1. School of Public Health Comparing the Effectiveness of a Consumer Directed Health Plan with Traditional Cost Sharing in Controlling Medical Care Use and Cost Roger Feldman/Steve Parente University of Zurich, Switzerland June 21, 2006 This research was supported by a grant from Pfizer, Inc. The authors have no conflict of interest with the grantor.

2. School of Public Health Outline What is a consumer directed health plan? –General introduction and preliminary research findings Theory of consumer behavior –CDHP cost-sharing design creates a budget constraint with 2 kinks –Contrast with ‘standard’ health insurance that uses coinsurance or deductible –Determine expected effects on enrollee behavior Empirical model and results

3. School of Public Health ‘Classic’ CDHP Model – Definity Health in Minneapolis Definity Health Care Advantage Web- and Phone- Based Tools Health Tools and Resources Care management programs Internet tools to manage HRA, find providers and services Health Coverage Preventive care covered 100% Annual deductible in $1,000s Expenses above deductible covered at 80-100% Health Reimbursement Account (HRA) Employer creates tax-advantaged account Member directs HRA Account rolls over at year-end Account does not contain ‘real’ money and does not belong to employee Annual Deductible Preventive Care 100% Health Coverage Annual Deductible HRA $$

4. School of Public Health The Health Savings Account (HSA) An HSA account is owned by the individual and used to pay for current and future medical expenses Both employee and employer can make tax-free contributions to HSA Used with a high deductible health plan HSAs were enabled by the 2003 Medicare Modernization Act Bush Administration has proposed refundable tax credits for individuals to purchase plans with HSAs HSAs are offered by UnitedHealth, the Blues, Aetna, Cigna, Humana, and Kaiser Annual Deductible Preventive Care 100% Health Coverage Annual Deductible HSA $$

5. School of Public Health Who Chooses a CDHP? Strongest and most consistent conclusion: CDHPs are preferred by highly-paid employees (Parente, Feldman, and Christianson, 2004) A large employer that offered a PPO and POS plan introduced Definity Health 2001: –38% of employees choosing Definity had income above the firm’s 75% percentile –19% of POS and 29% of PPO enrollees were above the 75 th percentile of income

6. School of Public Health Do CDHPs Experience Favorable Selection? When the University of Minnesota offered a CDHP in 2002, there was no evidence of favorable selection (PFC, 2004) In the large employer previously mentioned, CDHP enrollees had lower baseline illness burden than the PPO but about equal to the POS plan In our largest sample of 80,000 covered lives in 3 employers, there is evidence of mild unfavorable selection against the CDHP

7. School of Public Health Potential HSA Take-up Medicare Modernization Act of 2003 lets individuals and employers contribute to tax-free health savings accounts up to the lesser of the deductible (at least $1,050 for an individual or $2,100 for a family) or a maximum set by law ($2,700 for a single person or $5,450 for a family) 2006 State of the Union (SOTU) proposes to eliminate all taxes on out-of-pocket spending through HSAs Low-income families would be offered refundable tax credits to purchase health insurance policies with HSAs We project that tax credits would increase HSA enrollment from 3 million to 7 million (Feldman, et al., 2005) with much of the increase coming from previously uninsured

8. School of Public Health Price-elasticity* of uninsured take-up with respect to HSA premium subsidy * = % change in uninsured / % change in premium

9. School of Public Health CDHP Effects on Cost and Use Evidence is very preliminary, but it suggests that CDHPs with small gap between HRA and deductible do not control cost & use (PFC, 2004) CDHP disadvantage is most striking for hospital cost versus POS cohort CDHP pharmacy cost trend is most favorable

10. School of Public Health Hospital Costs 2000-2002 Note: costs are adjusted with 2-part model for age, gender, case-mix, income, number of covered lives in contract, and use of flexible spending account

11. School of Public Health Why is Today’s Talk Different? Our prior work simply compared costs or use for all enrollees in each cohort, e.g. did the CDHP cohort spend more on average than the PPO cohort? This research recognizes that the effects may differ within the CDHP cohort –Key insight: CDHP creates a budget constraint with 2 kinks –Kinked budget constraint has different incentives for ‘low’ vs. ‘high’ users of services

12. School of Public Health The Kinked CDHP Budget Constraint Goods Medical Care HRA Deductible d a b f Co-Insurance Budget c e Deductible Budget CDHP Budget

13. School of Public Health If I Only Lived One Year… Goods Medical Care FSA Budget FSA FSA = Flexible Spending Account With an FSA, You ‘Use It or Lose It’ at the end of the year

14. School of Public Health Key Difference Between FSA and CDHP HRA lasts more than one year if you stay with the employer and HSA is owned by enrollee Both versions of CDHP provide ‘insurance’ against cost of possible serious illness in the future Risk-averse, far-sighted consumers in good health may conserve medical care in a CDHP

