Academic journal article Journal of Risk and Insurance

The Effects of Consumer-Directed Health Plans on Health Care Spending

Academic journal article Journal of Risk and Insurance

The Effects of Consumer-Directed Health Plans on Health Care Spending

Article excerpt


We use unique data from an insurer that exclusively offers high-deductible, "consumer-directed" health plans to identify the effect of plan features, notably employer contributions to the spending account, on health care spending. Our results show that the marginal dollar contributed by the employer to the spending account is entirely spent on outpatient and pharmacy services. In contrast, out-of-pocket spending was not responsive to the amount the employer contributes to the spending account. Our results represent the first plausibly causal estimates of the components of consumer-driven health plans on health spending. The magnitudes of the effects suggest important health care spending consequences to higher employer contributions to spending accounts. Our findings are most directly relevant to health reimbursement arrangement plan designs, though our results are still of value to health savings account plan designs.


Consumer-directed health plans (CDHPs) that feature relatively high deductibles and a tax advantaged account to pay for services received while a deductible applies have been growing over the past few years because many employers and insurers view them as a way to control health care costs. A recent survey indicated that 13 percent of employers offered CDHPs in 2008, up from 7 percent in 2006, and 8 percent of workers were enrolled in such plans in 2008, up from 4 percent in 2006 (Claxton et al., 2008). Approximately 26 percent of employers who did not offer a CDHP said they were somewhat or very likely to offer such a plan in the next year. In addition, recent anecdotal reports suggest that the economic downturn is causing more families to turn to high deductible CDHPs as a means of cutting their premium expenditures (Alderman, 2009).

CDHPs are controversial, however, presumably due to the greater cost sharing associated with them. Greater cost sharing exposes the consumer to greater financial liability and reduces consumer welfare, although it reduces moral hazard effects of insurance. Given the greater financial liability associated with a high deductible plan, the role of the tax advantaged account is critical in terms of evaluating the welfare implications of switching from more traditional insurance plans to a CDHP. The tax advantaged account has the potential to buffer consumers from the increased financial liability, but it can undo the incentive to reduce unnecessary care (i.e., moral hazard). Surprisingly, despite the large and growing interest in CDHP, relatively little is known about the effects of these plans, particularly the common feature of employer contributions to tax-advantaged spending account, on health care use and spending, and health outcomes.

Specifically, how individuals respond to the cost-sharing features of CDHPs has not been widely studied, and prior studies of CDHPs have several limitations. Past research is commonly based on case studies of a handful of employers or small surveys of employer and employee attitudes and experiences with regard to CDHP (see Lo Sasso et al., 2004; Buntin et al., 2006; Feldman, Parente, and Christianson, 2007; Wharam et al., 2007; Parente, Feldman, and Chen, 2008). External validity is a distinct challenge when examining the experiences of just a few firms. A greater challenge facing prior studies is that they almost uniformly study CDHP as an add-on option to an employer's health plan offerings leading to difficult, if not intractable, selection bias. There is reason to suspect that individuals who choose to enroll in a relatively new health insurance product design over familiar alternatives such as a health maintenance organization (HMO) or preferred provider organization (PPO) are likely to differ on unobservable factors related to their anticipated health care utilization leading to biased inference.

We attempt to remedy the shortcomings of the existing literature by employing unique data from an insurance company that offers CDHPs in the small group market. …

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