With this week's “health care summit” between President Obama and the Republicans, one hopes that the GOP will do a better job than they have done thus far in promoting the benefits of Health Savings Accounts. If they had done so in the past, ObamaCare would likely never have come into consideration. While structured differently than traditional health insurance plans, it is precisely this structural difference that holds the key to reigning in runaway health care inflation. Health Savings Accounts should also have a nearly universal appeal to a particularly vital population in this debate, namely, doctors.
Our present system of medical spending and reimbursement is an unholy “mashup” of two concepts that need to remain separate: health care and health insurance. Health care is a product that seeks to meet our want and need to remain healthy. Health insurance is also a product, but is focused on risk management. All but the most die-hard socialists generally agree that free markets, when allowed to work, will best deliver solutions to meet human wants and needs. Yet for some reason our government has decided that the product called “health care” cannot be delivered via free markets. Thus, we now have 50% of health care expenditures being spent by government. And where insurance should kick in for unpredictable events whose low probability allows for the pooling of risk, we are instead using it as a general financing mechanism for events that take place with near certainty, such as annual physicals. One wonders why we are not being clothed and fed by similar “insurance” schemes. The more we finance routine expenditures with "insurance", the more we fight the consequences.
It is this fundamental distortion of the proper role of insurance that lies at the root of our unsustainable medical cost inflation. If a majority of people instead used HSA's, inflation of medical care costs would likely be no greater than the inflation seen in any other sector of our economy. Indeed, looking at the sub-specialties of laser eye surgery and cosmetic surgery, where insurance has played a dramatically smaller roll, there is a demonstrable trend of consumers getting better care for less money. Perhaps Obama can order a Presidential Commission to report back on that.
The Road to HSA's
It is not uncommon for a company to pay $10,000 a year or more to provide family coverage for an employee. The employee gets the “benefit” of the insurance coverage, as opposed to a higher salary or wage, and the company gets a tax deduction for the cost of the insurance. Of course, if the employee loses their job, they and their family lose their insurance coverage, too.
Rather than spending $10,000 on a “traditional” family insurance plan, the company could instead do the following: First, they spend $5,000 on a high-deductible insurance plan that would cover 100% of the above-deductible costs of any potentially financially devastating event that isn’t likely to happen, such as a heart attack. Second, to cover this deductible, the employer deposits $4,000 (2010’s limit is actually $6,150) into an account for the insured to spend on any medical expense, such as annual physicals, or a random trip to the doctor to be told they have the flu. The employee and family are free to choose any medical service providers they want, no questions asked. There’s $1,000 left over, which can be returned to the employee in the form of a higher wage, re-invested by the company to grow the business, used to increase a corporate dividend, or any combination thereof.
The wonders of the HSA stem from the fact that of the $4,000 placed into the account, the employee rolls over whatever they don’t spend into the following year, at which point they get another $4,000. Voila! The employee now has a strong incentive to watch how the money is spent. For the first time, as is typical with nearly any other purchase, the consumer will now likely ask “What does that cost?” It is precisely this "skin in the game" that is key to re-introducing market forces to health care delivery.
If President Obama is truly looking for new solutions to our health care and insurance issues, in a plan that won’t bankrupt the country, Health Savings Accounts are just what the doctor ordered:
Better medical care, though restoration of the primacy of the doctor-patient relationship. Under our current system, the bogeyman of "the insurance company" enters into countless aspects of the doctor's decision-making. Doctors very often have to worry about pleasing "the insurance company" as much as they do the patient. Indeed, in many respects, their ability to freely exercise their accumulated knowledge is challenged at every step of the way by faceless staff workers having absolutely no knowledge of any particular patient's medical needs. With widespread HSA's, doctors would largely be free from the prying eyes of an insurance company and would instead be able to focus on delivering value to their customer, knowing full well that other providers in the marketplace were competing to do the same. Without insurance companies being involved for routine care, doctors would be free to innovate into modern-day delivery systems, such as direct patient communication via phone and e-mail (two procedures that currently don't have CPT codes).
Perhaps some doctors wouldn't like replacing the insurance company with a more competitive marketplace. But then again, like any competent service provider who is attentive to their customers’ needs and fashions solutions to them, competition is not to be feared. Consumers would instead rightfully fear service providers who fear competition.
Reduced utilization leading to lower costs. True story: A couple of months ago, in a horrendously stupid gardening episode involving a suddenly motionless wheelbarrow, I managed to break my own rib (feel free to both wince and laugh). After several weeks of ongoing pain, I went back to my doctor and succeeded without too much pleading to get authorization for a CT-scan, as much to put my mind at ease that I hadn’t done anything other than crack my rib. My cost: Ten bucks. Had my cash outlay been significantly more than that, (say, full-freight?) would I have skipped the CT-scan and carried on with the pain, just as the doctor predicted I would have for some time? Probably. But similarly, if the doctor had strongly urged the CT-scan, even knowing I would pay for it in full, perhaps I would have done so after getting a second opinion. The point is, my involvement in the decision-making processes concerning my medical care and the financing of that care would have skyrocketed.
Why are we surprised that virtually unlimited demand, made possible by virtually free services like my CT-scan, produces unusually high price inflation? To slow the rate of growth in health care costs, we simply have to keep utilization in check, and to do that, there is simply no match for the aforementioned “skin in the game”. At ten dollars for a CT-scan, I have essentially none. Yours truly, part of today's problem? Guilty as charged.
