CDHPs. What will the insurers do when they have a large influx of expensive patients signing up with the high-deductible plans? Obviously, they’ll have to jack up the premiums to levels that will displease everyone.

Those hurt the most will be those with health care needs, who have depleted HSAs, who will have higher premiums, and who will have greater out-of-pocket costs because of the high deductibles – the very people who have the greatest need for insurance protection. This is hardly a “success.”

By now, you can write your own closing lines about how we can do it right.

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