The consumer choice model: a humane reconstruction of the U.S. health care system. (Consumer Choice).

KEY CONCEPTS

* Consumer Choice Model

* Employees Buying Health Care

* Health Care Purchasing

* Marketplace Dynamics

* Consumer-driven Health Care

MOST OBSERVERS AGREE that there are fundamental failures in the U.S. health care system. The ascendancy of managed care has created a consumer backlash, health care premiums have resumed double-digit increases, and the number of uninsured continues to climb, even in the face of unprecedented economic prosperity. Employers, the architects of our health care purchasing system, have become disillusioned with managed care, given its failures to satisfy beneficiaries, control costs, or simplify their administrative burden. The disruptions in the Medicare HMO programs, which large employers had hoped would solve their retiree health care obligations, have been particularly galling. The system is overdue for a change. (1)

Health care economists have lately reached a remarkable consensus regarding the best approach to solving these problems. Alternatively called "consumer choice," "defined contribution," "voucher system," or "health mart" proposals, these new approaches explicitly limit the role of purchasers in making health care decisions and put the marketplace power into the hands of consumers.

Relying on the marketplace appeals to conservatives; liberals like the prospect of covering the uninsured and creating a consumer-driven model; purchasers are attracted to the possibility of limits on their financial liability; and beneficiaries see a new empowerment to make their own health care choices. While no idea that promises so much to so many can survive the scrutiny of critical analysis or emerge intact from the political process, these approaches remain the best hope of thoughtful observers for a humane reconstruction of our health care system. Some see it as the only alternative to a national single payer system. (2, 3)

Even if these proposals never become law, the debate promises to be prominent, lively, and consuming. The chorus for "managed competition" led Clinton's health care task force to propose the "Health Care Security Act" of 1993. Even though this legislation was never enacted, managed care emerged as the model of choice and has become the force transforming U.S. health care. The legislative failure did nothing to lessen the impact of managed care and the proposals for "consumer choice" have the power to create similar sweeping change. (4)

Regardless of the political implications, it is important to understand these proposals and how they would affect the health care system. While "the devil is in the details" and the dominance of one particular proposal over others might have specific implications, some broad results can be anticipated as these proposals assume wider currency.

Why the health care purchasing model is failing

Current health care purchasing is the starting point for the consumer choice reforms. As outlined in Figure 1, health care purchasing is based on a marketplace in which health plans and insurers compete. Each of these entities offers a variety of health benefit programs on an insured basis or self-funded by employers. These programs differ by cost, the physician or hospital networks offered, the benefits included, and the out-of-pocket costs. They may be based on fee-for-service, PPO, point of service, or HMO delivery systems.

The employer's benefits manager is the decision-maker. Employers have tremendous purchasing leverage in deciding which health insurance program to offer because the cost is fully tax deductible and they can purchase health care "wholesale" by offering a group product rather than a series of individual policies. Employees have little recourse--purchasing insurance on their own would cost substantially more and they would be unable to deduct the cost of that coverage from their income taxes.

The cost of health insurance is a major concern of employers, and the choice of which program to offer is often dictated by price. Administrative simplicity, appeal to employees, and other features may also be important. Most employers offer a single health program to their employees, although large employers and governmental programs often offer two or more alternatives. The employee thus receives health care coverage in lieu of higher wages but must abide by the employer's selection.

There are a number of objections to this model. The employer's role is a distortion of the marketplace between providers and patients. The employer may be less motivated by concerns of quality or availability than the beneficiaries. Employees have little choice and only indirectly influence the marketplace to offer better service and to be more cost-effective. Increasingly, employers are shifting the cost of health benefits to employees through exclusions, mandatory contributions, coinsurance, and copayments at the time of service, and even refusing to offer health insurance. Providers increasingly resent the role of purchasers in imposing managed care mandates and driving down their reimbursement. And since health care coverage is tied to employment, the underemployed are likely to be uninsured. (5)

Although managed care can claim some success in controlling costs and improving quality, growing frustration and a consumer/provider backlash makes an alternative desirable. Managed care resulted from the drive of employers to control health care costs and has increasingly become a source of dissatisfaction to providers and patients alike. With the return of double-digit health care cost increases, even employers are becoming disillusioned with their role in purchasing health care. (6)

Enter consumer choice

Many economists who once embraced managed care are proposing consumer choice models as a better solution. By putting the consumer in charge of purchasing his or her own health care, the marketplace will offer better health care at lower prices without the priorities of the employer obscuring the consumer's interests. A representation of how this would work is presented in Figure 2.