However, once consumers knew exactly what procedures like a CT-scan cost, because they’d be more directly paying for them, the only way service providers would maintain their sales would be to either lower the price, increase the quality, or both. The free market’s magic of “price discovery” would signal service providers to enter the market with higher-value alternatives under the hopes of capturing market share. So, paying “full freight” for my CT-scan would cost me less under a system of full price transparency. This is a critical point that many people miss: they assume that if we suddenly had to pay “full freight” for non-emergency medical care, we’d be paying today’s artificially inflated prices.
Increased efficiency for doctors' offices. Under the dynamics of traditional insurance, a doctor's practice must often employ an army of office workers that handle all of the insurance-related issues, many of which are not stemming from low-probability, catastrophic events. With HSA’s many of these costs can disappear, as the doctor is paid in full at the time of service from the patient’s HSA account. The patient in turn receives regular statements detailing their expenditures and balances. With reduced operational costs for their offices, the doctor would be in a better position to lower the costs of their services. There's even a "green" angle in all of this: think of the reduction in paper usage!
True portability. As stated earlier, typically health insurance for an employee and perhaps their family disappears with the loss of the job. It is common to hear of people staying with jobs they don't like, "just to have the health insurance". What does the employer gain from that? What do the employer's customers gain from that? Note that the savings account of the HSA is owned by the employee, not the company. So over time, this pool of money can grow and provide financing for medical expenditures regardless of employment. Furthermore, since the accompanying catastrophic policy would be dramatically cheaper than a “traditional” plan, it would be inherently more affordable during an period of unemployment.
Ideally though, the catastrophic policy would be owned by the employee as well. This could be achieved by migrating our compensation practices towards taking the money that is earmarked towards an employee's insurance benefit and paying it directly to the employee instead, with the expectation that the employee would shop on their own for insurance, just the way they shop for any other product. Remember that employer-provided health insurance came about only as a response to wage controls during World War II, specifically the 1942 Stabilization Act. (Can we talk sometime about unintended consequences?)
Now consumers would be truly liberated to seek the best policies for themselves. No longer would they be forced to pick from a limited menu of choices provided by their employer's human resources department. Combining this aspect with the ability of consumers to seamlessly purchase any insurance product from any insurance provider in the world, and the proven value-creation capabilities of free markets would restored to 16% of our economy.
Pre-existing conditions. Under a long-standing existence of a system of privately owned HSA’s, the current problem of "pre-existing conditions" would be greatly diminished. From “womb to tomb”, a person should be covered by a catastrophic policy that would provide coverage for high-expense, low-probability events. These events would be priced into the insurance product, as this is precisely the role of insurance. So to be clear, if suddenly a person receives a diagnosis that results in large ongoing medical bills, but the person already has insurance, the insurance company should fully honor their contract and pay all claims.
By strong contrast, to force a service provider to provide new coverage for a condition that will guarantee that the service provider pay more than they receive in return violates every aspect of free trade ever recorded. It should be no surprise that the "free market" hesitates in providing such a product! This is not a "failure" of the market. It is a consequence of a lack of financial planning and responsibility on the part of the consumer. Harsh words perhaps, but this is not a foreign concept to responsible market participants. Who seeks collision insurance for their car only upon wrecking it, or fire insurance only upon watching their house burn down? With such insurance in place before the catastrophic event, the concept of "pre-existing condition" disappears entirely and is rightfully replaced with peace of mind.
Would the increased "threat" of suffering the financial consequences of expensive medical conditions resulting from largely voluntary behavior, like smoking, eating and drinking too much, or not exercising be an incentive to taking better care of ourselves? Should it be?
To whatever extent we’re asking an insurance provider to suddenly provide financing for a medical calamity that was not previously insured against, we’re entering the realm of charity. The only way the math works, the only way the insurance company does not go bankrupt, thus jeopardizing everyone’s coverage, is to charge all customers more, all the time, to be able to suddenly provide the coverage to the large new claimant. There is clearly room for emotional and passionate debate here, and for that reason, it is exactly the realm in which the government should not be involved.
Innovation in insurance products. With insurance returned to its proper role, there would be incentives for insurance companies to lower the costs of their catastrophic coverage if the policy holder could prove on a regular basis that they are doing their part to reduce risk. This would be a natural response to the Darwinian-sounding dynamic described above and would properly reward risk-reducing behavior. It is exactly the kind of thing that issuers of auto and fire insurance do already.
Tax benefits. Current legislation allows for tax-free growth of the funds in the HSA account, which adds additional appeal to consumers, but probably adds to legislators’ lack of enthusiasm. It makes for a great excuse to dismiss HSA’s as a tax-avoidance scheme, gift to the rich, or some other anti-big-government slur. We shouldn’t confuse the two issues. With reduced government spending in general, taxes can come down naturally. Tax policy and health care policy need not have much to do with each other, mainly because the government need not have much to do with health care.
Sounds Interesting, But Do They Work?
Ironically, we can look to the experiences of a government for proof that they do. In 1995, Mayor Bret Schundler of New Jersey’s Jersey City oversaw the introduction of HSA's for government employees. Costs went down and participants were happy. It is documented by Schundler here. Likewise, in the private sector, Whole Foods chairman John Mackey has described his company’s positive experiences with HSA's. Steve Forbes has done similarly about the experiences at Forbes, Inc. But more generally, HSA’s will work because the free market, with all of its aspects of informed consumers being satisfied by motivated producers, works. We don’t have a free market in health care today, so it should be no surprise that the system is not working.
Unfortunately, there is a big loser in this entire approach, and that is the armies of government bureaucrats who want to retain control over our health care and the associated sectors of our economy. Perhaps that is the sole reason HSA's have not yet taken off. It is time for someone, perhaps a newly emboldened GOP, to call the bluff.
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