A Conversation with Paul Fronstin, PhD: Current Crop of Consumer-Directed Plans More ‘Lite’ Than ‘Heavy’

This Employee Benefit Research Institute official sees little change in the level of health benefits so long as unemployment remains low
MANAGED CARE April 2006. ©MediMedia USA

This Employee Benefit Research Institute official sees little change in the level of health benefits so long as unemployment remains low

Medicare is inexorably going broke, but don’t expect our political leaders to do much about it until the last possible minute, which may arrive as soon as 2013. As Paul Fronstin, PhD, points out, that’s when the program is expected to go into negative cash flow on its way to projected insolvency in 2020. And when some future administration and Congress finally take on major Medicare reform, it might mean the end of employer-based health benefits as corporate America seeks relief from ever-rising health costs.

Fronstin is a senior research associate at the Employee Benefit Research Institute, a private, not-for-profit, nonpartisan research group in Washington, D.C. He joined EBRI in 1993, and since 2003 has directed its Health Research and Education Program. Fronstin’s research interests include trends in employment-based health benefits, consumer-directed health benefits, the uninsured, retiree health benefits, employee benefits and taxation, and public opinion about health care. He has edited books on the implications of evidence-based medicine on consumer-directed health benefit plans, on the evolution of such plans, and on the economic costs of the uninsured.

He holds a bachelor’s degree from the State University of New York–Binghamton and an MA and a PhD from the University of Miami in Coral Gables, Fla. All of these degrees are in economics. Fronstin spoke recently about Medicare, health benefit trends, and managed care with Senior Contributing Editor Patrick Mullen.

MC: What trends will shape health benefits over the next couple of years?

FRONSTIN: We’ll continue to see cost shifting and other changes to benefit packages which will lead to people paying more for health care services. We really haven’t seen cost shifting in the form of higher premiums. Let me explain, because people hear that and say, “What are you talking about? Premiums are going up, workers are paying more.” That’s true, but the employee’s share of the premium hasn’t changed, and may actually be down from 10 years ago as a percentage of the total amount. Employers are picking up a greater share of the tab. If premiums go up 10 percent, and both workers and employers pay 10 percent more, I don’t view that as shifting cost to employees, since both sides are bearing the burden equally.

MC: What effects are rising premiums having?

FRONSTIN: Rising premiums drive people to decline coverage. One reason fewer people are covered by employer-sponsored plans is that more people are opting out, mainly because of affordability. More small businesses are not offering coverage than in the past. Considering what’s happened with premiums over the last five to seven years, I’m impressed that we haven’t had greater erosion in coverage.

MC: Do you foresee that this erosion of coverage will continue?

FRONSTIN: In the short term, I don’t see a tremendous erosion of coverage. One thing that people outside of health care tend to forget is the impact of the overall economy on health care. In the late ’90s, the strong economy enabled the managed care backlash. The lower unemployment rate drove employers to enhance benefits and drove small employers to offer benefits. Once unemployment drops below a certain threshold, the economy starts to have an impact on what employers do and don’t do. The likelihood that a small business offered health benefits increased 20 percent between 1998 and 2000, even though small businesses saw almost a 20 percent increase in premiums over those two years. That tells me that employers will do what they have to do to recruit and retain workers if they think it will affect the success of their business. Even if health care costs are increasing rapidly, if employers think cutting back on those benefits will affect their business, they’ll make other tradeoffs but they’ll maintain health benefits.

MC: You see indications that we’re heading for another period like the late ’90s?

FRONSTIN: Right now, we’re at 4.8 percent unemployment. The economy is certainly moving in the right direction as far as unemployment is concerned. We’re not that far away from that threshold. I don’t know if the threshold is 4.6 percent, 4.4 percent, 4.2 percent or 4 percent, but we’re within a percentage point of it as opposed to being within 3 percentage points. If unemployment continues down that path, employers will postpone abandoning health insurance.

MC: How much success do you expect consumer-directed plans to have?

FRONSTIN: I’m not sure yet. Employers are experimenting, and I think they’ll give them a couple of years before they throw in the towel. Opinion varies as to whether or how well those plans will work.

MC: The way you phrased your answer suggests that you don’t foresee great things for such plans. Why is that?

