Consumer-Driven Health Care: The Changing Role of the Patient

Policy Reports | Health

No. 276
Tuesday, May 10, 2005
by Devon M. Herrick, Ph.D.


Figure I - Paying Directly for Medical Care

Consumer driven health care is a new paradigm for health care delivery. Defined narrowly, consumer driven health care refers to health plans in which individuals have a personal health account, such as a health savings account (HSA) or a health reimbursement arrangement (HRA), from which they pay medical expenses directly. The phrase is sometimes used more broadly to refer to defined contribution health plans, which allow employees to choose among various plans, often with a fixed dollar contribution from an employer. Those who opt for plans with rich benefits may have to contribute a significant amount of their own money in addition to an employer’s contribution. Those with more basic coverage contribute less of their own money.

“People with personal health accounts have economic incentives to better manage their own care.”

More choice and greater control over one’s health plan are characteristics of a consumer-driven health care market place.1 People with personal health accounts have economic incentives to better manage their own care. The reason: In addition to health benefits, they realize economic rewards for making good decisions and bear economic penalties for making bad ones. These economic incentives make patients more likely to seek information about medical conditions and treatment options, including information about prices and quality. Patients will respond to these incentives in different ways. Some will seek information about diseases, treatments and health care providers over the Internet, including comparative information about treatment outcomes of individual health care providers and the fees they charge. Some may bypass primary care physicians and directly order their own diagnostic tests or seek online consultations. Others may bypass brand name drugs and obtain less expensive generic substitutes, therapeutic substitutes and over-the-counter drugs. In general, people will consume fewer medical services, and pay less for health care in the long run when they are spending their own money.2

Figure II - Federal and State Tax Subsidies for Health Insurance

By contrast, most patients have few incentives to be prudent consumers of medical services in the current health care system. The reason: Third parties — government, employers or insurance companies — pay for about 86 percent of all health care.3 As a result, the economic incentive for patients is to consume medical services until they are worth only 14 cents on the dollar. [See Figure I.]

“Third parties pay for about 86 percent of all health care.”

Excessive physician visits is one way in which patients waste health care dollars. Up to one-quarter of physician visits are for conditions patients could easily have treated themselves, according to employee benefits experts.4 A recent report by the Agency for Healthcare Research and Quality even suggests that an annual physical is of little value.5 Patients also waste money through nonemergency visits to hospital emergency room. Even though these are one of the most costly ways to obtain routine treatment, 55 percent of the 103 million visits to hospital emergency rooms are judged unnecessary. Overall, the total cost of unnecessary physician office visits and unnecessary emergency department visits is just under $31 billion annually, or about $300 per American household per year.6

If third-party payment for medical bills is so wasteful, why do Americans rely on it so heavily? The main reason is tax law. Employer payment of health insurance premiums is excluded from the taxable income of employees, a subsidy worth up to 45 cents on the dollar for many workers.7 Yet, until recently, employer deposits to an employee owned and managed health savings account (HSA) were fully taxed — meaning government took almost half the deposit for the middle-income workers. Thus, the tax law generously subsidized third-party payment of medical bills but penalized deposits to accounts used to purchase care directly. As a result of legislation that became effective in 2004, these perverse incentives are finally changing. [See Figure II.]

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