Welcome to part 2 of real reform options that will help the true issue of high medical cost, thus making health care more affordable to all Americans. In this segment, we will discuss the use of Health Savings Accounts (HSA) to help provide choice, cost savings, and options for providing of health care.
Most people have heard of the HSA idea, but few are really aware of how they can be used. You've probably heard all the talking points of how no one can afford to fund the accounts, how it will shift costs on to the worker, etc, but is any of that information really true? The answer is partially, but only in circumstances where HSAs are not set up in the appropriate manner.
First, let's define HSAs. HSAs are a tax deferred medical savings account in which both employees and employers can contribute pre-tax money for the purpose of paying for qualifying medical expenses when used in conjunction with a high-deductible health insurance plan. HSAs are one of the only tax-free vehicles that allow, not only the pre-tax contributions, but also tax-free withdrawals if used for medical expenses. In addition, HSAs, unlike Flexible Spending Accounts (FSA), allow the interest bearing money in the account to roll over year to year rather than being a "use it or lose it" method and these accounts are owned by the employee, not the business. In this capacity, HSA also provide a valuable retirement savings option.
Now that we've defined HSAs, let's look at how these can be best used. As stated above, HSAs must be used with a high-deductible health insurance (HDHI) plan. What this means, much like car insurance, HDHI plans have a much higher deductible that the participant must meet with their own funds before the health insurance plan kicks in. Due to the statistical probability that the need will not go above the deductible amount, the cost of the premiums are therefore lower. However, with most HDHI plans, once the deductible is met, the plan will kick in at 100% rather than the 80/20 expense reimbursement that most plans have. This simply means, if you have $10,000 expense, the HDHI would cover the full $10,000 after you meet the deductible, while most plans would only cover $8,000, leaving you to pay the remaining $2,000. Already, you can see the benefit of the HSA, in that there are no hidden costs, but many of you still have fears of how you would meet those high deductibles. To explore this, lets look first at an example of a self-insured individual, then move that into an employer provided health plan.
Example: Using actual premium rates form Anthem Blue Cross Blue shield for a family plan: Husband - Age 49, Wife - Age 49, Chile - Age 20
Plan Option 1:
$500 deductible per person
Co-pays for doctor visits and prescription drugs
$644 monthly premium
Plan Option 2:
$5000 family deductible
$210 monthly premium
As you can see, there is already a $434 price differential in premium. Plan 1 would require that the family pay an annual amount of $7,728 annually just for the premiums. In addition, they would be responsible for the first $500 for each person making the total annual expenditure of $9,228. However, in plan 2, if the family saved enough money to pay for their deductible by investing $417 into an HSA, then they would paying $2,520 in premiums, plus $5,000 to meet the deductible, for a total annual expense of $7,520 resulting in an annual savings of $1,708. But wait, that's not it!! We must remember that once the HDHI deductible is met, most plans cover at 100%, while conventional low deductible plans only cover at 80/20. So if this same family had a baby during this year and that hospital expense equaled $10,000, then they would still be on the hook for 20% of that charge ($2,000 - total annual expense $11,228) while in the HDHI plan, there are no extra fees to deal with. Add to that fact, should the family not use all $5,000 in the year due to them being healthy, then any money not used that year rolls over into the next, allowing for a nest egg savings, or a reduction of funding need the next year to meet their deductible. So if they had $2,000 left in the account, they would only need to fund an additional $3,000 in the following year to meet that deductible, or $250 per month, thus reducing their monthly expense.
I'm sure most of you are now saying "I'm covered under an employer provided health care plan, so how would this affect me?" Well, the answer will be made clear, but first we must make some clarifications on employer based plans. First, remember that the contributions made to HSAs are considered pre-tax. All companies have to submit a payroll tax to the government on behalf of their employees, so any contributions made on your behalf would result in a payroll tax savings to the company. In addition, when a company provides a health care plan, they must have people on their payroll to administrate the plan, adding administration and headcount costs to the company to facilitate payments, disbursements, etc. Since the employee owns the HSA and it's their money to spend, the employee is in control of how the money is spent and dispersed, not the company, thus alleviating that cost. I will talk more on that later.