The beneficiary becomes the decision-maker. Individuals can choose from qualified programs and there is no artificial restriction to limit the full force of health care consumers purchasing with their pocketbooks. They can trade off between better access and lower cost, higher out-of-pocket costs at the time of service and lower monthly premiums, and keeping their physician and saving health care dollars. As long as there is some qualification of health plans and good information to support effective decision-making, the elements of an efficient marketplace for health care will be in place. (7)

How will this look to consumers? The promise of choice and control will be attractive, but the initial lack of meaningful outcomes information about performance and accountability will cause anxiety. Consumers unaccustomed to bearing a meaningful part of health care costs will be making hard choices, and these will probably be driven by out-of-pocket costs. They will demand service, value, and communication from physicians and hospitals who are unaccustomed to looking at patients' as "consumers."

The dilemma facing the individual purchasing health care for the first time is similar to the transition when employers moved away from traditional retirement plans and began providing 401(k)s. Many employees initially experienced difficulty investing their 401(k) dollars and made choices that were overly cautious. These newly educated consumers have become more sophisticated about investing. A similar evolution would occur as consumer choice programs were implemented. One problem is that provider and health plan performance data is less complete and reliable than financial performance information.

The employer's role in the consumer choice scenario is greatly reduced. The employer contributes money to allow the employee to select and pay for a health plan, subject to some surcharge for more expensive plans. The employer has no role in qualifying health plans, unless it chooses to participate as a sponsor or advisor to the health mart. Unlike most benefits programs today, the employer's potential cost is capped at a predetermined level. Employers have learned from their experience with employee pensions that the defined contribution (a predetermined sum is set aside) is preferable to the defined benefit approach (a given level of health services is guaranteed). (8)

The HIPC or health mart is key to the success of the consumer choice model. They must determine which health programs will be offered and negotiate on behalf of beneficiaries with health plans and insurers. Most important will be collecting data and distributing it to beneficiaries, a problematic activity given today's technology. Only if good information is freely available to beneficiaries can this model produce better, more cost-effective health care. Collecting premiums from companies, governmental sponsors, and individuals will require a high degree of administrative expertise and huge sums of money must circulate flawlessly. Handling consumer complaints and assuring health program compliance will be demanding. While some aspects of health mart functioning may seem challenging, successful group purchasing models exist and have achieved some success, including the Federal Employees Health Benefits Program, (9) the Pacific Business Group on Health, (10) and the Minneapolis Buyers Health Care Action Group. (11)

Who wins? Who loses?

Given the fact that almost 15 percent of the United States' GDP goes to health care spending, it should not be surprising that powerful interests exert themselves to shape or prevent health care reform. There will be stakeholders who will benefit from a shift to a consumer choice model, those whose interests will be adversely affected, and, perhaps most significantly, intense lobbying for changes favorable to each constituency.

Winners and losers will be determined by the outcome of these battles. Even if there is no final legislative solution, changes are occurring in the marketplace to move health care purchasing in the direction of consumer choice. Some of the eventual impact can also be extrapolated from the results of group purchasing efforts (please see Table i for a summary of these effects).

1. Consumers

Beneficiaries stand to gain the most from a consumer choice model, but at some risk. Most people want the opportunity to choose from health plans and have control over their benefits and spending. And while most are unaccustomed to making health care choices, there is considerable evidence that given appropriate education and support, consumers can become effective purchasers. The risk that consumers assume, however, is that they will bear a disproportionate share of the cost of health care. Employers, after all, will seek to limit their financial exposure and government subsidies will be restricted to the needy and uninsured. Inevitably, some newly enfranchised consumers will make inappropriate choices and suffer poor health care outcomes or rely on emergency services and charity care.

