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April 8, 2005



PAUL GIGOT: Welcome to THE JOURNAL EDITORIAL REPORT. Traditionally, auto workers in America have enjoyed health care that is about as close to free as you can get: no monthly premiums, and no deductibles. So when the union and the auto companies start negotiating changes in health coverage and costs, you know big changes are in the wind. Across the nation, companies are searching for ways to control and cut the costs of employee healthcare. This week we look at one of the fastest-growing plans, so-called consumer-driven benefit programs in which the worker has to take more responsibility for how his health dollars are spent. Correspondent Celeste Ford reports from Kansas City.

CHRIS DELANEY: It's very hard to actually find industries that aren't seriously considering consumer-driven benefit programs.

SEAN STILES: I think employees are much more healthy than they were back when we had the traditional plans.

KAREN DAVIS: I think the explosion in health care costs in the last few years has made everyone desperate, but I think we're rushing in without a lot of evidence on what we're ...

CELESTE FORD: As the county struggles to control the cost of employee health insurance, corporate leaders are looking at the kind of plan that is being tried in Kansas City, Missouri. A financial company called American Century Investments is cutting costs by offering a consumer-driven health care plan in which employees are expected to take more responsibility.

MAIL COURIER: I know exactly what I'm getting into. I can always go on line and check where my deductible is, where I'm at on my out-of-pocket and all that stuff.

CELESTE FORD: From the mail courier to these mid-level managers ...

MELISSA STILES: You know, it made me more aware of what monthly prescriptions cost and how much was really being paid out, and how much the company was covering.

CELESTE FORD: ... now employees have an incentive to investigate costs, avoid unnecessary medical expenses and shop for the best deals. As an example, let's take a single employee. The company places 800 dollars in a healthcare reimbursement account that the employee uses to pay for medical expenses. But after the employee spends the money in the account he must cover the next 2,000 dollars out of pocket. If the employee spends all that, for a total of 28 hundred dollars, the company covers 100 percent of all other costs.

MAN: Your blood pressure is normal today.

MAN: That's good to hear.

CELESTE FORD: Employees who don't spend much, keep the company money in their account and roll it over to the next year. But this raises some concerns. Will consumers skip needed medical care to save dollars?

SEAN STILES: In the data we don't see people foregoing care, and that is absolutely not what we want to see.

MELISSA STILES: It's often pointed out that this kind of plan rewards you for not going to the doctor.

CELESTE FORD: Are you foregoing medical care in order to save money?

SEAN STILE: No, not at all.

CELESTE FORD: Melissa and Sean Stiles, who are expecting their first child, are natural planners, and consumer-driven health care works for them. Plus, they are rewarded for good health. Sean has saved more than 2000 dollars in company money in his healthcare account ...

SEAN STILES: I think it would give people incentive to take more responsibility for their health care, and even more responsibility on their lifestyle to become more healthy. So I would like to see it become the next big thing in healthcare.

CELESTE FORD: At American Century not everyone is on board. Not even Jon Zindel, a vice president, and a man who helped develop the plan. Zindel, a healthy, high income, father of four, did not enroll. His family is a big health care consumer and Zindel says he's more comfortable with a traditional plan, with higher monthly payments but lower deductibles.

JON ZINDEL: Yeah, I mean the hassle factor was definitely an element of it. I took the time to run the numbers and once I got to that point, then I decided to stop and say, if I don't have to change, I'm not going to change.

CELESTE FORD: Consumer driven health care clearly has drawbacks for others, too.

What's the profile of the person least suited for this type of plan?

KAREN DAVIS: Older, with chronic conditions, low wages, no savings.

CELESTE FORD: Economist Karen Davis is president of the Commonwealth Fund and the health insurance expert who came up with one of the industry's most alarming statistics: 10 percent of Americans generate 69 percent of the medical costs. She says consumer-driven health care won't help this segment because the plans cater to the healthy and wealthy. And Davis says the research suggests there are even more sick people who do not treat their illnesses because of the high deductible.

KAREN DAVIS: They're more likely to report not filling prescriptions, more likely to report not getting lab tests done when a doctor says you should have that done.