15. School of Public Health Model (1): Basics 2 periods and 2 states of the word: ‘good health’ and ‘serious illness:’ Known probability p that healthy consumer will become seriously ill next period Fixed money income Y and employer contribution of C in each period C 1 can only be spend on medical care; C 2 can be spent on medical care or goods Insurance policy has deductible D and no coinsurance

16. School of Public Health Model (2): CDHP Equilibrium Healthy consumer’s objective function: Solution involves finding optimal M 2 given good health, then recursively choosing how much to save in the first period:

17. School of Public Health CDHP Equilibrium Goods Medical Care HRA D eductible d a b c CDHP Budget

18. School of Public Health Model (3): Deductible Plan Deductible plan (D-plan) has same F.O.C. but different equilibrium value of M 1 compared with CDHP Suppose the D-plan enrollee had the same value of M 1 as the CDHP enrollee That would imply equal H 1 but less saving Less saving implies a higher value of E(W 2 ) That contradicts the F.O.C. The D-plan enrollee cuts back M 1 until H 1 = E(W 2 )

19. School of Public Health Model (4): Coinsurance plan Assume the coinsurance plan (C-plan) has c % coinsurance up to a maximum limit on out-of- pocket expenditure At c = 1, the C-plan is identical to D-plan At c = 0, medical care in the C-plan is ‘free’ so there is no reason to conserve The demand function is continuous, so there must be 0 < c* < 1 at which M 1 in the C-plan and the CDHP are equal

20. School of Public Health Predicted Spending by Budget Region Region 1 – predicted spending less than employer contribution to HRA Region 2 – predicted spending above HRA but below deductible Region 3 – predicted spending above deductible D-plan lowest C-plan and CDHP higher with uncertain order D-plan = CDHP < C-plan D-plan = CDHP = C-plan

21. School of Public Health Data Large employer added a CDHP to previously- offered PPO and POS Plans in 2001 Quasi-experimental pre/post design We selected 3 cohorts of workers continuously employed from 2000-2003: –Always in PPO –Always in POS –PPO or POS in 2000, switched to CDHP in 2001 and stayed in CDHP 2002 and 2003

22. School of Public Health Plan Characteristics

23. School of Public Health Empirical Model – Step 1 Predict employee’s 2000 spending region on the basis of cohort, contract-level, and employee demographic data –Cohort stands in for unmeasured variables that affect spending –Control for health status using indicators for 34 ‘adjusted diagnostic groups’ (Starfield and Weiner, 1991)

24. School of Public Health 2000 Cost Model Dependent variable = ln(2000 total medical expenditure in contract); regression controls for 34 ADG categories

25. School of Public Health Predicted 2000 Spending Regions by Cohort

26. School of Public Health 2001-2003 Cost Models We estimated 2-part models for total $, physician $, Rx $, and proportion of Rx $ on brand-name drugs 1 st part = probit analysis of any $ 2 nd part = ln($  $>0) Models include predicted region x Cohort Will present ‘key’ results

27. School of Public Health Total Expenditure Regressions control for year, age, male, income, covered lives, FSA use, concurrent ‘health shock’; omitted category = POS x REGION1; NA = ‘not applicable’ because all observations = 1

28. School of Public Health Physician Expenditure Regressions control for year, age, male, income, covered lives, FSA use, concurrent ‘health shock’; omitted category = POS x REGION1; NA = ‘not applicable’ because all observations = 1

29. School of Public Health Rx Expenditure Regressions control for year, age, male, income, covered lives, FSA use, concurrent ‘health shock’; omitted category = POS x REGION1

30. School of Public Health Brand Name Rx Proportion Regressions control for year, age, male, income, covered lives, FSA use, concurrent ‘health shock’; omitted category = POS x REGION1

31. School of Public Health Summary of Empirical Findings (1) CDHP enrollees predicted to be ‘low spenders’ consistently spent less in following years than a comparison group with conventional cost sharing –This difference was found in all probit equations and for cases with positive total expenditure and Rx expenditure This finding is striking because CDHP enrollees had no cost-sharing in this region –HRA account provides insurance against future expenses

32. School of Public Health Summary (2) CDHP enrollees predicted to be in Region 2 or 3 spent more than the comparison POS group – This finding is similar to our previous cohort study in 2001 and 2002 (PFC, 2004) –CHDP enrollees in Region 3 have used their accounts and face no cost-sharing at the margin  no incentive to conserve on medical care The maximum out-of-pocket limit is too low –Problem could be addressed by raising the limit and introducing modest coinsurance above the limit

33. School of Public Health Summary (3) Tiered pricing steers POS enrollees away from brand name prescription drugs More results will be forthcoming (Parente, Feldman, and Song, 2006)

34. School of Public Health Final Thoughts Both CDHP and deductible plans represent return to ‘demand side cost- sharing’ in US health care Is consumer directed health care just ‘deductible-lite’? Our models suggest that CDHP is welfare-inferior to deductible plan because it imposes an additional constraint on enrollee –But we ignored the tax subsidy for HRA