Are You Ready To Own Your Health Care?
Employers and insurers have latched onto a Big New Idea that will change your family's health care as profoundly as managed care did 20 years ago. No one has any idea whether it will work, but it's coming your way—and soon.
By Amy Feldman

(MONEY Magazine) – Most Americans got their first hint of the future of the U.S. health-care system during President Bush's acceptance speech at the Republican National Convention—but they had to listen very closely. Along with a litany of other benefits that the President promised would come from his re-election, he declared, "More people will own their own health plans." Since the President didn't go into detail, it was easy to let the phrase pass as mere sloganeering, not to be taken seriously.

That would be a mistake. Behind the slogan lies the most formidable reform movement in American health care. It's known as "consumer-driven health care," or CDHC, and while the Republicans are taking credit, the movement is much bigger than either party. The idea at the heart of it is simple: If you have more control over your health-care spending, and providers and insurers have to compete for your business, good things will follow. As it has in every other business, advocates say, competition in health care will give rise to better service and—just as important—will slow skyrocketing costs.

Though still unproved, the idea of consumer-driven care is rapidly taking on an air of inevitability. Early adopters of CDHC include big employers such as Sara Lee, big insurers such as Aetna and a host of smaller entrepreneurial newcomers. Its most widespread manifestation so far is the health savings account, or HSA, the IRA-like benefit that is just beginning to be marketed to individuals and to appear in employee-benefit plans. A recent survey by benefits consultancy Mercer found that 73% of firms are likely to add HSAs to their benefits mix by 2006. Bob Natt, the former CEO of managed-care firm Physicians Health Services and now head of a company that provides debit cards linked to HSAs, says that consumer-driven programs will do to today's managed-care plans what managed care did 20 years ago to the traditional indemnity plan. "Over the next five to seven years," he says, "the traditional plan for most employers will be gone."

What might a CDHC-inspired system be like? Ask one of the movement's advocates and you might get a scenario like this: Imagine that you need coronary bypass surgery. Now imagine that you shop for your surgeon the same way you might for a good restaurant, by checking an online rating service. On the site you compare competing cardiologists' success rates, as well as their education, their experience—and their price. The operation itself takes place in a heart-surgery-only hospital that looks like an upscale hotel and treats you like a visiting dignitary. You pay some of the bill yourself out of the fat HSA that you've been contributing to for years, and your insurer covers the rest. You get far superior care at much lower cost than today. And the providers make money too.

As evidence that CDHC could work in the real world as well as in theory, believers point to cosmetic surgery. Because consumers spend their own money on these medical services, they shop for the best care at the lowest price. The result: Since 1998, the average price of a tummy tuck has risen 19%, only slightly faster than inflation. By contrast, per capita spending on health care overall has soared 49%.

Critics of CDHC—and there are many—take a less utopian view. They say CDHC could easily become a cover for businesses to stick their employees with a greater share of health-care costs. And they warn of a future in which the wealthy and healthy would be fawned over by hospitals and insurers while the sick and poor get nothing. "HSAs tend to fragment the health pool, separating the healthy from the sick and the rich from the poor," argues Gail Shearer, director of health policy analysis at Consumers Union. "I find it tragic that this is what we are going to end up with."

Tragic, utopian or simply rife with unintended consequences, it's too late to stop CDHC now. If you get your health insurance through your employer, some version of consumer-driven health care is almost certainly coming your way within the next few years. (The public health system seems likely to resist longer.) The fact is, the current system is too complex and expensive, and it desperately needs a Big New Idea. Consumer-driven care is the only one with any momentum. It's time to get ready.

THE BIG NEW IDEA The unofficial godmother of consumer-driven health care is Regina Herzlinger. Herzlinger, 60, is a Harvard Business School professor of business administration and a senior fellow at the Manhattan Institute, a New York think tank and the intellectual home of "compassionate conservatism" (another George W. slogan). Herzlinger wrote her first book on consumer-driven health care, Market-Driven Health Care, seven years ago. In 1999 she organized a conference at Harvard that gave the movement its name.

Herzlinger likes to view herself as an outsider and an iconoclast, and in some ways she is. Neither Republican nor Democrat, she's a market-oriented business professor in the highly regulated world of health care and a woman competing in male-dominated arenas.

Her interest in medicine dates to her graduate thesis on the productivity of physicians at Massachusetts General Hospital. She wanted to see how they would perform if they knew how productive they were compared with their peers. The doctors she dealt with didn't like being measured and resisted her efforts to show them how they stacked up. "It was so foreign, so different from the rest of the economy," she says.

