Consumer Driven Health Care

Executive Summary

The issues surrounding the full adoption of consumer driven health care range from cost pressures, employer concerns and the need of effectively engaging the consumers in decision making through the provision of adequate choice and information. Until now the government has been supremely instrumental in propelling the consumer driven health care system. While the merits remain engulfed in hot debates, the fact that consumer driven health care simultaneously creates both the movement, the financial responsibility, as well as the involvement in health care choices of the consumers has created serious concerns. As the evolution moves on, all stakeholders in the health care system are going to be affected. The plans will enable the consumers to personally navigate the system and directly engage with the providers. On the other hand, the pharmaceutical sector may become educators and an intermediary consumer movement may serve to satisfy the fact that transparent information will have become a necessity for health care decisions. Leveled in line with these demands, the ensuing discussion analyzes the impacts on health care in terms of costs, efficiency and effectiveness in addition to the impacts with regard to the new consumer, and the stakeholders; notably the pharmaceutical sector.


            Descriptively, consumer driven health care system allows individuals to draw from their Health Savings Accounts or their Health Reimbursement Arrangements or such similar payment products to directly  meet routine health care expenses while protection from catastrophic health expenses is guaranteed by a high deductible health insurance policy. These policies cost less as the consumer meets routine medical claims from a pre-funded spending account. Should the balance in the account run out, medicals claims are paid just like in a regular deductible. Yearly unused balances increase future balances that can be invested for future medical expenses. The term “consumer driven health care” applies because routine medical claims are paid through a consumer controlled account verses a fixed insurance benefit. This scenario allows the consumers to occupy the role of a primary decision maker as regards the nature of health care they receive. Patients are therefore more likely to choose less expensive options and for those with chronic conditions, the system would promote compliance to treatment regimes(Goodman 2006).

            Proponents of such a health care system argue that in the long run, Americans will pay less for health care provision because of reduced monthly premiums and increases free market variability. Market variability due to the use of Health Savings Accounts fosters competition which in turn lower prices and stimulate improvements in the quality and delivery of health care services. Opponents of the system cite the fact that individuals who are less wealthy and less educated will tend to avoid the health care cost burden, when this is coupled to the inability to make informed decisions, then the result is lowered health outcomes. Additionally, since the system simply shifts the cost burden to the patients, those with chronic conditions will never be able to save anything. In the end, inequality in health care quality and delivery may reign(Gross 2007).

            Basically, consumer driven health care system is a derivative of the business model for health e-commerce ventures which were designed to enable consumers of health products and services to engage more directly with the providers in making the health care purchases. In essence, consumer driven health care is geared towards giving individuals more choice in making health care decisions and to help stabilize these costs. This system is a product of the same theories that sought to capitates payments to providers. The rejection of such a prompt gave rise to the consumer driven health care system(Kovner 2008). In the initial conceptual model, cost and quality of the relevant information was made available through the internet. The primary model relied on the creation of  Health Savings Accounts(HSAs) before the inclusion of a second model; the Health Reimbursement Arrangements(HRAs) which are funded by the employers who receive tax benefits for funding such accounts(Grudzien 2006).

            Impacts of Consumer Driven Health Care

            The phrasal representation “consumer driven health care” is in itself a revelation of the transformation in health care where consumers of health care services and goods are gaining more and more importance in health care industry. The consumers being the purchasers of goods and services in the health care industry suggests an existence of economic relationships between the consumers and the suppliers. The word driven implies that the supplier is going to be compelled to react according to the consumers’ demands and position as regards the provision of these goods and services. Implicitly, the complete phrase can thus be used to describe a situation where there exists a two way business interaction that is able not only to transform the health system structure but also reconfigure the health industry to engage in a competitive conduct. Such a paradigm shift in the management of health care is bound to present strong challenges, advantages and disadvantages.

            What effect will such a system of health care have on the effectiveness and efficiency of health care provision? Currently in the United States, over $ 1 trillion dollars is spent annually on health care. Critically analyzed, this is 15% of the Gross Domestic Product and is more per capita that anything spent in other developed countries. The magnitude of the expenditure itself calls for a need a novel idea such as consumer driven health care. If such a system of health care were to be adopted, then what forces will shape the new consumer of health care services? On this basis, it is prudent to discern the effects of the key players such as employers, insurers, providers, and government entities. All these forces will only support such a system if most beneficial to them. A third scale of analysis desires that we look into the ways in which the industry is going to change. This analysis borders on the certainty of a fundamental restructuring of the system through a set of rules governing the new competitiveness. These structural changes will most certainly be orchestrated by the new nature of buyer-supplier relationship(Ferrari 2004).

The Effect of Consumer Driven Health Care on the Efficiency and Effectiveness

            To understand the changes that may occur in the efficiency and effectiveness after the transition to consumer driven health care, it is prudent to establish the objective function which measures productivity. Generally, productivity is descriptive of the magnitude of outputs achieved for a given level of inputs. In the health care industry, the physical inputs like labor, capital and supplies should be able to achieve certain levels of health outcomes. In essence, this means that productivity will be used in providing improvements on the management or treatment of diseases since this is the fundamental production process of the health care system. However, the simplicity of the productivity measure can only be taken to be useful and sustainable if it is coupled to the variety of other societal entanglements as well as other complexities in health care provision.