FRONSTIN: If savings don’t materialize, you’ll have a backlash driven by employers. At that point, we’ll see whether the kind of information needed to design benefits to provide real consumerism is available. Rather than taking away choices, that would mean providing people with useful information so that they can make informed decisions.

MC: Are consumer-directed health plans really a way to give people more control over their benefits or just window dressing for cost shifting?

FRONSTIN: We used to talk about different types of plans as managed care heavy and managed care lite. Right now we have consumer-driven lite. People are being given some decision making, but not a whole lot, and certainly not what’s possible. It’s very hard to give people a lot of responsibility when they don’t have the information needed to make good decisions. I’m not convinced that account-based health plans and high-deductible plans are the best way of changing the way people use the health care system.

MC: How much of the growth of consumer-directed plans is consumer directed? In other words, are people actually embracing this concept or are they getting pushed into it by their employers?

FRONSTIN: It’s the latter at this point. Our research shows that about half of the people in these plans had no choice of plans, compared to about only a third of people with traditional insurance that didn’t have choice.

MC: So to call them consumer-directed is perhaps a misnomer.

FRONSTIN: There’s choice on different levels. They’re consumer driven in the sense that the individual, once in one of these plans, drives his own use of health care.

MC: How effective are consumer-directed plans at controlling health costs?

FRONSTIN: The problem is that so much spending is above the deductible. Twenty percent of the population accounts for 80 percent of spending and essentially those people are all above their deductible. What incentive do they have to change how they use health care? Say someone who spends $6,000 in care during a year reduces that spending to $5,000. That’s a significant change, but they’re not saving $1,000 of their own money. They’re saving 10 or 20 percent of that, a hundred or two hundred dollars. That’s just not enough to produce major changes in behavior.

MC: What effect might consumer-directed plans have on quality?

FRONSTIN: If people had information on treatment options, they would use that information whether they had a copayment or not. People want the best care. Benefits could be designed with that information in mind to steer people to certain providers and to certain treatment options. But people need the data to base those decisions on.

MC: You’re talking about linking benefit design to evidence-based information about providers?

FRONSTIN: Right. The high-deductible and account-based benefit plan is a blunt instrument, a one-size-fits-all benefit design that’s not very flexible. It doesn’t allow you to be innovative. New York publishes 30-day post-operative mortality rates following open heart surgery. You could use that data to design a benefit package to steer people to the best hospital and the best doctors. In some clinical areas, it may make sense to reduce cost sharing. There’s a plan in Asheville, North Carolina, that found that when it eliminated cost sharing for diabetes drugs and related supplies, compliance went up, overall health care costs went down, and sick days went down. A study in the American Journal of Managed Care found that reducing or eliminating copayments for cholesterol-lowering medication increases compliance and reduces hospitalizations and trips to the ER, saving more than a billion dollars a year nationally. The difficulty is figuring out what approach makes sense for which treatment or which doctor or which hospital. Right now, we just don’t have the data to know that. But we’re not far from having that data, maybe three or four years.

MC: Have you seen any evidence linking high-deductible plans and people deferring treatment or having worse outcomes?

FRONSTIN: That’s an interesting question. In a survey we released in December, we found that people in consumer-driven plans or high-deductible plans were more likely to report that they delayed or avoided needed health care because of cost. So that’s their perception. We also asked people in these and other types of plans how many doctor visits and emergency room trips they had, how much they used the health care system, and how many prescriptions they filled. We found no difference in use when you looked at it that way. These plans haven’t been around long enough to see the real impact on health status.

MC: Health spending is projected to reach 20 percent of the gross domestic product by 2015. This trend doesn’t seem to be economically sustainable. Something’s got to give.

FRONSTIN: I see 2013 or possibly 2020 as potential tipping points. Medicare goes into negative cash flow in 2013 and becomes insolvent in 2020, based on current intermediate projections. That means we’re going to have comprehensive Medicare reform at some point.

MC: It’s likely that Congress and any president will wait until there’s a crisis before they take any serious action.

FRONSTIN: It’s already a crisis, but I agree that they’re going to wait until the last minute. One way something could happen three or four years in advance is if a president takes office and sees that the trust fund will go insolvent during his or her term. That president may think, “I’m going to be in office when this hits, so I have to deal with it now.”

MC: Why is Medicare so important to the employer-based health system?

