Stateline Story

Indiana Places a Big Bet on Consumer-Driven Health Insurance

One thing Mitch Daniels believes with absolute conviction is that consumers need to pay more of the cost of their health care. He has written it in a flurry of op-ed articles in newspapers and journals all over the country. If patients have to reach a little deeper into their wallets, the Indiana governor insists, they will think twice about paying for the same diagnostic test a second time or going to the emergency room on the weekend for convenience.

"The prevalent model of health plans in this country," the Republican Daniels argued recently in a Wall Street Journal commentary , "signals individuals they can buy health care on someone else's credit card." He called today's health care system "a machine perfectly designed to overconsume and overspend."

No one can say Daniels isn't practicing what he preaches. Indiana has been using a version of consumer-driven health care for state employees since 2006. Starting next year, 90 percent of Indiana state workers will be covered by a consumer-driven plan with low premiums and high out-of-pocket expenses for actual care.

But questions remain about how many state workers in most of the country want a consumer-driven plan. The evidence from other states is that such plans encounter considerable resistance, both in government and in the private sector. In the 22 other states with some form of voluntary consumer-driven plan, only 2 percent of government employees have signed up; most are young and healthy and don't worry much about getting sick. In plans designed for private companies, 17 percent of employees are now covered by the consumer-driven plans.

But Daniels and other Indiana officials say their experience has been different. They claim their plan has already reduced the state's overall health benefit costs by more than 10 percent, and furthermore, that subscribers have few complaints — only 2 percent have switched back to a traditional plan.

If Indiana's program continues to hold down costs, while satisfying state employees, more states can be expected to test the consumer-driven option. Last year, Arizona, Louisiana, Minnesota, Utah and West Virginia joined 18 other states that already offer one. But no state has gone for the idea on the scale that Indiana has.

How Indiana's experiment works

Indiana has attracted customers to its consumer-driven system by adding quite a few sweeteners. Starting in 2006, Indiana state employees were given the option to sign up for a consumer-driven plan with no monthly premiums. The plan paid 80 percent of all doctor bills, but only after a $5,000 deductible was met. The maximum out-of-pocket exposure was $8,000.

The traditional plan — with a $1,500 deductible and $2,000 total exposure — remained available at a cost of $3,500 in annual premiums for family coverage.

To make the consumer-directed plan even more attractive, Indiana did other things that most states haven't done. It paid 60 percent of the $5,000 deductible through a contribution to an employee-owned health savings account. The entire $3,000 contribution was deposited on January 1, reducing much of the risk that a catastrophic event early in the year would leave an employee with a huge medical bill and not enough money set aside to pay for it.

Indiana also offered free preventive care, including annual physicals, mammograms and colonoscopies, and a 24-hour nursing hotline. Soon there will be a clinic on the state's campus in Indianapolis where employees can get low-cost check-ups and visit a doctor when they're sick.

At first, state employees were slow to adopt the scheme; only 4 percent signed up the first year. But it gradually caught on — partly through word-of-mouth and partly through an intensive education program. By the third year, 30 percent of the state's 28,000 civil servants had signed up, and the numbers have steadily increased.

As more of the state workers opted for a consumer-driven plan, premium costs in the traditional plan started rising. An employee's annual premium for family coverage in the traditional system started out at $3,500 in 2006, rose to nearly $5,000 within three years, and next year will exceed $9,000. The consumer option generated something of a snowball effect.

The reason for the premium increase in the traditional plan is what is known as "adverse selection." When an insurance pool shrinks, fewer healthy people remain to cover the costs for those who have high medical bills. At this point, the math on the traditional plan no longer makes sense for anyone. "It defies logic that anyone would continue to stay in the traditional plan," says Indiana's personnel director, Daniel Hackler.

Consumer-driven health plans have been gaining momentum in the private sector, albeit slowly, for more than a decade. When paired with a federal tax-preferred health savings account , employees end up paying lower monthly premiums and companies report reduced employee benefit costs.

To achieve savings, the plans rely on employees to spend their health dollars wisely. States and companies save money on the actual cost of medical care, not on health insurance premiums. In Indiana's case, the state contribution for health insurance is about $15,000 per employee for both consumer-driven and traditional plans. The savings come from reduced use of the health care system and from cheaper prescription drugs.

According to a 2010 analysis by the Mercer consulting firm, Indiana employees on the consumer-driven plan had fewer emergency room and doctors' office visits than their counterparts in the traditional plan, and they opted more often for cheaper generic drugs.

a 50-state view of how much state employees pay each month for healthcare. Indiana state employees pay an average of $578 each month.

Not for everyone

Typical subscribers to the consumer-driven plans are young, computer-savvy workers who tend to research health care options online. Demographically, however, state employees are older, and fewer have research skills compared to those in the private work world. For state employees who lack workday access to computers, such as game wardens, road workers or prison guards, it isn't easy to do the research needed to make a consumer-directed plan pay off. That's one of the reasons most state governments that have tried the experiment have lower adoption rates than private companies do.

Virginia, for example, has offered a consumer-driven plan since 2007, but only 600 state employees have signed up, out of approximately 103,000 eligible workers.

Virginia offers some lessons about why experiences in many states have differed from those in Indiana. For example, Virginia does not contribute to its employee's health savings accounts, although it does pay the full monthly premium for the consumer-directed plan. In general, Virginia employees pay less for traditional insurance plans than their counterparts in Indiana, where health care and insurance costs are among the highest in the country.

Equally important, Virginia has done little to educate its employees on the consumer-driven system, admits state personnel director Sara Wilson. Instead, Virginia has focused on other cost-containment efforts such as chronic disease management, obesity prevention and smoking cessation.

Why Indiana?

In part, it is Indiana's intensive education and outreach program that has overcome the barriers to acceptance that most states face. It also helps that the state's carrier — Anthem of Indiana — is one of the largest providers of consumer-driven plans in the country and offers easily accessible comparative information on local health care services across the state.

But Indiana's generous health savings account contribution is likely the biggest reason for the plan's extraordinary growth. Virginia and other states have been reluctant to ask lawmakers to appropriate new dollars for the savings account offset, even though experts say short-term savings on consumer-directed plans are likely to more than cover the investment.

So is it time to declare Mitch Daniels' experiment a success? Possibly. Experts say that the state's traditional plan is close to what they call a "death spiral," in which the cost of covering a small pool of subscribers exceeds the price any given employee is able to pay. Once the remaining traditional plan subscribers are added to the consumer-driven pool, the price tag is likely to go up, and customer dissatisfaction is likely to go up with it.

For now, though, it seems to be working. In addition to other advantages, each of Indiana's current consumer-driven subscribers has a sizeable health savings nest egg to fall back on. Overall, the savings account fund exceeds $49 million, and many individual subscribers have more than $10,000 in their accounts.

-Contact Christine Vestal at cvestal@stateline.org