Entrepreneurs are employers, and healthcare is one of their biggest cost items. In recent years they have used high deductible plans to create incentives for employees to be smarter consumers of healthcare and manage healthcare cost. Emerging evidence shows this is not working well. Employers need to give employees more help: smarter incentives and better advice.
Recent analysis of the impact of high deductible health plans show that they reduce spending significantly, but not in a smart way. A study by researchers from Harvard and U.C. Berkeley followed well-educated, well-paid workers at a major company after it switched to a high deductible plan. Overall spending declined about 12%, which is quite significant. However, the researchers found that:
- Spending reduction was entirely due to lower volume of health service consumption, and not at all due to employees finding equivalent services at lower prices (i.e., shopping effectively).
- The reduction in volume occurred across the spectrum of services, including both preventive care and care that was potentially wasteful, such as imaging.
- Even those employees who were likely, based on their history, to exceed their deductible cut back on spending at the beginning of the year, despite the fact that an extra dollar spent early in the year was likely to be reimbursed later, after the deductible was met.
The growth in recent years of new “urgent care” offerings gives consumers much better access to primary care, and they use it. However, emergency room utilization has not declined. And, research shows that over half of ER visits could be handled by primary care providers at a small fraction of the cost or are not necessary.
Consumers have more options and more incentives to be smart buyers, but they are not buying smart. Why this is happening is not yet fully explored, but I feel comfortable tabling some strong hypotheses:
- Current high-deductible plan designs are crude: they discourage some spending but do not create well-targeted incentives.
- Consumers have difficulty making healthcare choices. Healthcare is complex and technical, and the stakes are high. So they tend to stick with what they have done in the past and make the safe bet: e.g., if in doubt, go to the ER, especially if someone else is paying (and despite the miserable experience).
- Many consumers lack a good source of advice on how to choose healthcare. The consumer’s relationship with his or her primary care doctor has been leaned down to the point where primary care providers are often unable to coach patients on choosing the care they need.
This is a gap that employers can fill, and they can save money if they do.
Plan design is the starting point. The shift of drug prescriptions from branded to generic is a lonely triumph of U.S. healthcare cost control: prescriptions in the U.S. are now >80% generic, and generic drugs are often 1/10th the cost of branded substitutes. Payers developed sophisticated drug tier strategies, with different consumer co-pays (cost sharing) at each tier. This made the savings from generics very visible to consumers. And, over a period of time payers and employers educated consumers to ask their doctors about the generic equivalent, and often offered financial incentives to try it. This combination of measures won big.
Compared to the above, the big front-end deductible is a very blunt tool. It discourages all spending equally, whether or not the consumer has the option to make choices. The incentives can be perverse: until the consumer reaches the deductible, all medical spending is discouraged, and after the deductible is satisfied, everything is on the house, and then everything goes back to discouraged on the plan anniversary. The New York Times reports examples of consumers who discontinued life-saving treatments at the start of a plan year because they had to pay a new deductible.
I’m guessing the deductible concept carries over from property/casualty insurance (e.g., car insurance), where big deductibles are common. But healthcare is different than car insurance: car accidents are rare for most of us, but healthcare is part of everyday life, and most families have to pay a large part or all of their health insurance deductible every year.
I’m not a health plan designer, but, as a starting point for discussion, I suggest incentives that are more like the prescription drug incentives. First, rely less on deductibles and more on cost-sharing that continues from first dollar to the out-of-pocket limit. Employees then have an incentive to behave like consumers all the time, and they always get some help with their healthcare costs. The economics for employers can be made equivalent to a high-deductible plan.
Second, put different kinds of medical services into tiers, with some types (preventative care, care in lower-cost settings, weight-loss, smoking cessation, etc.) largely paid by the employer, and other types (care in higher-cost settings, cosmetic procedures, experimental medicine, and [controversial] care for conditions that result from self-abuse like smoking) subject to higher degrees of cost sharing. This approach points employees in the right direction: always be a smart buyer of medical services, spend more on high value services and visa versa, look for opportunities to shift from high to low cost settings, and beware that self-abuse costs money down the road.
Employees also need coaching to make better choices; the evidence for this is the poor choices they make when they face a high deductible with no advice. And, there are strong examples of coaching paying off with “frequent flyer” patients (heavy users of medical services), as evidenced by the success of Omada Health and Iora Health (both venture-backed start-ups). Coaching will also have value for the average employee, and while the ROI may not be as high, the benefit in wellness and long term cost avoidance is likely to be attractive.
The gold standard of coaching is a strong relationship with a primary care practice, particularly one that employs care teams comprised of physicians, nurses, and health coaches. This costs more than “puppy mill” primary care (30 patients per day for 7 minute appointments), but there is evidence that it pays off in lower downstream costs and quality of life. Companies like Comcast are investing to provide this to their employees. There are also services that provide health coaching to employees separate from the primary care relationship.
Cloud/mobile services are beginning to have an impact too. Many provide fitness advice/monitoring, a few are effective modifying diet to improve health, and there is even a successful cognitive/behavior therapy system from the UK: SilverCloud Health. I suspect this is an area where entrepreneurs, start-ups, and venture funding will play a big role.
It was foolish to think that consumers would become smart healthcare buyers if offered a crude incentive. But I believe that getting people to take more responsibility for managing their health and healthcare cost is the biggest opportunity to get better results at lower cost. So we need to learn from the version 1.0 efforts and roll out a more effect version 2.0 of healthcare consumerism.
Note: I am a partner in NAV.VC, a venture capital fund. I have no financial interest in any of the companies mentioned in this post, however, NAV.VC does invest in similar companies.