The basic problem, Herzlinger says, is that the American health-care system is shielded from the discipline of the market. Instead, bureaucrats set the economic incentives, a process that typically starts with good intentions and ends with absurdity. Hospitals, for instance, are paid (usually by insurers or by government in the form of Medicare or Medicaid) for individual acts of care. The unintended result is that providers have ample incentive to do more tests, more procedures and more hospitalizations, and little reason to actually make people better. Herzlinger likes to cite as examples hospitals that have bundled under one roof all the specialized services needed to treat a specific disease. These programs tend to work well, in that they make patients better and keep them out of the hospital. But, of course, that means less money for the hospital. The strategy makes medical sense but not business sense. Herzlinger's goal is to make those two things the same. Provide better care, make more money.

The best way to realize that ideal, Herzlinger says, is to give patients real choice. "Right now the health industry is so devoid of choice, it's laughable," she says. In her vision, patients would be free to decide which insurers and which providers they wanted and to shop around for the best deal. The information to make an intelligent decision would be readily available. (Insurers and health-plan administrators, along with new outfits like HealthGrades and the Leapfrog Group, are already scrambling to provide the data.) Eventually, insurers and health-care providers would have to tailor their offerings to what consumers needed and could afford. One new business Herzlinger sees arising from this process is what she calls the "focused factory"—a highly efficient medial center that treats only one particular disease.

For now, the consumer-driven idea attracting the most attention is the health savings account. (Herzlinger regards HSAs as only a small step in the right direction.) HSAs are tax-free accounts offered in conjunction with low-cost, high-deductible insurance plans. Either you or your employer (or both) puts a certain amount of money into the account each year and, to oversimplify somewhat, you are free to spend that money on any health treatment or medication you wish. Whatever you don't spend each year is yours to keep.

The purpose is twofold. If you spend your own money, you will be a more frugal consumer of health care, thinking twice, say, before running to a specialist for a minor complaint. The other reason is more subtle: If you are knowledgeable about treatment risks and prices (something few patients have any idea of today), you will take your business to providers who give better care at lower cost. Those who don't keep up will fold. The "creative destruction" of the free market will reform the system.

Herzlinger believes that corporations, which bear the brunt of soaring health insurance costs, will be eager to adopt consumer-driven reform. "The CEOs are thinking, 'Health-care costs are killing me,'" she says, "and consumer-driven care offers them a way out."

Consider the mutual fund firm American Century, which rolled out a consumer-driven health plan administered by a start-up company called Definity Health. The CDHC options came with health reimbursement accounts (a precursor to the HSA) and relatively inexpensive, high-deductible insurance policies. In the first year, 30% of American Century's 1,800 employees signed up; by last year, 52% had. Linda Hosler, director of human resources, figures that the firm's overall health-care costs had been rising near 15% a year before it hired Definity. They're now trending up between 7% and 8%. In large part, she says, the savings came from simple things like saying no to brand-name prescription drugs when over-the-counter remedies would do just as well. As for Definity, it now runs plans for more than 95 large companies, including Sara Lee and And large insurers such as Aetna, which once touted managed care as the antidote to rising costs, now market their own consumer-driven plans.

Not every CDHC story, however, has been an unqualified success. Mailing-equipment maker Pitney Bowes, for example, tried to get a handle on its health-care costs by taking a number of pages from the consumer-driven playbook—for instance, charging its employees more for brand-name prescription drugs when a generic was available. It did only so much good. As the Wall Street Journal reported, the number of Pitney Bowes employees who were hospitalized in 2003 and the average length of their stays were unchanged from the prior year. But the company's hospital bills rose 17%. How come? One big reason was that several hospitals in California, where Pitney Bowes has plants and offices, had banded together to increase their pricing leverage with insurers. Clients like Pitney Bowes were stuck with the bill. Jack Mahoney, the company's medical director, says that the problem isn't that its employees don't respond to incentives to spend less. It's that consumer-driven plans don't work until they reach critical mass. "The provider community is not going to pay attention until they see a large number of people," Mahoney says.

HOT POTATO If you work at a company that rolls out a consumer-driven option during open-enrollment season this year, there may be reason to switch. If you aren't a big spender on health care, an HSA will lower your insurance premium and allow you to save for the future. (See the table on page 140.) If you have big medical bills, though, you may be better off staying put. And whether HSAs will truly slow the long-term rise in health-care costs remains to be seen.

