What Holds Back Consumer-Driven Health Plans?

A previous entry discussed new evidence that so-called consumer-driven health plans (CDHPs) reduce health spending one eighth among employer-sponsored group plans run by national health plans.

CHDPs are defined as High-Deductible Health Plans coupled with Health Savings Accounts or Health Reimbursement Arrangements). These plans became available in 2005. However, they only appear to cover a little over one quarter of employed people or their dependents who are enrolled in their benefits.

The case for CDHPs is that consumers (patients) will spend their health dollars more prudently than insurers or employers will. So: How can such a small proportion of people be enrolled in CDHPs after over a decade of evidence supporting the case that they cut the rate of growth of health spending?

According to the Kaiser Family Foundation’s 2016 Employer Benefits Survey, the average premium for a family High-Deductible Health Plan was $16,737, versus $19,003 (almost 15 percent higher) for a traditional Preferred Provider Organization (PPO). Why do employers appear to be leaving money on the table?

One reason is an agency problem. If government policy forced you to buy housing benefits, or automobile benefits, from your employer, the market would obviously work a lot less effectively than the current one, where you buy your home or car wherever you want.

This agency problem is compounded by a type of money illusion: People believe their employers pay most of their health benefits. Employers believe the same thing, even though economists understand workers pay one hundred percent of their health costs, either directly or through suppressed wages.

This illusion is reflected in how cash flows for premiums are divided. According to the Kaiser Family Foundation’s survey, an average $5,569 of premium for a PPO plan is deducted from a worker’s pay, while $13,433 is contributed directly by the employer. For a High-Deductible Health Plan, the shares are $4,289 versus $12,488.

So, if an employer switches from a PPO to a HDHP, the worker saves $1,280, or 23 percent of the premium deducted from his pay. However the employer’s share of premium drops $945, just seven percent.

If the labor market had no friction, this would not matter. However, there is a lot of friction. The largest source of friction is seven decades of cultivating workers’ sense of dependency on employer-based benefits, so they are not confident in demanding changes that would benefit them.

Further, as long as the government mandates workers get health benefits from their employers, rather than on their own, it gives power to employers. There is no reason for them to switch to consumer-driven health plans if almost all the benefits are captured by workers.

The solution is to reform the tax code so that workers get the same relief from taxation of health benefits whether they acquire them individually or through their employers.