Outlook on Consumerism in Health Care

Paul Fronstin, Ph.D.

Director, Health Research and Education Program

Employee Benefit Research Institute

Copyright© - Employee Benefit Research Institute Education and Research Fund, 1978-2008. All rights reserved.

The information contained herein is not to be construed as an attempt to provide legal, accounting, actuarial, or other such professional advice. Permission to copy or print a

personal use copy of this material is hereby granted and brief quotations for the purposes of news reporting and education are permitted. Otherwise, no part of this material may be

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2

HSA & HRA Enrollment(millions)

2006 2007 Notes

AHIP 3.2 (HSA-only) 4.5 (HSA-only) HSA & HSA-eligible. Employment & individual market. No info on methodology.

AAPPO 10 (4.5 HSA, 5.5 HRA)

No info on methodology.

CDMR 6 10.3 (5.8 HSA, 4.3 HRA)

No info on methodology.

ICDC 5.5 8 EBRI estimates based on data printed in ICDC.

KFF/HRET 2.7 (1.4 HSA, 1.3 HRA)

3.8 (1.9 HSA, 1.9 HRA)

Workers only. Does not include dependents.

Mercer 2.4 4 Workers only. Does not include dependents.

EBRI/

Commonwealth

3.6 Mid-range of above

3

Large Employer Interest in HSAs: Likelihood of Offering a High-

Deductible Health Plan with an HSA

8%

35%

56%

19%

54%

28%

0%

10%

20%

30%

40%

50%

60%

Very likely Somewhat likely Not likely

By 2005 By 2006

Source: Mercer Human Resources Consulting, 2004.

4

HSA Offer Rates, by Firm Size, 2006 & 2007

4% 6%

22%

7% 9%

39%

0%

10%

20%

30%

40%

50%

60%

10-499 500+ 20,000+

2006 2007

Source: Mercer Human Resources Consulting,

5

2007 CDHP Offer Rates Compared to 2006 Predictions, Selected Firm Sizes

10%

25%23%

31%

22%

30%

0%

10%

20%

30%

40%

50%

3-199 5,000+

Offer Rate Predicted HRA Offer Rate from Prior Year Predicted HSA Offer Rate from Prior Year

Source: published & unpublished data from KFF/HRET.

6

Health Plan Enrollment, 1988 & 2007

Source: KFF/HRET.

73%

21%

16%

57%

11%

13% 5%

3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2007

1988

FFS HMO PPO POS Account-based

7

Three “Types” of Consumerism

• Simple– Generally higher cost sharing

• Lite – Account-based plans (HRAs & HSAs)

• Heavy– Align incentives with real time information on

price, quality, treatment options, and outcomes.

8

What is Heavy Consumerism?

• Strategic use of cost sharing– diabetes in Asheville, NC, et al.– NY heart surgery

• Condition-specific information at hospital and physician level

• Tiered cost-sharing

9

Annual Claims Distribution“20/80 Rule”

$0

$10,000

$20,000

$30,000

$40,000

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percent of Population

Ave

rage

Cos

t P

er P

erso

n

Average Cost

or higher

20% of population that accounts for 80% of spending

Source: EBRI estimates from MEPS.

10

15 Most Costly Conditions Account for Over 50% of Spending

Heart disease 9%

Trauma 7%

Cancer 6%

Pulmonary conditions 6%

Mental disorders 5%

Hypertension 4%

Diabetes 3%

Arthritis 3%

Back problems 3%

Cerebrovascular disease 2%

Pneumonia 2%

Skin disorders 2%

Endocrine 2%

Infectious disease 2%

Kidney 1%

Total spending 56%

11

Challenge of Consumerism

• “All we need to do is present people with more information, greater choices, and the right kind of incentives, and good things will come.” speaker at Dec. 2007 EBRI Policy Forum

12

Consumerism in Retirement

• Low participation in retirement plans.– 20-30% of employees don’t participate and

forgo employer match.

• Poor investment choices.• Too much information is overwhelming

leads to herding effect.• Education changes intentions but does not

modify behavior.

13

401(k) Plan Participation Rates, by Age Groups, 2003

60

38

6167 69 67

56

0

10

20

30

40

50

60

70

80

90

100

Overall 20s 30s 40s 50s 60-64 65-69

Source: Fidelity Investments.

14

401(k) Plan Participation Rates, by Age Groups and Earnings, 2003

48

90

37

83

47

89

52

90

57

90

62

90

58

87

0

10

20

30

40

50

60

70

80

90

100

$20,000–$29,999 $100,000 or more

Overall 20s 30s 40s

50s 60–64 65 to 69

Source: Fidelity Investments.