Now, that being said, let's see how this would benefit employers and employees. Keeping in mind that the costs would be less for employers due to business exchanges and discounts, lets use the same figures as above for the sake of comparison. If the employer chose to fully fund the HSA account for the employee ($417/month), they are effectively reducing the payroll tax on that employee that they must pay by that amount. Add to that the $210 premium for the HDHI, they will realize an annual savings of $204 per employee per year. While this may not seem like a huge amount of money, when you consider the reduction of administrative costs and headcount to see to the conventional plan, the saving starts to add up. As a case in point, Michael Lafaive, Fiscal Policy Director of Michigan, wrote an essay detailing how the state of Michigan would realize a savings of $16.2M per year by simply switching to a program in which the state adopted a HDHI/HSA program in which the state would fully fund the HSA accounts of 50,000 employees. This would not only benefit the state, but it would provide for completely free health care for the employees: no deductibles, no co-pays, and no unexpected/hidden expenses. For smaller companies, even greater savings realizations could be made by enacting a program of matching funds into the HSA accounts. Using the following, the employee could contribute half ($2,500) with the employer matching those funds. Now for the cost of $208 per month, the employee would realize a tax break and completely covered care, while the business would realize a hard savings of $2704 per employee plus the untold soft savings in reduction of administration. Starting to see how this benefits, not only employees, but employers as well? Couple this with portability of insurance as discussed in part 1, we now start seeing costs savings growing exponentially.
Lastly, since the HSA belong to the people, it now puts them in charge of their health care spending. With the current insurance methodology, how often do you ask the doctor the cost of procedures ordered for you? How often do you research their necessity? My guess is not often and why should you? You aren't paying the bill, someone else is. However, if you are now spending your money, your control over the cost will become yours alone. After all, it is YOUR money, so wouldn't you want to make sure that you are getting the best for your dollar? Now people will start questioning their doctors and shopping around for the best price compared to service. If you require a colonoscopy, you will now be more inclined to shop around for the best deal. In doing this, doctors are now going to have to compete for your business. Rather than just charging a price that would be handled by insurance companies, they will now have to start lowering prices or increasing service to entice you come to them for health care. It will embolden and strengthen the doctor/patient relationship, in that doctors will now have to work harder to earn your business for fear of effecting their livelihood. By putting the funding and choice into the hands of the consumer, market forces will now come into play forcing those with exorbitant prices or lacking services to change or go out of business. Likewise, those that offer the best price/service combination will see their business grow, and with growth, comes price reduction. Isn't it better to be able to chose your doctor and care based on your individual need and circumstance rather than having to chose within a limited pool of doctors in "your plan" as determined by a health insurance company. The by product of allowing you to be in charge of your options is increased quality of service and savings. As more begin shopping around for best prices, then the overall cost of health care will be required to come down to meet that need, thus affecting the cost of insurance premiums as a whole.
I've said it once and I will say it again, health insurance was never intended to become "pre-paid" health care that it is today. Insurance is to be used for catastrophic circumstances, not day to day care. Just as you don't use your car insurance to pay for oil changes and tune ups, neither should health insurance be used for preventative care. In the terms of car insurance, it does not cover those maintenance expenses, but instead covers catastrophic expense cause by accident or acts of god. One of the reasons that health insurance is so expensive is that it is used for means not intended. HSAs help alleviate that issue, places responsibility and choice of health care in your hands while providing methods to reduce cost via competition. No, it's not the end solution to cure our health care problems, but it is one piece of the puzzle that will contribute to true reform.
Stay tuned for Part 3, where we will talk about Tort Reform and it's cost on our medical system.