FRONSTIN: As health care costs continue climbing and Congress has to address Medicare reform, it gives employers an opportunity to get out from providing health care benefits. I can see employers taking the position that if the federal government has to deal with Medicare reform, they should fix employers’ health cost problem while they’re at it. That would mean the end of the employment-based benefit system as we know it.

MC: That system is of course a bit of an historical anomaly. It certainly wasn’t inscribed in the Constitution that we should have an employer-based health care system.

FRONSTIN: That’s right. Still, when the health care system represents close to one-fifth of our economy, it’s very hard to make a fundamental change. Medicare’s looming insolvency may be what’s needed to spur change. I’m not predicting that this is the way things will go; I’m a gambling person, and I never would have bet that the Medicare prescription-drug bill would pass two years ago. I’m laying out one scenario. Some people strongly disagree with me, even people in the employer community. They say they spend too much money to give control of that spending to the government. But as health care costs continue to climb at double-digit rates over the next 10 years, they may not feel the same way they feel now.

MC: So you foresee employer-sponsored health care going the route of employer-sponsored pension plans?

FRONSTIN: It’s hard to imagine that it won’t go the same route as pension plans, given what’s happening with costs.

MC: What might comprehensive Medicare reform look like?

FRONSTIN: It’s going to be something we can’t even imagine right now because it’s going to be so expensive. Look at the prescription drug benefit. Nobody predicted that we’d have something called a doughnut hole benefit. Medicare actuaries say that fixing Medicare’s insolvency problem today would require cutting benefits to Medicare beneficiaries in half or doubling the payroll tax. So we can’t even imagine what changes will be required if we wait 10 years.

MC: At some point, politically inconceivable options become financial necessities?

FRONSTIN: Eventually we get there. For years, we’ve been saying that the system is unsustainable. We will finally learn what that means within 15 years, but probably not before that.

MC: What changes in Medicare do you foresee in the nearer term?

FRONSTIN: I expect that any changes to the program will be driven by cost. So if the cost of the prescription drug benefit comes in way out of line from what was expected, I could see the government going to price controls. Think back to 1965 when we got Medicare. The promise was a fee-for-service program with no price controls. In 1983 we got price controls for hospitals with DRGs, and in 1989 we got price controls for doctors with RBRVS. Right now, we have no price controls on drugs, but I think it’s inevitable that we’ll have them.

MC: Other than moving to high-deductible and consumer-directed plans, what other benefit trends do you see among large employers?

FRONSTIN: They’re investing in disease management and health promotion programs. They know they have to engage the 20 percent of the population that accounts for 80 percent of health spending, and the way to do that is through disease management programs. The flip side of course is that 80 percent of the population accounts for 20 percent of health spending. Employers don’t want to ignore them because they don’t want them to fall into the high cost 20 percent. That’s where health promotion programs come into play. There’s mixed evidence about these programs and their return on investment, so it’s hard to know what impact they’ll have. But it’s clear that employers are concerned about the impact such things as obesity and smoking have on health care costs and on productivity. Some employers are doing positive things and some are being more punitive, like an employer in Michigan that last year told employees they would eventually be fired if they kept on smoking.

MC: What aspects of managed care remain viable?

FRONSTIN: Employers certainly haven’t abandoned managed care. All the new benefit designs build upon things about managed care that employers have always liked and thought worked well. Employers are looking at narrower networks, which is a step back to an HMO model.

MC: In what ways are employers’ expectations of providers changing?

FRONSTIN: There’s a movement among insurers and employers toward greater price transparency among providers. They essentially want physicians to post prices.

MC: I can almost hear the sound of physicians screaming.

FRONSTIN: That’s where this whole information age is starting, because it’s the easiest thing to get data on. Doctors have to charge something at some point and health plans know what they’re reimbursing doctors, so they’ve got the information. Of course, you don’t know what you as a patient will need from a doctor until you get there. It’s not like when you need a car repair and you take it in for an opinion and they tell you what’s wrong and how much it is. But I think things will change. Providers are going to be held more accountable for what they charge and for their outcomes. They’re going to have to start to prove their value like every other aspect of this economy.

MC: Thank you.

The interviewer, Patrick Mullen, is a former managing editor and editor of Managed Care. He writes from his home outside Cleveland.