2. Employers

Employers have had a major impact in improving health care. While some might object to their advocacy of managed care, employers have brought discipline to health care spending and have been responsible for many reforms leading to quality improvement, including NCQA accreditation, HEDIS, satisfaction scores, report cards, and accountability. There should be some hesitation to reduce their role in health care purchasing, but, in fact, many employers are retreating from an activist stance on improving care under the pressure of escalating costs.

Most employers would embrace a limited role in health care purchasing if they could be assured their costs would be contained. Especially attractive to some old-line industries are proposals that would cover the cost of retiree's benefits. Employers would lose the ability to integrate their health benefits programs with return-to-work and productivity enhancements and to coordinate their workers' compensation plans. Still, if a defined contribution approach limited their financial liability and assured their employees a consistent and effective health benefit, most would be satisfied to withdraw from the role of health care purchaser. (12)

3. Health plans and insurers

Health plans and insurers have the most to gain or lose. Because health marts are likely to be local in sponsorship and operation, much as today's purchasing coalitions are metropolitan, national health plans may be at a considerable disadvantage. Consumers will favor local health plans, particularly those that feature a prominent delivery system. Insured programs would largely replace self-funded programs, and administration would be simplified by having one administrative body rather than thousands of employers, individuals, and administration companies.

There would be more direct accountability if performance was effectively measured and reported, and it would be easier for an individual to change enrollment between plans than for an employer to change carriers, making marketplace volatility a serious issue for those at financial risk for cost and service. If providers are encouraged to organize and offer their services in PSOs (Provider Service Organizations), there will be an expanding market for provider reinsurance as well. Finally, consumer choice marketing would be directed at individuals similar to today's retail products, rather than the broker-driven, wholesale approach used in the health care marketplace.

4. Providers

How consumer choice will affect providers is uncertain. The AMA's aggressive advocacy testifies to organized medicine's belief that it will increase physicians' incomes and expand their autonomy, amid cries of "get health plans and employers off our backs." Still, it is unlikely that a consumer who has chosen a health plan and assumed responsibility for his or her care is going to be undemanding. If anything, consumers are notoriously intolerant of poor quality, bad service, high cost, and inadequate communication, making them potentially more intrusive into physicians' practices than health plans have ever been.

With a decreased role for employers and without the backing that they give to managed care organizations, physicians hope they can reassert their traditional roles. This seems unlikely. Health care economists are supporting this model as a way to control health care costs. Consumers are price sensitive and will not choose expensive health care models like the indemnity plans that allowed the unfettered autonomy that physicians so cherish. They will look for health care models that tightly manage the delivery of care to control costs. Providers will have a broad role in these organizations, but they will entail greater organization, consistency. and attention to service and quality. Physicians seeking fee-for-service solo practice without oversight or management won't find it in a consumer choice world. (13)

5. Consultants

Consultants thrive during times of change and uncertainty, and the creation of health marts will provide both. Benefits consulting for employers would be limited in a defined contribution environment, but provider and health plan consulting would increase substantially. Health marts would need tremendous assistance to set up complex operations quickly. measure health care, communicate with beneficiaries, hold health plans accountable, and coordinate with county, state, and federal initiatives.

Conclusion

Even if no legislation passes mandating a consumer choice model, there will be changes to the tax code and health care laws, including ERISA and HIPAA. Allowing full deductibility of health insurance premiums by individuals is being advocated, removing the biggest obstacle to implementing consumer choice proposals, including the Consensus Health Care Access and Choice Act of the House Republicans, the Affordable Health Care Act of Rep. Norwood (R-GA), and the Health Insurance for Americans Act of Pete Stark (D-CA). A similar plan has been proposed by Sen. Breaux (D-LA) for Medicare beneficiaries. (14,15)

Ultimately, those who believe in the consumer choice model have faith in the marketplace. If one accepts that consumers empowered with real choices and meaningful information can move the health care system in the direction of better care and greater efficiency, then consumer choice is a chance to have the effective health care system that we have struggled to achieve. For those who feel that our health care system should be shaped by public policy and not influenced by financial considerations, consumer choice represents another diversion from the single-payer system that must sooner or later be enacted. If the political process does not distort the way consumer choice is implemented, then we may finally resolve the debate between single-payer advocates and those favoring marketplace initiatives on the basis of evidence rather than blind faith. (1)

Figure 1 Current Health Care Purchasing

Competing insurers and health care organizations offer a variety of health insurance products in the marketplace. Employers act as a filter, offering only a few of these programs to employees. Employees get cost-subsidized access to health care through their employers' benefits programs, but their choices are constrained and they have only a modest impact on the marketplace. In this example, the employer chooses to offer a PPO and HMO A.

