Consumers have skin in the game, so now what?

If consumers can not make more informed healthcare decisions, they may just end up being skinned alive.

A mantra of health economists, policymakers, insurance administrators, and commentators has been that consumers need "more skin in the game" to promote lower health costs and cost growth rates.  When there was a backlash to "aggressive" care management from some health plans, providing consumer incentives was an alternative solution.

Now about one-third of employers offer only high-deductible health plans to their employees. Health insurance exchanges are populated with plans with deductibles exceeding $10,000 (e.g., the average deductibles were more than $5,000 for an individual and $10,500 for a family on a Bronze Plan and approximately $3,000 for an individual and $6,000 for a family on a Silver Plan).

I suspect that many who suggested that consumers needed more skin in the game would say that we have achieved that goal at least for the employed and self-insured population.

Assuming reasonably accurate information on prices, quality, and benefits, a consumer now likely has incentives aligned with the insurer regarding what medical care services to acquire. In some cases, even the providers may have aligned incentives if they are not paid for each individual service. Major challenges remain regarding making informed choices, and my colleagues and I at Altarum Institute have written about those challenges separately. We also need much more work to make price transparency information useful and used so that consumers can efficiently apply their leverage on prices.

During the debates regarding Medicare Part D drug benefits, I was curious how much people paid out of pocket for medications, who perceived them to be "unaffordable," and how much cost was a barrier to medication acquisition, which resulted in a couple of little-read publications. A data source that I frequently used was the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey. I thought that I would examine these data to take a look at trends in how much skin the consumer is now putting into the game relative to the past several years.

Figure 1 presents the ratio of consumer health expenditures (insurance premiums, medical service copays and deductibles, over-the-counter pays, and non-insured expenditures), relative to after-tax income, between 1984 and 2013. Data are presented by income quintile (i.e., dividing households into five groups of equal size to provide a sense of trends by level of income).

Except for the lowest-income population, where the ratio has decreased from more than 20% of income being used for health expenditures in 1984 to about 15% in 2008, the ratios have been relatively stable across income groups.

Since 2008 (vertical blue line), a time of relatively low total health expenditure growth, the ratio of expenditures to income has generally increased in all income groups.

Even with implementation of the Patient Protection and Affordable Care Act, the lowest-income group still contributes more than 15% of after-tax income to health expenditures on average, and the trend does not appear to be downward.

Ratio of Health Expenditures to After-Tax Income

There are two straightforward components to this measure: after-tax income and health expenditures. Not too surprisingly, given much discussion regarding how the recovery from the Great Recession has been slow and has not significantly increased consumer incomes, Figure 2 confirms these observations. Relative income not adjusted for inflation has been flat or declining for all income groups, and 2013 was substantially lower than previous years for all income groups except the lowest-income households, who experienced their primary decline 4 years earlier.

Relative After-Tax Income (Not Adjusted for Inflation)

Figure 3 shows that consumer expenditures on health care have continued to increase at relatively high rates. The pace of growth has been the highest for higher-income groups, largely employers passing along insurance cost increases, in some form, to employees.

Relative Consumer Health Expenditures (Not Adjusted for Inflation)

The increases in expenditures have primarily been for insurance premiums and not medical services or medications. Across all groups, nearly 60% of consumer out-of-pocket health expenditures are for health insurance in 2013, compared to less than 40% in 1984.

What lessons do I draw from this?

Consumers may have been asked to put the "wrong skin in the game" by paying for insurance premiums instead of medical products and services through copayments and deductibles if the intent was to create consumers with incentives aligned with payers.

Health expenditure growth has been relatively tame for the past few years. One important factor, unlikely to go away, is the increasing reliance on consumers paying for health insurance and medical goods out of pocket. Thus, health service purchases may become more cyclical in nature and less of a stabilizing economic force during recessions.

Pundits and policy wonks, myself included, appear to have gotten their wish for increased consumer skin in the game. Now we must figure out how best to ensure that consumers can make more informed decisions, given that they have more skin in the game. If not, consumers may just end up being skinned alive.