Saturday, November 20, 2010

ObamaCare: the demise of consumer directed health plans

Media outlet reports, insurers communicating to policyholders, and human resource departments communicating to employees are full of reminders to participants enrolled in consumer directed health plans: no longer will participants find over-the-counter drugs reimbursable beginning 01/01/2011. (1) Consumer directed health plans are specifically know as Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA), and Flexible Spending Accounts (FSA).

Why the removal of over-the-counter reimbursement?

Many commentators argue that ObamaCare removed the reimbursement merely as a government revenue measure. That removing the reimbursement then removed the tax qualification of the reimbursement and causes the participant to show more taxable income. Other commentators say that the removal of over-the-counter reimbursement is merely signaling the beginning of the end of consumer directed health plans.

Removal of over-the-counter reimbursement is not the entire story?

ObamaCare's removal of the reimbursement for over-the-counter drugs is really not the story. The story largely unreported is the purposely designed long term demise of consumer directed health plans under ObamaCare. More generally missing from the story is the long term demise of consumer directed health care decisions over the past forty years. Also under reported is that ObamaCare's removal of reimbursement for over-the-counter drugs works directly opposite of other government initiatives to bring drug costs down for consumer by accelerating the speed at which name brand drugs become generic drugs which in many cases also become over-the-counter drugs.

Consumer Directed Health Plans

What is a consumer directed health plan? Consumer directed health plans are a group of insurance plans based on the concept of utilization of health-care dollars at the point of service. That incentives are created for the consumer to make judgements regarding price and quality of health-care related items at the point of service. Currently its estimated that 46 million workers are covered under consumer directed health plans (2)

Consumers of health-care need incentives?

Why do consumers need incentives to judge price and quality in the realm of health-care? Don't consumers always judge price and quality? Why is health-care different than other consumer price and quality decisions?

Health-care price and quality decisions were the same as any other consumer decision until third party payer effects distorted the decision making process. What does third party payer effects mean?

An example likely best illustrates third party payer effects and the consequential distorted decision making process. If you have purchased "bread insurance" for those occasion in which you buy bread, is your decision to buy bread more based on price and quality or is your decision more based on the bread store accepting your "bread insurance"? If the store you have entered has stone ground whole wheat bread on sale for 50 cents a loaf, but the store will not accept your bread insurance, exactly how do you react? Do you buy the bread or do you seek another store that has a regular white bread priced a $2.00 a loaf however will indeed accept your "bread insurance"?

Remember, you have already paid your monthly premium for your bread insurance. Do you absorb an extra 50 cents and buy the best price/quality or do you purchase the $2.00 loaf and allow the pre-paid third party insurance to handle the transaction? The question is then: does a price distortion occur when third party effects enter the consumer's decision at the point of sale? Yes. "One of the biggest reasons for higher medical costs is that somebody else is paying those costs, whether an insurance company or the government" -Thomas Sowell. (3)

How pervasive is the third party effect?

Circa 1960 health-care costs were paid at a rate of forty five (45) percent on the dollar by health-care consumers at the point of sale. Circa 2008 the forty five percent has become fifteen (15) percent. Addressed alternatively, we have increased from 55% transfer payment level to 85% transfer payment level between 1960 and 2008. (4)

Consumer directed health plans are cost containment programs

Consumer directed health plans are an attempt to reverse the third party payer effect. That is, the plans encourage consumers to make decisions at the point of sale regarding cost/benefit rather than a third party effect causing the consumer to reject cost/benefit as someone else is paying hence cost/benefit takes a back seat.

Why are consumer directed health plans going to end under ObamaCare?

The removal of over-the-counter reimbursement for consumer directed health plans is merely the first signal of the demise of such plans. The health insurance scheme designated as ObamaCare does not specifically forbid consumer directed health plans however the internal workings of the scheme make consumer directed health plan non-viable. Why would such plans be non-viable? Three components of the ObamaCare scheme work to remove consumer directed health plans:

(1) high deductible plans, which are the hallmark of consumer directed health plans, are only allowable under ObamaCare based on a sliding scale of deductible and co-insurance based on income. That is, there is a maximum deductible and co-insurance allowable then those figures are reduced for lower income thresholds at 300 to 400% of the poverty level income then again at 200 to 300% of the poverty level income,

(2) the 80% minimum "medical loss ratio" (amount insurer is required to pay out in benefits for each dollar of premium). High deductible plans would likely never meet this requirement,

(3) first dollar coverage requirements of ObamaCare for "preventative services" does not correlate with a high deductible plan. That is, first dollar benefits, through the third party payer effect, defeats the high deductible plan's incentive of the health-care consumer making cost/benefit decisions at the point of sale. Further, a high deductible plan's cost structure is based on consumers paying first dollar benefits in exchange for a lower premium.

Theoretically you could design a consumer direct health plan given the above parameters however the end result would be a plan with a low deductible, with many first dollar benefits, as well as a plan based on third party payer effects. That is, you would have designed a policy that looks just like the prescribed ObamaCare health plan. (5)

Counter to over-the-counter

ObamaCare is counter to other government initiatives designed to lower drug costs. One one hand you have the government striking deals with drug companies allowing drug companies to more freely advertise their name brand drugs with the drug companies shorting the patent period allowing drugs to go generic quicker. Meanwhile many generic drugs become over the counter drugs or even name brand drugs going direct to over-the-counter such as Zertec. On the other hand the ObamaCare scheme disallows over-the-counter drugs to be reimbursable under consumer directed health plans. Hence two centralized government schemes work directly counter to one another.


The removal of the over-the-counter reimbursement by the ObamaCare centralized planned scheme is merely the first stage of the demise of consumer directed health plans currently covering 46 million workers. The incentives produced by consumer directed health plans causing consumers to make cost/benefit decisions at the point of sale to overcome the third party payer effect will be purposely eliminated over time through the conscious designed central planning scheme known as ObamaCare. The ObamaCare required removal of reimbursement for over-the-counter drugs works directly counter to other measures of government to reduce drug costs.

Update 02/28/2011: The big problem with healthcare? It's not a market.


(1) Health-Care Reform Changes Flex-Spending Reimbursement Rules

(2) Employer Benefit Research Institute, December 2009.

(3) Alice in Health Care, Thomas Sowell,

(4) Back in the Old Days When the "Single Payer" Was the Patient, There Was "Self-Rationing".

(5)Bad Medicine, Michael Tanner, Cato Institute, 2010.

1 comment:

  1. Thats Good

    It is very interesting news related to insurance program..,