Figure 2 Consumer Choice Health Care Purchasing

Employers provide a "voucher" as funding for their beneficiaries on a defined contribution basis, and the government may contribute to cover Medicare, Medicaid, and previously uninsured recipients. A HIPC (health insurance purchasing coalition) or "health mart" accepts this funding and offers qualified plans available in the local marketplace. Beneficiaries select a health plan based on information including quality, satisfaction, outcomes, and access, and must add their own contribution if they choose a more expensive plan.

Table 1

Impact of Consumer Choice on Health Care Stakeholders

Consumer choice offers somethings to each participant in the health care
marketplace. There are significant differences between the various
proposals that could determine who finally wins

              Pros                    Cons

Consumers     Choice                  Confusion
              Control                 Cost
              Information             No opt-out

Employers     Limited cost            Productivity
              Ritiree solution        Workers comp
                                      Cost-shifting

Health Plans  Local influence         Many decision points
              Ease of administration  Accountability

Insurers      Insured premiums        Regulatory oversight
              Ease of administration  More risk

Providers     More income             Less solo practice
              More autonomy
              Reduced oversight

Consultants   Change-driven demand    Loss of benefits work
              Employee compensation
              Health marts

Christopher H. Coulter, MD, MPH, CPE, FACPE

Acknowledgements

The author wishes to thank Robert Larsen, MD, Csaba Mera, MD, and Pamela Newcomb, MA, for their assistance in the preparation and review of this article.

References

(1.) Jenkins, MW. Managed Care. We Hardly Knew Ye. The Wail Street Journal. Aug 4, 1999, p. A 23.

(2.) Reinhardt, U. "Recent Developments in American Health Policy: Prom 'Unmanaged Care' to 'Managed Costs.'" paper prepared for the AAHP Annual Institute, June 5, 1999.

(3.) Enthoven. A.C, Consumer Choice Health Plan: A National Health Insurance based on Competition in the Private Sector. New England Journal of Medicine. vol. 320, pp. 29-37 and 94-101, January 5 and 12, 1989.

(4.) Zeiman, W. and Brown, L, Looking Back on Health Care Reform: No Easy Choices. Health Affairs. vol. 17, no. 6. pp. 61-68. Nov/Dec 1998.

(5.) Kertez, L. Weighing the Choices. Healthplan, vol. 40, no. 2. pp. 32-37, Mar/Apr 1999.

(6.) Meyer, M. Oh No. Here We Go Again. Newsweek, Dec 7,1998.

(7.) Enthoven, A. and Singer, S. Markets and Collective Action in Regulating Managed Care. Health Affairs, vol. 16, no. 6, pp. 26-32, Nov/Dec 1997.

(8.) Atkins. L. An Employers Opinion. Healthplan, vol. 40, no, 2, pp. 38-40, Mar/Apr 1999.

(9.) Butler, S.M, and Moffit, R.E. The FEHBP as a Model for a New Medicare Program. Health Affairs, vol. 14, no. 4. pp. 47.61. Winter 1995.

(10.) Luft, H,S. Modifying Managed Competition to Address Cost and Quality. Health Affairs. vol. 15, no. 1, pp. 23-38. Spring 1996.

(11.) Hiizenraih, D. The Life Savers' Dilemma. The Washington Post, p. D1, January 17, 1998.

(12.) McNeil, D. What's Happened to Employers' Push for Quality? Business & Health, vol. 17. no, 4, pp. 26-32, April 1999.

(13.) Personal, Portable Protection: A System of Individually-Based Insurance Makes Good Sense for Both Workers and Employers. American Medical Association News, p. 1. Aug 3, 1998.