            Given that the current health care system in the United States is the most expensive system in the world, a comparison with other developed countries on the basis of mortality and life expectancy attests that the system is less productive. However, on the basis of four disease states (diabetes, cholelithiasis, lung cancer and breast cancer), evidence suggested that it was more productive comparative to Germany and the United Kingdom. The high costs were attributable to the high administrative costs, higher compensation of doctors and other medical personnel. Consumer driven health care poses as the most reliable option in changing features which contribute to productivity hence health outcomes. For instance, a transformation to prospective payment from cost plus system of reimbursement for health institutions. Other reimbursement plans that supremely focus on the health outcomes rather that the activity also furthers the gains(Ferrari 2004). Customer driven health care has the ability to create incentives for providers to adopt more efficient technologies hence increasing productivity due to the underlying market competitiveness.

            Since this transformation does not in any way threaten the existence of a competitive market, the cornerstone of such a market will have to be an informed buyer who has the capacity to make an accurate judgment of the value of outputs received with reference to the level of inputs injected into the system. This would usher in an era of comparative shopping among the suppliers as well as differentially reward the suppliers who provide the best goods and services at the least cost. Moreover, the system would also allow the buyer to choose a level of productivity that is desirable and affordable and trade off other savings for needs outside the health care system. Given the nature of the transformation and the rewards consequent to the paradigm shift, it is reasonable to expect an increase in productivity, improvement in health outcomes and the improvement on the efficiency and effectiveness of the health care system(Forster 2007).

Forces Shaping the New Consumer

            There are two major forces that possess the potentiality of shaping the evolution and the pace of the novel system. The first force is the degree to which the buyers of health care goods and services become empowered to spend their own financial resources and making their own buying decisions. The second force is the quality of health care provision and the accessibility of the relevant information that pertains to the inputs and the outcomes in the health care process.

 In the case of marginalized consumers with inadequate heath care information, there is going to a continuity of the turbulence as seen in the health care system today. Such a scenario slows down the transformation to consumer driven health care system. On the other hand, when marginalized consumers have the benefit of adequate information, the consumer as the main driving force in the system retains a marginalized role in the purchases but is also associated in the trade-offs(Herzlinger 2004). The end result is an unstable relationship among the players since consumers are well informed and possess the power to make their own decisions in seeking out productive suppliers.

            Empowered consumers with inadequate information may create a scenario where there is a rush for the establishment of a brand making consumers to almost completely rely on the value associated with a brand. It is on the basis of such information that consumers will make their buying decisions. With the help of interpreters, superior information may be passed to consumers or alternatively, the interpreters may broker the brand to the consumers(Ferrari 2004).

However, the best scenario is when there are empowered consumers in possession of adequate information. This scenario aptly captures the spirit of the productive economic system. It implies that the market is awash with consumers buying on their own account. The existence of such a scenario itself may eliminate the need for intermediaries. Not that there is going to be a vacuum where these intermediaries had occupied but that such a space will be occupied with a different faction, for instance, it may be the marketing or sales front end of the provider entities(Herzlinger 2007). This would demonstrate the productivity of the providers(suppliers of health services) to the consumers. Alternatively, the space may be occupied with an aggregator of consumers which may leverage the consumers’ volume power in negotiating a unit price for making the buying decisions.

            In the end, the trend towards informed consumers who are able to make their own health care purchasing decisions will lead to an unprecedented change in the nature and quality of services and goods offered. These changes are not only positive in nature as they will shift the burden of health care costs on the shoulders of individuals. Such a change greatly challenges the deeply rooted societal perspectives on the roles of democratically elected governments. The creation of new consumer oriented intermediaries may usher in another era of misguided government regulatory intervention. Assuming that such a scenario does not arise then a consumer driven health care system has the potential to move health care provision to anew level of productivity hence better health outcomes for the United States citizenry.

            On the contrary, because of these sub classifications of consumers based on empowerment and availability of information, individuals who are less educated and healthy may avoid the needed health care services due to the cost burden coupled to the ability to make well informed and appropriate health decisions. Moreover, as Jonathan Oberlander; a political scientist at the University of North Carolina, Chapel Hill reiterates, the system simply shifts the health care cost burden back to the patients. Patients suffering from chronic health sicknesses may not be able to afford such costs, since with a deductible of between $ 3000 to $ 4000, these patients will thus be unable to save anything in their accounts. Employers are specifically impressed because the system is beneficial to them. They will not adequately fund replenish the employees health care accounts even though they will save money(Gross 2007).

            The success of the consumer driven health care is dependent on the ready access to relevant information on health services, products and pricing. Due to the absence of free market variables in the health care industry, the lack of transparency will saddle consumers with additional expenses. This means that despite the theory that health insurance based on higher deductibles results in consumers shopping around for better products and services(based on quality and price), the inadequacy of such pertinent information practically goes against the attainment of benefits in a consumer driven health care model(Shearer 2007).