CELESTE FORD: Definity Health, the largest provider of these plans, concedes that some employees struggle with the high deductible, so Definity is looking at repayment programs, including a line of credit for those who can't pay their medical bills.

At American Century the cost of insuring the firms 18 hundred employees is still going up but not as fast. A national survey of corporations found that last year they spent up to 21 percent less on consumer-driven health care compared to some traditional plans. Employees clearly found it in their interest to spend less money, so they did. Definity says next year a quarter of the largest companies in the country are likely to offer these plans. But critics argue that this is simply a shift of cost from the employer to the employee.

CHRIS DELANEY: It really isn't. It's a different way of sharing costs and what employers are looking for today is something that is sustainable, that is long-term, and that fundamentally changes how consumers take charge and interact with the healthcare system.

CELESTE FORD: For the future one thing seems certain, consumer-driven health care plans are on the way. And with these plans, the cost and responsibility for our long-term health shifts from our employers and our doctors to ourselves. For the Journal Editorial Report, I'm Celeste Ford.

PAUL GIGOT: Joining us to discuss all this are: Dan Henninger, columnist and deputy editor of THE WALL STREET JOURNAL editorial board; Kim Strassel, a senior editorial page writer; and Rob Pollock, also a senior editorial page writer.

Dan, just a few more facts about General Motors. They're going to spend 5.6 billion dollars this year on health care, to cover about 1.1 million employees and retirees. That adds up to about 1500 dollars per vehicle. Amazing figure. That's an extreme case of what a lot of companies are facing. Clearly something's got to change. What do you make of this trend toward employee responsibility in health care.

DAN HENNINGER: Well Paul, I think the reality you just described suggests why this trend is here to stay. Health care is a very complex subject, and the reason it's a complex subject is because health care itself in America has become complex, which is to say, yes, we're an advanced industrial society, people are living longer, which means that towards the end of life you come up with chronic diseases like diabetes, obesity, cardiovascular disease, cancer, and things like that. At the same time, because it's the United States we have a very modern, highly-advanced medical system. No one is better than the United States at innovating medical technology, surgical treatments, and pharmaceuticals.

Anything new is going to cost money. So if on the one hand you have the population interfacing all the time with the medical system, and on the other hand a very advanced medical system, it's going to be expensive and it's going to be complex. And it has to be rationalized. Something has to give. And that's why this subject is now on the table.

PAUL GIGOT: And health care is different than other kinds of insurance because we have this third-party payment system where employers, or government, pays for individuals, quite in contrast to other kinds of insurance like auto insurance which you buy as an individual. Right, Rob?

ROB POLLOCK: You know, that's one of the crazy things is that when you lose your job or you move, now you lose your health insurance. That doesn't happen with other insurance, and that's something that really ought to change going forward.

PAUL GIGOT: This business of consumer-driven health care, Dan, are a lot more companies going to pick this up?

DAN HENNINGER: I think they are. On paper at least, theoretically, it does look like a win/win situation. The programs that have been initiated seem to be lowering outlays for the companies. It is also the case that because of some changes in the tax law and Congress' initiation of health savings accounts last year, that people are able to take tax-free money, put them in accounts, and roll them forward, therefore incurring savings for the individual. So under those circumstances it is very likely that more and more companies will try these programs. And as we go forward, we'll learn what's wrong with them, what's good about them, and what makes them work.

PAUL GIGOT: There's also a common misperception that somehow employees don't pay for health care, or they pay a minimum amount for health care. But that's not really true, is it, Kim? Because we have this system in which the companies get the tax benefit for health care, but individuals don't get the tax benefit for health care.

KIM STRASSEL: Yeah, I mean this is an accident of history. But people pay a lot of money for health care. They just have no idea. It's hidden, all hidden costs. The most obvious way that they do is that what they don't understand is that corporations get about 150 billion a year as an inducement to offer health insurance. Now those are tax subsidies that do have to be covered by someone. These are lost revenues that are ultimately paid by other taxpayers, namely you. When you write a check to the IRS, you are paying for health care. Also, when you're paying your taxes, you're also paying for Medicaid and Medicare.