15

Percent of 401k Plan Participants with Company Stock Option Who Allocate 50% or More of Account

Balance to Company Stock, by Age Group, 2006

16%

12%

14%

16%17%

19%

0%

5%

10%

15%

20%

25%

Overall 20s 30s 40s 50s 60s

Source: EBRI.

16

Percent of 401k Participants With Zero Equity Allocation in Account Balance,

by Age Group, 2006

36%

47%

33%31%

34%

42%

0%

10%

20%

30%

40%

50%

Overall 20s 30s 40s 50s 60s

Source: EBRI.

17

The Paradox of Choice

% Visiting

% Buying

40%

30%

60%

3%

18

More Investment Choices Means Lower Participation

50%

55%

60%

65%

70%

75%

80%

2 7 12 17 22 27 32 37 42 47 52 57

Number of funds offered

Pre

dic

ted

Pa

rtic

ipa

tion

Ra

te

More Choices, Less Participation

Source: Iyengar, Jiang, and Huberman.

19

Consumerism Predictions

• CDHP backlash.

• Movement to greater transparency.

• Usable information on cost, quality, outcomes.

• Strategically-designed cost-sharing to create incentives based on above data.

20

“Headlines”- Characterizations of the Employment-Based System

• Vanishing

• Employers are fleeing the system

• Employer-based health care is ending. It is dying in front of our very eyes

• Employer-based health coverage is melting away like a popsicle on the summer sidewalk

21

Percentage of Employers With 3-199 Employees Offering Health Benefits,

1996-2007

63%60%

59%59%

59%

65%68%

66%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: Kaiser Family Foundation.

22

Worker Eligibility and Take-Up Rates for Own Employer Health Benefits,

Wage and Salary Workers Ages 18-64, 1988-2005

74.0%76.2%74.9%74.0%73.6%

75.7%77.8%

87.9% 86.5% 85.2% 84.9% 84.8% 84.0% 83.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1988 1990 1992 1994 1996 1998 2000 2002 2004

Eligibility rate Take-Up Rate

Source: Employee Benefit Research Institute estimates based on data from the Current Population Survey.

23

Percentage of Workers, Ages 18-64, With Employment-Based Health

Benefits, 1994-2006

73.3% 73.3% 73.5% 73.6% 74.2% 74.6% 74.9% 74.3% 73.0% 72.1% 71.7% 71.4% 70.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Employee Benefit Research Institute estimates based on data from the Current Population Survey, March Supplement.

24

Percentage of Private Consumer Health Care Expenditures that are Out-of-Pocket and

Private Health Insurance Payments, 1960-2005

0%

10%

20%

30%

40%

50%

60%

70%

80%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Out-of-pocket Payments Private Health Insurance

Source: Centers for Medicare and Medicaid Services.

25

Big Questions

• Is current employment-based system sustainable without fundamental reform?

• What changes are needed to shore up/strengthen the employment-based system?

• Is the employment-based system worth saving?• What is the role of the employer, worker, et al?• Where is the employment-based system

heading?

26

Employer Interviews

• 10 employers – leaders in field• Senior HR and Benefits. One CFO.• All jumbo employers – 14,000 – 200,000+• 650,000 workers + dependents covered• Over $10 billion spent on health care

– one-half of 1% of private spending• 3 of 10 moved to HRA or HSA

– 13-60% enrollment, 4% overall• Viewpoints not necessarily nationally representative, but

they are informative, and influential.– Towers Perrin complement study.

27

Why Coverage is Offered

• Business case

• Competitive labor market – recruitment & retention

• Wellness, prevention, DM have positive effect on worker health & productivity

• Despite view on bottom line – role of employer is access

28

Employer Innovations

• Health coaches for both healthy and unhealthy employees• Educational campaigns• Increased emphasis on preventive care and enhanced wellness

programs• Increased innovation in disease management programs• Elimination of employee and family premiums when choosing a

high performing health plan• Elimination of cost sharing when choosing in-network health

care providers• No-cost on-site health screenings• Quarterly scorecards of health plans • RFPs from health plans every 2 or 3 years

29

Employers Not on the Verge of Dropping Benefits

• None would be the first to drop coverage– “Insane”– “Would be last”

• Would drop coverage if…– elimination of the employer tax deduction– movement to universal system– erosion and/or elimination of ERISA preemption – Other employers dropped coverage

• Think talk of dropping coverage by other employers is an empty threat

30

Next Generation of Benefits

• Greater focus on shared responsibility and accountability

• Individuals need to be become more engaged, and should make informed decisions

• Employers starting to facilitate next generation– Could be seen as step away from employment-based

system• Account-based health plans may play role in next

generation of benefits, but will not play central role.

Thank youEBRI

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