Is Consumer-Directed Health Care Going the Wrong Way?

Gary Claxton and colleagues, of the Kaiser Family Foundation, have written a concise analysis of the evolution in health payments from 2004 through 2015:

From 2004 to 2014, the average payments by enrollees towards deductibles rose 256% from $99 to $353, and the average payments towards coinsurance rose 107%, from $117 to $242, while average payments for copays fell by 26%, from $206 to $152. Overall, patient cost-sharing rose by 77%, from an average of $422 in 2004 to $747 in 2014. During that period, average payments by health plans rose 58%, from $2,748 to $4,354. This reflects a modest decline in the average generosity of insurance – large employer plans covered 86.7% of covered medical expenses on average in 2004, decreasing to 85.3% in 2014. Worker’s wages, meanwhile, rose by 32% from 2004 to 2014.

I would quibble with Claxton et al’s use of the noun “generosity” to describe the share of health costs paid by insurers. Insurers pass costs through: Claims they pay are covered by premiums, which are charged to either beneficiaries or employers. If the latter, the beneficiaries’ pay through lost wages. Plus, because claims processed and paid by insurers add administrative costs (“load”) to the costs of actual medical care, total health costs are higher. There is no “generosity involved.”

Quibbling aside, the analysis gives great insight into how we pay for health care has changed. Certainly, as written, it looks like patients are bearing a much higher share of the costs directly. However, patients paid 14.6 percent of costs directly in 2014, versus 13.3 percent in 2004. It is not really the case that there has been a big shift of costs directly on to patients. So-called “consumer-driven health care,” whereby patients disintermediate insurers and respond directly to prices presented by providers has not really taken root.

Further, while there has been significant growth in patients’ direct payments, it is increasingly malformed. In 2015, deductibles comprised 47 percent of patients’ direct payments, versus only 23 percent in 2004. However, deductibles are the crudest and least effective way for patients to increase the share of health spending they control directly. Deductibles are determined by the calendar year. They are a characteristic of what I have described as the (very flawed) heliocentric doctrine of health insurance.

Deductibles do almost nothing to contain costs incurred by the small share of very sick patients who account for most health costs. More sophisticated methods of cost sharing are required, in which all patients participate in price formation. That is the only way to get costs under control, and it looks like our system is incapable of letting such methods arise.