HSAs Force Health Providers to Compete

Megan Johnson, a self-employed single mother in Dallas, had severe pains in her side and back, just below the ribs. Her doctor said it was possibly kidney stones, but a CT scan would be necessary to confirm the diagnosis. Megan’s doctor gave her the name of an outpatient radiology department near her home. A call to the hospital revealed her share of the cost would be more than $2,800. Because Megan’s health insurance had a $5,000 deductible, she decided to ask some questions: Do I really need this? Is it less expensive anywhere else?

A quick search of HealthcareBlueBook.com confirmed a reasonable price for an abdominal CT scan was about $800—not $2,800. More online research identified dozens of medical imaging centers—including one next to the doctor’s office. The insurance company negotiated price was $407—a fraction of the initial price the hospital quoted. Megan was able to save nearly $2,400 by simply doing a little research online.

Megan’s experience is not unique. A growing number of patients are paying directly most, or all, of their medical bills these days. Like Megan, they’re finding ways to make their health care dollars stretch further.

One problem they face: Finding out what health care services really cost before they make the decision to buy. Even though it accounts for one-sixth of the U.S. economy, health care is difficult to shop for in all but a small percentage of health care purchases. For the most part, no one ever sees a real price for health care services—not doctors, not patients, not employers, not employees.

The reason patients never see the prices is because third-party payers (insurance companies, employers and government) negotiate with providers—leaving patients with a small co-pay under traditional insurance. Because no one sees what services cost, individuals have every incentive to over-consume and caregivers to over-provide, resulting in waste of precious health care resources. And without real prices, there is no basis for third-party payers or anyone to negotiate the lowest possible prices.

Recently, however, more and more employers are encouraging their employees to shop for health care the way they shop for groceries. To encourage that activity, employers are allowing their employees to manage more of their own health care dollars by means of a health savings account.

The idea behind an HSA is a simple one: Instead of giving all of your health dollars to an insurance company or the government, you put some of those dollars into an account that you own and control.

This reduces wasteful health care spending because individuals like Megan spending their own money often get the lowest prices, and they also can decide whether they really want to buy those services. A recent Rand Corp. study found that patients with HSA plans reduced medical spending by about 30 percent, without adversely affecting their health.

Deposits into an HSA account are made with pretax dollars. There is no minimum monthly or required lump-sum payment. For 2013, they can contribute a maximum of $3,250 for an individual and $6,450 for a family. The interest earned on those funds is exempt from taxes, similar to an IRA.

Because they can set aside money for health care expenses, HSA account owners are incentivized to buy a high-deductible health care policy, which has a lower premium than comprehensive coverage plans.

When individuals need care, they spend first from their HSA account, paying the insurer-negotiated rate or less if they can find it. If they exhaust their HSA funds before reaching their insurance policy deductible, they pay out of pocket.

Once they reach their policy deductible, insurance pays all remaining annual costs after patients reach their out-of-pocket maximum. In 2012, the minimum deductible is $1,200 (individual) and $2,400 (family), but deductibles could range several thousand dollars higher.

Patients can be confident they are receiving a fair price in the same way that they would ensure they are receiving a fair price for any good—by calling around and learning the different prices charged by various providers. Online tools, such as HealthcareBlueBook.com, help individuals compare prices.

Critics question whether patients have the knowledge and intelligence to make good decisions, whether patients will forgo necessary care or over-consume care, and how people will negotiate prices when ill. In fact, HSAs are having their greatest impact on providers.

When health care dollars are in the hands of the patient, those on the supply side of the market—doctors, hospitals and labs—compete for those dollars by reducing price, increasing quality and making care more accessible. Examples include Rx.com (the first online mail order drug business), MinuteClinic (the first walk-in clinic chain), Teladoc (the first telephone consultation service) and Walmart’s $4 price for prescription drugs.

GOP presidential candidate Mitt Romney has stated publicly that he supports strengthening health savings accounts. He will have a chance to address health care spending in the first presidential debate on Wednesday. It is important to keep in mind that patients win when providers are free to offer transparent and competitive pricing. The increased competition encourages higher quality and better service for consumers. For more information on practical, realistic and workable forms of universal coverage, see my recent book, Priceless: Curing the Healthcare Crisis.

[cross-posted in Psychology Today]