NCPA - National Center for Policy Analysis

What Holds Back Consumer-Driven Health Plans?

October 26, 2016

Senior Fellow John R. Graham writes at NCPA's Health blog:

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.

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