Healthcare policy is back on voters’ minds. The Republican party has placed its bet on consumer-driven healthcare, framed as “delivering dollars to the American people”, as a winning strategy. While the idea is not new, there is a lot the public needs to learn about it. Decades of research in health economics has a lot to teach.
Recent Policy Discussion
It has long been a conservative perspective that government programs do not work well. Thus, healthcare would be better organized by the private sector. Historically, this has meant encouraging greater enrollment in private health plans. Now, the Republican party, under Donald Trump, has soured on these plans, accusing them of ripping off America.
The latest idea is that the government should stop sending money to providers, insurance companies, and pharmaceutical firms. Instead, it should give more money directly to consumers who will use it to find lower-priced high-quality healthcare. No details about this “consumer-driven” policy approach have been provided yet. Broadly, it envisions high-deductible health plans paired with health savings accounts. This approach provides a theoretical incentive for consumers to shop around for the best deals.
Despite the current lack of policy details, the philosophy behind this approach has been around for many years. Although the Medicare-for-All idea has been subject to some public discussion, the “consumer-driven” approach to health reform has not received the public scrutiny it deserves. As the nation prepares for Congressional midterm elections this fall, healthcare is now a major issue on the minds of voters. Voters deserve clear policy choices, and policy scholars must clarify what these choices entail.
Conceptual Problems with Consumer-Driven Healthcare
Both theory and evidence point to significant problems for consumer-driven healthcare. In 1963, future Nobel Laureate Kenneth Arrow spelled out the conditions that make the market for healthcare very different from the market for other goods and services.
Years later, Thomas Rice questioned the idea that consumers have a demand for medical care that is separate from the supply influence of physicians. The broad literature on “physician-induced demand” provides ample evidence that physicians strongly influence patient choices.
Unresolved questions do remain about the extent to which demand inducement is driven by selfish interests of physicians. Physicians, alternatively, may use their informational advantage to provide more services in the patient’s interest. In either case, if patients are so driven by physician influence, then more effective ways to encourage higher-value lower-cost care would focus on suppliers rather than consumers. Such methods include utilization review, health plan networks, and performance-based payment. Moreover, even those with a more favorable view of traditional demand analysis in healthcare acknowledge some limitations. Specifically, patients often need more information about costs and benefits to be able to make good healthcare purchasing decisions.
Concerns Raised by Empirical Studies
Empirical studies on consumer-driven health plans have not supported the idea that incentivized patients will use their shopping power to obtain better care at lower prices.
A recent report by the Government Accountability Office found that health savings accounts tend to enroll healthier and wealthier patients.
A systematic review by Rajender Agarwal and co-authors found high-deductible health plans are associated with lower costs, because they encourage consumers to use fewer services. This includes spending less on preventive care and medications.
Evidence on the price effects of consumer-driven health plans is scarce. However, a 2013 study by Neeraj Sood and colleagues examined prices paid for 9 outpatient procedures by enrollees in 63 large employer plans. They found no association between consumer-driven health plan enrollment and prices, except for a 2.3% lower average price for office visits.
A more direct analysis of consumer price shopping comes from a study through the National Bureau of Economic Research. The focus was on lower-limb MRI scans. They found that the recommendation of a physician tends to override price considerations. Specifically, patients bypassed an average of 6 lower-priced facilities to use the recommended one.
Resources Needed for Consumer Engagement
Despite these problems, consumer-driven healthcare is not without hope. There is broad consensus that consumers’ engagement in their care is a good thing. But engaging consumers to make wise healthcare choices does not come for free. Here we can draw some lessons from the literature on patient decision aids.
A recent Cochrane review evaluated 71 decisions ranging from cardiovascular treatments to mental health therapies to joint replacement surgery. Each of these decisions involved diagnosis-specific aid resources that included pamphlets, videos, or web-based resources. They specify options, risks, and personal preference considerations. Preparing these aids requires years of expert research and testing. The benefit is that decision aids enable patients to choose options that best meet their needs and preferences. These decision aids did not include explicit price considerations or availability of alternative providers. Adding these features is possible, but it would clearly multiply the cost and complexity involved. Since prices are always changing, the pricing information would require much more frequent updating than the medical benefits and risks.
Consumer Engagement with Reference Pricing
The use of decision aids in shopping for lower-priced medical care has shown promise in the context of reference pricing. For example, a health plan sets a reference price, say $30,000, for a specific service, like knee replacement. Patients have more generous coverage for care at hospitals with negotiated prices below the reference price. But they must pay the difference at hospitals with prices above the reference price.
Reference pricing has been successfully implemented by the California Public Employees Retirement System (CalPERS) and Safeway, Inc. An article published in Medical Care found that reference pricing led to a 12.5% reduction in the price of CT scans and a 10.5% reduction in MRI scans. Reference pricing has also experienced success in the context of colonoscopies, ambulatory surgery, and laboratory testing.
A key feature in all of these cases is the use of structured decision aids providing consumers with timely and relevant information about prices, options, and healthcare quality considerations. These tools were often supplemented with clear instructions on the purpose of reference pricing and staff available to assist with questions, scheduling, and transfer of medical records to chosen providers.
The Bottom Line
Evidence does not support the idea that consumers will use health savings accounts to drive lower prices and higher quality of care. Related efforts to encourage better choices through price transparency have been similarly disappointing. Consumers can make good choices and drive lower costs if they do so with an embedded infrastructure that supports their decision making.
Even so, individuals are likely to vary in how much of this decision making they wish to take on themselves. Some may prefer to just accept a trustworthy doctor’s recommendation and not take on the cognitive burdens of complex comparison shopping. Consumers also need a meaningful set of options to enable price competition, which is challenging in the current era of provider consolidation. Nevertheless, focused and well-supported pricing incentives can provide cost and quality benefits to patients. As we enter a new round of health policy debate, voters need a clear and realistic description of these benefits along with their costs.
Author informationDerek DeLiaDerek DeLia, PhD is an Associate Professor at the Rutgers University Bloustein School of Planning & Public Policy. He is a Health Economist with research interests in healthcare payment and delivery reform, healthcare access, insurance coverage, and healthcare markets. He teaches courses in Health Economics, Health and Public Policy, and quantitative research methods. Dr. DeLia’s research is published in peer-reviewed journals such as Health Affairs, Health Services Research, Annals of Emergency Medicine, and Medical Care. He has been awarded more than $5.3 million in federal, state, & private research funding as Principal Investigator (PI) and has made substantial contributions to raising more than $18.8 million as a contributing co-Investigator. Previously, Dr. DeLia held research positions at the MedStar Health Research Institute, Rutgers Center for State Health Policy, and the United Hospital Fund of New York. He also taught Health Economics, Econometrics, and Statistics for the Rutgers Economics Department, Columbia University, New York University, and the City University of New York. In his spare time, Dr. DeLia like to run, lift weights, read, and spend time outdoors.
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