But also, too, another way that you're paying for your health care is that any time you get a health benefit, it's in lieu of wages that you might otherwise be getting. And it's a lot of money. And I think there's an average that companies say, about 3,000 dollars in health benefits for an individual, close to 8,000 dollars for a family. And I think if you asked a lot of people, would they prefer to just have that money come to them in a check that they could make their own choices with, they'd say "yeah."

PAUL GIGOT: That accident of history you talked about is World War II, when we had wage and price controls in this country, and the companies couldn't compete for employees based on wages so they competed based on benefits. And later, after World War II, we sanctified that through the tax code, which gave that benefit to employers, and that became the system that we have now.

ROB POLLOCK: That's the important thing to remember. The reason that we have this kind of screwy system is because it's cheaper for an employer to give an employee a certain amount in health benefits -- much cheaper, in fact -- than to give them the equivalent in after-tax wages.

PAUL GIGOT: What about this issue of HSA's? Dan raised it -- these Health Savings Accounts, which allow people to build up money over time. You young and healthy folks, unlike us old people who need a lot more health care, right now you don't need to go to the doctor as much, you can build up money in the account when you're young and then you could use later. These have been passed by Congress in 2003. What's been the receptivity in the marketplace? Are they catching on?

ROB POLLOCK: Pretty good so far, actually. According to the best numbers we have so far, about eight percent of large employers are offering them this year. Another 18 percent say they'll do so next year, and another 47 percent say they're interested in the concept. That's not surprising. We've actually had experiments in HSA-type plans in other countries around the world. South Africa is actually a good model. In 1994 the Mandela government deregulated the private insurance market, and HSA-type plans quickly captured about two-thirds of it.



PAUL GIGOT: That's interesting.

KIM STRASSEL: And also, this is about choice. I think one of the reasons they are catching on is because consumers like the idea of being able to make their own decisions. You know, we were talking about GM. Actually it's a good comparison to auto insurance. Rob was mentioning it earlier. When you have a car, if you're expected to take care of its upkeep changes, tires every year, you search for mechanics that have better prices, or for parts that aren't as expensive. What we'd like to have is the same sort of -- and you have your insurance in case there's a major problem, major accident. What we'd like to have is a health care market that's the same way, where you have some money to make your own choices. You go for better doctors, better services, and then you have your insurance there in case something really bad happens.

PAUL GIGOT: It's interesting when you look at the, consider some of the procedures that aren't covered by health insurance, such as Lasik eye surgery. The trend line on the cost of that -- it started out fairly expensive for each operation. Now it's gone down and down and down as people have -- as doctors and medical centers -- have competed for the consumer dollar. And people are spending their own money. They're cost conscious. That's not true of things like MRIs and all kinds of other procedures where you go into -- you have no idea what you're paying.

KIM STRASSEL: No, and because we don't care, because someone else is paying it, you go in and have them as often as you want, which drives up the prices for everyone else.

DAN HENNINGER: You know, an interesting example of this is Whole Foods, the famous organic food company. John Mackey, its founder, was one of the first people to put in place one of these programs. One of the problems with the current system is that you're required to pay for everything. One size fits all. Mackey allowed his employees to make a list of the things they would like to have covered under their plan, with a cost attached to those things, and they pared it down, and he let the employees vote on what coverage they wanted included in their plan so it was the employees themselves who in effect designed the content of the plan.

PAUL GIGOT: What about this objection we heard in the taped piece that these plans cater to the healthy and the wealthy? Is that true?

ROB POLLOCK: Most of the data we have so far in its early days suggests that that's not true. About 70 percent of purchasers, according to one study, are over the age of 40. Seventy-seven percent are families with children who use a fair amount of health care, and about a third of them make less than 50,000 dollars a year. So the yearly evidence is that it's not in fact the case.

KIM STRASSEL: It's actually the current plan that caters to the wealthy, because most people who work for big companies do tend to fall in higher income brackets. And those are the ones that directly benefit from the government subsidy that goes to corporations. If you earn more than 100,000 dollars a year, you're benefiting by about a 2500 dollar government health subsidy. If you earn 20,000 dollars a year, it's more like 100 bucks.

PAUL GIGOT: Okay, thanks Kim. Thank you all. Next subject.