(14.) Thorpe, K.E. "Changes in the Tax Treatment of Health Insurance: Impacts on the Insured and Uninsured," paper prepared for the EBRI Spring Policy Forum, "Severing the Link Between Health Insurance and Employment: What Happens if Employers Stop Offering Health Benefits," May 5, 1999.

(15.) Increasing Affordability and Access to Health Insurance. The Washington Business Group on Health's Policy and Marketplace Trend Report. Vol. 2. no. 6, pp. 2-7. June 1999.

RELATED ARTICLE: Forerunners of Consumer Choice

Several health care purchasing initiatives feature elements of the consumer choice model. Not only do they provide real world examples of these ideas at work, but they also give a preview of what a consumer-driven marketplace for health care might look like.

The Federal Employees Health Benefit Program (FEHBP)

Who: Millions of federal employees.

What: Health plans are screened and their performance is measured and reported to all potential applicants. More than 300 health plans are offered around the country. Employees select plans based on access to their physicians, detailed performance information in well-designed comparison guides, and contributions based on the real cost of care (please see www.opm.gov/insure/).

Promise: A market-based program that acts as a voucher system for federal employees, reserving health plan selection for beneficiaries.

Reality: The costs are controlled because federal law requires that FEHBP get the lowest rates; performance of hospitals, specialists, and delivery systems is not reported; its unique features may not translate to private marketplace.

Despite some limitations, the model is seen as successful and has been proposed as the basis for reforms, including a Medicare overhaul by Sen. Breaux (D - LA) and Bill Bradley's campaign health care proposal.

Pacific Business Group on Health (PBGH)

Who: Three million beneficiaries of northern California employers including Hewlett Packard, Fireman's Fund, Bank of America, and Pacific Gas & Electric.

What: PBGH sponsors a group purchasing initiative that qualifies health plans and aggressively negotiates both price and performance measures. These health plans are then offered to membership, which includes 10 percent of the region's population.

Promise: A private purchasing group that drives health care quality. The group requires external audits of plan results, imposes rigorous performance guarantees, and makes available detailed comparisons of physician group and hospital performance (please see www.healthscope.org).

Reality: PBGH has had a clear impact on measuring and managing quality, but participating employers still offer their employees a limited choice of plans in traditional health benefits programs.

The PBGH model is seen as one of the successful local purchasing initiatives. The medical community in California is highly consolidated, however, and this model for managing health plans and provider groups may not work as well in other areas of the country.

The Buyers Health Care Action Group (BHCAG)

Who: Approximately 250,000 beneficiaries of major Minnesota employers, including Dayton Hudson, American Express, General Mills, and Honeywell.

What: An employer alliance that abandoned the group purchasing model in 1996 and implemented a direct contracting relationship with the Twin Cities' physician organizations. These are qualified, performance is measured, and the results are available to employees to support their selection of provider groups.

Promise: Eliminating the health plan middleman, improving quality, and making providers directly accountable to beneficiaries (please see www.bhcag.com).

Reality: The burden of managing provider groups has proved to be daunting and administrative challenges resulted when the former plan administrator quit. Large cost increases have also dampened the initial enthusiasm. The BHCAG experience is held up as the example of direct contracting with provider groups, bypassing health plans, and suggests that individuals might have a closer relationship with health care providers in a consumer choice environment.

Christopher H. Coulter, MD, MPH, CPE, FACPE

References

(1.) Murray, S. Why Health Insurance that Works Still Fails to Catch On Broadly. The Wall Street Journal, Jan 18,2000, p. Al.

(2.) Luft, H.S. Modifying Managed Competition to Address Cost and Quality. Health Affairs, 1996 Spring; 15(1):23-38.

(3.) Robinow, A. The Buyers Health Care Action Group: Creating a Competitive Care System Model. Managed Care Quarterly, 1997; 5(3) 61-64.

Christopher H. Coulter, MD, MPH, CPE, FACPE, is the Executive Director of UltraLink, LLC in Costa Mesa, California. He can be reached by calling 714/427-5513 or via email at chris [e-mail].