Consumer Reports provides a valuable service with its tough product reviews and ratings. But the popular magazine also promotes a health-care system that is bad for consumers and the medical profession alike. The latest example appears in the July 2002 issue. The article, ominously titled “The unraveling of health insurance,” takes a look at the new consumer-driven health-care plans that are being adopted by large employers as an antidote to the nearly perpetual health-care crisis.

Enrollees in this new breed of health plan receive major medical insurance with a high deductible — typically between $2,000 and $4,000. The insurance might also cover some preventive care benefits, such as an annual exam. In conjunction with the insurance coverage, employees are given first-dollar coverage through health reimbursement arrangements (HRAs). This employer-provided money — typically between $1,000 and $2,000 — is used to pay for medical expenses below the deductible. In an important ruling, the IRS announced on June 26 that any HRA funds not spent during the year can be rolled over to the next year, giving employees an incentive to spend wisely.

About halfway through the article, Consumer Reports arrives at its bone of contention: “The notion of health insurance is to spread the risk of paying for serious illness over lots of people so that when illness does strike, the financial burden will not fall too heavily on any one person.” In fact, consumer-driven health care plans do exactly that. Large expenses associated with serious illnesses fall under the insurance coverage, with a cap on total out-of-pocket spending.

Consumer Reports is lamenting the erosion, not of health insurance, but of what leftist groups usually refer to as “social insurance.” Social insurance is fundamentally anti-consumer: benefits and premiums are the same for everyone, and there is little or no financial incentive to control health spending with smart purchasing decisions. Indeed, social insurance is characterized by overly generous insurance coverage, which fuels “moral hazard” — the tendency of people to spend recklessly when they face little or no cost from doing so.

Inevitably, costs explode under social insurance, and some sort of crude rationing mechanism must be employed. With Medicare — the prime example of social insurance in the U.S. — this takes the form of price controls and excessive regulations. In the 1990s, HMOs engaged in a top-down denial of services to reign in the runaway costs of employer-based social insurance. But this type of rationing proved unpopular, and new state-enacted “patients’ bills of rights” along with state-based independent review boards have made it much riskier for HMOs to control costs by denying care.

Consumer-driven health care, by contrast, takes a bottom-up approach that incentivizes individuals to ration their own spending. How does this work in practice? Consider “Bitter Medicine,” the recently aired ABC News special hosted by Peter Jennings.

The program examined two patented brand-name drugs, Vioxx and Celebrex, which account for 60 percent of the market for painkillers. This despite the fact that Celebrex costs $85, while painkillers such as Advil or Aleve, that are claimed to be equally effective, cost less than $10. How did these more expensive drugs capture such a large market share? The ABC special would have you believe that direct-to-consumer advertising is the culprit, although there seem to be plenty of advertisements for Advil and Aleve. What the show doesn’t tell you is that consumers are not confronted with the real prices of these drugs.

Most people taking Vioxx or Celebrex have insurance that pays for all but a small co-payment, making the effective price to consumers about the same as Advil or Aleve. Under the consumer-driven plans, however, employees are using funds from their HRA toward the real price of the drug and must decide whether the benefits of Vioxx or Celebrex are worth the additional cost.

These benefit-cost decisions send important market signals to pharmaceutical manufacturers about whether their research dollars should be focused on established classes of drugs or on innovative breakthrough drugs. Instead, “Bitter Medicine” shows us a Seattle-based HMO that decides not to make Vioxx and Celebrex available to its members — precisely the opposite of consumer empowerment. While these supply-side restrictions get a sympathetic airing, the ABC special neglects to mention demand-side solutions such as consumer-driven health plans.

For left-liberals, the employer-based version of social insurance has always been viewed as a temporary way station en route to a massive government single-payer plan. The recent movement away from employer-based social insurance is already prompting renewed calls for such a system. But for those who didn’t like HMO rationing, the government attempting to act like an HMO would be much worse. Savvy consumers will recognize that the failed leftist agenda of social insurance is not in their best interest.

Chris Middleton is the Senior Health and Tax Policy Analyst for the Center For Entrepeneurship of the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.