Our healthcare, in our own hands

In the ongoing debate over healthcare in the US, a new player has taken the field. Health savings accounts are changing the direction of the healthcare marketplace. John Goodman reports.

Health savings accounts (HSAs) are coupled with high-deductible health insurance plans, and allow account-holders to save pre-tax wages for medical expenses and manage their own healthcare dollars.

The underlying concept of the HSA is giving patients some control over their healthcare spending through providing health accounts individuals can own and control. Patients have financial incentives to be good health consumers, and to reap the rewards of saving their unused HSA contributions for retirement, just like an IRA.

High-deductible health plans usually have lower premiums than traditional health insurance plans, so they are more affordable for many individuals. Individuals can then funnel some of their premium savings into the HSA account, which can be used to pay for out-of-pocket medical expenses, including the deductible.

Under traditional insurance arrangements, employees are often oblivious of the true cost of health coverage. They also have little incentive to be wise consumers of healthcare. Due to a tax law dating back nearly 60 years, employees receive a sizable subsidy to obtain health coverage through their jobs.

As a result, over the years, employees have received lavish, untaxed health plans that were more like pre-payment for the consumption of healthcare than true insurance. The result was escalating prices and higher consumption. Around 1960, Americans spent just over five percent of GDP on healthcare. In today’s dollars this would be about US$28 billion. Americans also paid nearly half (47 percent) of all medical bills out of pocket. Today, they pay 13 percent out of pocket. As Americans began paying fewer medical bills directly, prices and spending rose. Now healthcare consumes nearly 17 percent of GDP or nearly US$1.7 trillion.

When a patient bears only 13 percent of the cost of a service, they have the incentive to consume until the service is only worth 13 cents on the dollar to them. Clearly, this is wasteful. Not only do employees typically not know the true cost of medical services, they know most of the cost is paid by a third party. So to the individual employee, the only way to get more benefits out of the company health plan is to consume more healthcare.

A recent Harris Poll found that consumers can guess the price of a new Honda Accord within US$300. But when asked to estimate the cost of a four-day stay in the hospital, they were off by US$8100. Furthermore, 63 percent of those who had received medical care in the last two years did not know the cost of the treatment until the bill arrived, and 10 percent never learned the cost.

Prices in healthcare do not serve the same function they do in other markets. Specifically, doctors and hospitals do not compete on the basis of price, and prices do not ration scarce resources as they do in other markets.

Instead, we ration physicians’ services the same way other developed countries do. We make people to pay for care with their time. The services of physicians are a scarce resource. So at a very low out-of-pocket price the demand far exceeds supply. Unable to balance supply and demand with money prices, our system rations by waiting.

Healthcare cannot be both easily accessible and free. It must be one or the other. Waiting is not an accidental byproduct of modern healthcare delivery. It is an essential component. In general, if doctors do not compete with each other on the basis of price, they do not compete at all. Because time, not money, is the currency we use to pay for care, the physician doesn’t benefit (very much) from patient pleasing improvements and is not harmed (very much) by an increase in patient irritations.

Critics have derided consumer-driven healthcare as a way for employers to shift cost to their employees. By putting up-front medical costs into the hands of the workers, they claim, companies are shirking their responsibility to their employees.

These critics are forgetting health insurance is not free; employees pay for it indirectly through wage deductions and fewer fringe benefit alternatives. Also, employers have no legal obligation to provide any fringe benefits. Those who provide health insurance are free to cease doing so and to pay higher wages instead.

HSA plans are a way to shift choice and cost-control to employees by giving them the ability to manage their own healthcare dollars. When people are given incentives to be wise healthcare consumers, they make better choices about the type and frequency of the care they consume.

A good example of consumer-driven healthcare integrating into a company’s existing health plan is furnished by Wal-Mart. Beginning in January, Wal-Mart will enroll new employees in a low-premium, high-deductible health plan with a health savings account. After an employee has been with the company a full year, Wal-Mart will start contributing to the HSA.

Wal-Mart has been criticized for offering only the high-deductible plan to new employees; but before they launched the new initiative, they were criticized for offering only higher premium plans most of their employees could not afford. Current employees also have the option of enrolling in the HSA plan should they so choose.

Wal-Mart management understood their employees prefer a greater proportion of their compensation in wages, as opposed to benefits. Lower-paid retail employees are probably not willing to give up several thousand dollars of their yearly salary for health coverage. They would rather have the cash.

Like Wal-Mart, all employers know there is a trade-off between wages and benefits. Further, it is in their self-interest to allocate the compensation package in a way that maximizes the overall value to the employee.

HSA plans can be designed to encourage wellness, preventive care and chronic disease management. They can reward workers who participate in wellness programs and achieve benchmarks. Some companies are going so far as to build on-site walk-in clinics, or hire physicians to provide care to their employees.

Businesses are only as strong as their workforce. Studies have shown the effectiveness of HSA plans in creating happier and healthier workers. Employees are healthier when they have more healthcare choices, and happier because they get to determine whether to spend their money on healthcare or other goods and services.

As the healthcare marketplace becomes more competitive, waste and inefficiency will be eliminated. HSAs are giving patients the opportunity to participate in that process, ensuring that the system meets their needs, rather than the needs of an impersonal bureaucracy.