A Small HSA Fix Could Produce Big Results
As Congress and the Trump administration begin laying the foundation for their replacement plan for the Affordable Care Act (ACA), their starting point should be ensuring all Americans have a ready path for enrollment in health insurance that, at a minimum, provides protection against major medical expenses. They should also promote broadened enrollment in Health Savings Accounts (HSAs) as an important means for paying for care before insurance coverage kicks in.
The combination of high-deductible insurance with HSAs is central to a market-driven reform of U.S. health care. High-deductible health plans (HDHPs) and HSAs have worked to lower costs in the employer setting by 7 to 22 percent below what would have occurred in more traditional insurance. The emerging GOP plan should include provisions encouraging employers to offer HSAs to their workers. It should also ensure that consumers in the individual insurance market have ready access to them and that HSAs are incorporated directly into the Medicare and Medicaid programs.
There is, however, a problem with existing HSA policy that must be fixed if HSAs are to reach their full potential in improving the efficiency of health care arrangements: As currently structured, HSAs are not built to provide easy access to care from well-organized systems of health care. Rather, HSA enrollees buy services on a fee-for-service basis, which is, in most cases, a much less efficient way of getting needed care.
In the typical case, a consumer with a high-deductible plan and an HSA would use their account to pay for physician fees, lab tests, the costs of filling prescriptions, and similar expenses while still in the range of total costs below the deductible threshold. The hope has been that use of HSAs would lead to more cost discipline in the medical services marketplace because consumers with HSAs have an interest in seeing their balances increase rather than decrease. They don’t want to waste their money on unnecessary care, or on overly inflated prices for services.
While HSAs have already cut costs, the lack of price transparency in medical services makes it difficult for consumers to seek out value for services in the same way they do in other markets. Today, there is still very little advance notice given to consumers about the prices they will pay for care before they receive services; instead, for the most part, consumers with HSAs pay fees based on rates negotiated by their high-deductible insurance plans on their behalf, and those prices are not easily ascertained by the plan’s enrollees before they get care.
Further, paying for care on a fee-for-service basis is not optimal even when the prices are known in advance. In Medicare and Medicaid, policymakers have been trying to get away from unmanaged fee-for-service because of its high costs. The trend is toward capitated arrangements, or “bundled payments,” that combine fees for a number of different service providers. These kinds of payment arrangements force the providers to develop more cost-effective ways of caring for patients. They also eliminate the incentive to order up unnecessary tests and procedures, which is all-too-common in a fee-for-service environment. Fee-for-service payments also lead to fragmented and disorganized care because the practitioners have no need or incentive to work together; they get paid separately, and their fees are not dependent on the satisfactory and cost-effective performance by others in the care delivery process. Disorganized fee-for-service care is thus both more expensive than necessary and more prone to errors and low quality care than a well-organized system of service delivery.
The rules governing HSAs should be modified to allow account holders to buy access to care from integrated care systems on a fixed-fee basis. For instance, it should be possible for an account holder to pay a fixed monthly fee to an integrated system for a pre-arranged package of services. In the typical case, these services would likely include access to the normal spectrum of physician-directed primary and preventative care, along with some coverage for prescription drugs and diagnostic tests. Major medical expenses -- surgery, oncology care, certain very expensive drugs, and devices -- all would be excluded from this kind of service arrangement because those procedures and products would necessarily entail expenses that push total costs above the threshold for insurance coverage.
Fixed monthly payments from an HSA to an integrated care system shouldn’t be considered an insurance premium either. The law currently requires that HSA holders have a high-deductible insurance plan before they are allowed to make qualified contributions to their accounts. That rule should stay in place; HSA enrollees need to have protection for high expenses. But the rule needs to be modified to allow HSA enrollees to use their balances to buy pre-packaged access to care without labeling the payments they make for these services “insurance premiums.” Insurance regulation typically imposes significant requirements of financial reserves on plans taking on risk. That is entirely unnecessary and inappropriate in this case because the integrated care plans offering access to their services for a fixed fee would not face large unexpected bills from high-cost cases. Those claims would be paid by the high-deductible insurance plans attached to the HSAs.
Allowing HSAs to pay for access to care in the form of fixed fees would lead physician groups and other integrated care organizations to compete with each other to attract HSA customers. This is the kind of marketplace competition that will drive a thorough reform of how health care is delivered to patients. One can imagine consumers with high-deductible insurance plans choosing among options that provide different levels of access and responsiveness based on the monthly fee they are willing to pay. For instance, $100 per month might provide access to a certain number of physician visits and consultations, regular preventative screenings, and vaccinations with no cost-sharing from the patient. Meanwhile, a different care network might charge $75 per month for similar services but with a more restrictive list of participating providers. The point is that a market like this is the surest way to get providers of medical services to reorganize how they do business to become price competitive.
The most expensive cases will be covered by high-deductible insurance, but a competitive market for more routine care could help hold down costs for these cases too. The insurers offering high-deductible plans would almost certainly work with the integrated care systems to offer lower premiums to enrollees who agree to get their care, including expensive care, from an integrated care system through which they get more routine services too. The integrated care system would then help manage costs when something more expensive is required, such as oncology care or surgery. In the employer setting, one could imagine workers being presented with multiple combinations of options of high-deductible insurance plans and integrated care systems. It would be entirely up to the workers to determine how much they wanted to spend out of their HSA resources for the options presented to them.
The steady enrollment growth in high-deductible plans and HSAs is encouraging --the number of people enrolled in high-deductible insurance has increased from about 1 million in 2005 to nearly 20 million in 2015. But it would be counterproductive if the continued growth of these plans led to a resurgence in use of unmanaged fee-for-service care. There is a place for that kind of care in the marketplace, but it needs to compete with organized systems of care that, under normal circumstances, will be able to provide consumers with more convenient access to care at less cost.
Republicans are in the very early stages of developing their replacement ideas. They need to decide upon the overall framework first before attending to some of the important details. But the details will matter too. HSAs can be a powerful force for transforming American health care, but only if they are flexible enough to encourage a real competitive marketplace to emerge among health care providers. A small but crucial change to the existing HSA rules is the key to ensuring this kind of competition occurs and works to the benefit of the American consumer.
James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.