One reason for doubt is that in U.S. health care, many costs that appear to be saved are merely shifted to someone else. Critics say that CDHC plans could be just another way of disguising that game of hot potato, allowing companies to pass more of the burden of rising expenses on to their workers. Brad Holmes, health-care director for Forrester Research, thinks that whatever system is in place, employees will have to bear more of the cost of their own health care. At best, he says, CDHC plans could make that burden easier to bear. "At worst," he adds, "they could be a wolf in sheep's clothing, allowing employers to push a disproportionate share of rising health-care costs onto employees."

If it's unclear how CDHC will play out in private-sector plans, its implications for government health insurance are murkier still. Major questions remain about what might happen to the 80 million people now covered by Medicare and Medicaid, not to mention the 45 million uninsured.

Herzlinger believes that government has at least three roles to play in CDHC. First, it should act as a sort of Securities and Exchange Commission for the health-care industry, requiring transparent pricing and keeping public lists of which doctors, hospitals and treatments are the best—and which are the worst. Second, she believes that government should require all citizens to buy high-deductible, low-cost catastrophic health-care policies and should subsidize those who cannot afford them.

She also thinks it's critical for government to protect the sickest patients, who otherwise would be unable to buy insurance. This group accounts for a hugely disproportionate share of health-care spending. Insurers naturally don't want these people because they are not profitable. "If you are an insurer and can attract the 80% of patients who account for 20% of the costs, you'll make money," Herzlinger explains. "The other way around, you'll lose it." Her answer is to have government step in to balance the load, shifting money from insurers with the healthiest patients to those with the riskiest. The technique is called "risk adjustment," and it is part of Switzerland's health-care system, which Herzlinger admires. "The economists say, 'Risk adjustment—it's so crude,'" she says. "So what? You can't have this kind of market without it."

Even if massive risk adjustment is technically feasible, however, it's hard to imagine that it could ever win political support in this country. Part of CDHC's appeal is that it relies on individual choice and entrepreneurial initiative. In order to cover the poorest and sickest, however, it requires a huge government intervention. There has been no political will in this country for any large, government-based health-care reform since the creation of Medicare and Medicaid in the 1960s. It's hard to imagine politicians convincing their constituents that tax dollars should go to an enormous new risk-adjustment bureaucracy—even for the worthy purpose of insuring the sick.

Finally, there's the question of whether it's wise to trust ordinary Americans to make their own health-care decisions. Herzlinger thinks they're perfectly capable of doing so and points to 401(k)s as a model. Previously it was widely thought (certainly on Wall Street) that most people were too dumb or uninterested to make their own investment decisions. But once the Internal Revenue Service approved 401(k)s, companies eager to be rid of their pension obligations rolled them out en masse, and many employees built 401(k) fortunes.

It's also true, however, that many others made basic errors—not signing up, investing too much in one stock and so on. Freedom to choose means freedom to screw up.

Despite the uneven results, 401(k)s irrevocably changed how we plan for our retirement. It seems likely that CDHC will similarly alter the way we get and pay for health care. The appetite for change is clearly here, and Herzlinger believes it won't require many aggressive consumers to change the game for everybody. Citing marketing studies that suggest that an innovation goes mass market when 16% of the target users adopt it, she asks, "Are one in six people sufficiently interested in health care to change it?... I think we're at that tipping point."

Herzlinger believes that her critics have underestimated the clout of one group in particular—the 76 million members of the baby-boom generation. "They are the most narcissistic, self-seeking and effective generation," she says. Closing in on 60, the group is about to spend a lot of money on medical bills. They are no more likely to leave the health-care system unchanged than they did the university, the institution of marriage or the workplace. They will demand better service. They will demand new ideas. And right now Regina Herzlinger's brainchild is the only one that looks to have a prayer of becoming reality.

What it would cost you


Will an HSA save you money? It depends what you're likely to spend.

A consumer-driven plan with high-deductible insurance and an HSA often costs more up front than a regular plan, especially if your out-of-pocket costs run high. But any money left in the HSA at year-end is yours, ready to defray future bills. Think of it as a way to transfer cash from healthy years to when you'll need it more.

NOTES: N.A.: Not applicable. Scenario is based on a family of four in the 28% tax bracket with employer-sponsored health insurance. For the consumer-driven side, the scenario assumes no employer contribution to the HSA and that the consumer chooses an insurance policy with the maximum deductible allowed in 2004. SOURCE: money research.