Impacts on the Pharmaceutical Industry

Currently the pharmaceutical industry has been shouldering the blame for the double digit increase in health care costs. Between the year 2001-2002, the consumer price index for health care increased by 4.4% while the industry index grew by 5.5%. A simple analysis of these percentages shows that the industry can only account for all the increase in the event that all other health care components shrunk. These statistics aside, the expenditure pent on informing consumers; $ 2.8 billion and a further $ 13.2 billion on informing doctors invariably increase the costs of health care in the long run. Therefore, unless new products are distributed for consumption without additional costs from these activities of pharmaceutical industries, the health care costs will continue to be high(Herzlinger 2004). Consumer driven health care has the potential of eliminating these costs hence advancing quality health care at lower costs.

            Health care markets are extremely sensitive to the presence of a market power. Medical device companies and pharmaceutical companies retain monopoly over devices and drugs for a considerably long period of time due to the patent laws. It is during this period before the expiry of the monopoly period that these companies earn monopoly rents, in effect leading to higher drug pricing. This is unlike the traditional neoclassical supply curve(Jost 2007). This trend will be reversed as consumers will be looking out for cheap but equally effective therapeutic alternatives, hence bringing the prices down in the long run.

            With the death of the intermediary between the suppliers and the consumers, the pharmaceutical industry has started to align itself with the consumer of its products through direct to consumer advertising. This has only become necessary after the FDA lifted restrictions on direct to consumer advertising. This move has been viewed by many as a gap that allows the pharmaceutical companies to foist their drugs on the gullible public in the name of providing pertinent drug information. Moreover, the use of billions of dollars in advertising only increases the overall costs of the drugs.

            On the other hand, there are those who view direct to consumer advertising as being revolutionary and instrumental in promoting consumer involvement. Such an exposure of drugs to consumers acts as an educational tool and helps the consumers to be more informed in making decisions in health care. Apart from getting information direct from the pharmaceutical companies, information technology is increasing consumer empowerment making them seek high quality but less expensive choices(Mason et al 2007). Therefore, even though the pharmaceutical companies bypassed the physicians and moved directly to the consumer in advertising and promotion, consumer empowerment means that the era in which the extra expenditures were passed onto the consumers will be long gone. Such an eventuality will stimulate a dramatic restructuring of the industry.


            The potential of a consumer driven health care system to improve the efficiency and effectiveness of the quality and delivery of health care are huge. However, the fact that access to health care is hinged on the ready access to relevant information remains the main obstacle in the realization of the full benefits. Health care and market forces are mutually exclusive. The existence of a competitive market; the cornerstone of which is an informed buyer increases the capacity of the buyer to make an accurate judgment of the value of outputs received with reference to the level of inputs injected into the system. So long as information is easily and cheaply accessible and transparency in the health care industry is promoted, the system may well be the answer to age old failures of the current most popular health care system. By putting insurance money under the complete control of the patients themselves, giving the employers cost relief, and eliminating the intermediary in the doctor-patient relationship, the system will undoubtedly achieve its health outcomes.


Ferrari, T. Bernard. (2004). Where Will Consumer Driven Health Care Take the Health Care       System. In Consumer-driven Health Care: Implications for Providers, Payers, and     Policymakers. Regina E. Herzlinger(Eds). John Wiley and Sons. p. 399-403

Forster, R. (2007). Market Forces and Health Care are Mutually Exclusive. Intelligently   Connecting Institutions and Expertise. Gerson Lehrman Group.

Goodman, John (2006), Consumer Driven Health Care, Networks Financial Institute Policy       Brief, Indiana State University

Gross, T. (2007). Fresh Air from WHYY, July 9, 2007. Diagnosing U.S. Health Care and ‘Sicko,’           Too. Terry Gross interviewing Jonathan Oberlander, associate professor, University of             North Carolina, Chapel Hill.

Grudzien, L. (2006). Can Consumer Driven Health Care, Health Reimbursement Arrangements            and Health Savings Accounts Save Employer Sponsored Health Care Reform From Ruin.       Benefit Express.

Herzlinger, Regina. (2007).  Who Killed Health Care? America’s $2 Trillion Medical Problem     and the Consumer-Driven Cure. McGraw-Hill Press.

Herzlinger, Regina E. (2004). Consumer-Driven Health Care: Implications for Providers,           Payers, and Policymakers. San Francisco: Jossey-Bass Publishers.

Jost, S. T. (2007). Health care at risk: a critique of the consumer-driven movement. Duke            University Press.

Kovner, R. A., Knickman, J., & Jonas, S. (2008).  Jonas and Kovner’s Health Care Delivery in   the United States. Springer Publishing Company.

Mason, J.D., Leavitt, K. J., Chaffee, W. M. (2007). Policy & politics in nursing and health care.             Elsevier Health Sciences.

Shearer, G. (2007). Testimony of Gail Shearer, Director, Health Policy Analysis, Washington      Office, Consumers Union before the Joint Economic Committee, on Impact of    “Consumer-Driven” Health Care on Consumers.



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