Can consumers fix what’s wrong with healthcare?

Letting consumers call the shots is a central idea in the Medicare reform plan proposed by Rep. Paul Ryan (R-Wis.) and adopted by the GOP-controlled House of Representatives. The GOP plan proposes replacing fee-for-service Medicare with a voucher that seniors would use to buy private health insurance on a public insurance exchange.

Another central — but unstated — idea in the plan is cost-shifting. Projections show that seniors’ healthcare tabs would far exceed the voucher’s value, which means they’d have to cover the difference out of pocket. The idea here is that patients are more careful healthcare “shoppers” when they perceive that the money being spent is their own.

“You tend to think of it as spending your own money,” says Helen Darling, president of the National Business Group on Health, a nonprofit association focused on employer healthcare issues and concerns. “That’s because it is.”

Ryan’s Medicare plan is a cousin of a fast-spreading idea in private employer health plans — consumer-directed health plans (CDHPs).

CDHPs exchange big breaks on insurance premiums for a very high deductible. While premiums can range from 10 percent to 40 percent below traditional co-pay health plans, the consumer pays at least the first $1,200 in annual costs for individual coverage, or $2,400 for family coverage, with insurance covering 80 percent beyond that point, up to an out-of-pocket limit.

CDHPs usually are coupled with Health Savings Accounts (HSAs), which allow tax-free contributions and withdrawals so long as the funds are used to pay for healthcare. They also can provide a vehicle for long-term saving to offset the rising cost of healthcare in retirement, since unused funds can be rolled over from year to year, and the accounts offer IRA-like portability.

HSAs permit total annual contributions up to $3,050 (individual) or $6,150 (family); the numbers are $1,000 higher if you’re over age 55. And some employers make direct contributions to employee accounts. In some instances, HSA funds can be invested.

A survey by Towers Watson and NBGH shows that 38 percent of companies offered a CDHP coupled with an HSA in 2010, with another seven percent expected to add the option in 2012.

HSAs also are gaining ground among employers as a retiree medical solution.

About 27 percent of employers that sponsor retiree health coverage currently offer an HSA option, the Towers Watson/National Business Group on Health survey found. But 25 percent of companies plan to convert their current retiree health coverage subsidy to an HSA in the coming year.

Do CDHPs reduce health expenditures? For employers, yes. A survey of large health plan sponsors by Towers Watson and the National Business Group on Health (NBGH) finds that sponsors with at least half of their employees enrolled in an account-based health plan (there are a variety of types), spend about $600 less annually for coverage compared with companies using traditional co-pay insurance.

But that reflects mainly the cost shift from plan sponsors to enrollees. Is there any evidence of lower utilization and prices? The data on that are “all over the map,” according to Helen Darling, NBGH’s president.

If your employer offers a CDHP, it can be a good deal if you’re in good health and don’t mind paying for routine care out of your own pocket. Here are some important issues to keep in mind:

–Catastrophic coverage. Many, but not all, CDHP plans have strong coverage above the out-of-pocket limit. Be sure to read the fine print to understand how well you’re covered in the event of serious illness.

–Preventive care. The CDHP model can discourage enrollees from using an appropriate level of preventive care, since payment for those services comes from the consumer’s pocket, argues Dan Mendelson, CEO of Avalere Health, a research and consulting company specializing in healthcare. “But there’s been an interesting change lately in the design of some plans to cover certain types of preventive care and generic medicines,” he says.” Again, check the fine print to understand what preventive services are covered, and which you’ll pay for out of pocket.

–Current expenses or saving? Fidelity Investments says 24 percent of its HSA accounts are used for long-term saving. HSAs can also be rolled over if you change jobs, or moved to a standalone IRA-style account.

–How to invest. Most HSA account holders can choose between an array of equity and fixed-income investments, but most make conservative choices, says William Applegate, vice president for HSA products at Fidelity. “Most people leave the bulk of their account balances in cash, partly because it’s a relatively new product and the balances are low.”

–Will you save money? Nearly 60 percent of respondents in the Towers survey said employees are paying CDHP premiums that are at least 30 percent less than those for traditional co-pay plans. “If you put (the savings) aside in an HSA account, most people would come out ahead, unless they have very large families who get sick a lot,” said Darling.

Tags | health care, health insurance, HSAs