Sunday, November 26, 2006

Improving Health Savings Accounts
Mike Rappaport

I am a big fan of Health Savings Accounts but I recognize that there are real limits on how much money they are likely to save.  Allowing people to spend their own money rather than an insurance company's money on the first $5000 will save some money, but much if not most of the waste occurs after the first $5000.  Bryan Caplan tries to minimize this problem, but I am only partially persuaded.   Not that many people are like his grandfather.   Moreover, people may have important needs that lead them to spend the initial $5,000; after that, they are not significantly constrained.

A more interesting solution would be to expand HSA beyond the first $5000.  Why not have people pay 5 percent coinsurance for the amount from $5000 to $100,000.  That results in an additional out of pocket of a maximum of $5000 (or a total out of pocket of $10,000 counting the initial deductible).  There are many people who would not pay $1000 for a $20,000 procedure unless it is useful. 

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Mike Rappaport
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Comments

Something no one talks about is what sort of pricing people on health savings plans will get. In our state, if you pay cash you will pay about 8-10 times (I am a physician and I am NOT making this up) for hospital services as a Blue Cross insured patient. If you always pay top dollar, I'm not sure how much you will save in the long run.

Posted by: Jeff Hull | Nov 26, 2006 7:06:30 PM

The comment by Dr. Hull is unfortunately quite accurate. Differential pricing would appear to be a real problem.

One possible solution is for the catastrophic health insurance policy to allow patients access to the cheaper pricing. Sadly, I don't really understand why the pricing system works this way. It would be interesting to know what happens under existing HSAs.

Posted by: Mike Rappaport | Nov 26, 2006 7:27:27 PM

There is an article in a recent issue of Forbes about a business that negotiates, apparently quite effectively, with medical service providers on behalf of cash customers.

Posted by: Jonathan | Nov 27, 2006 12:59:41 PM

My employer (a law firm) offers HSAs and more traditional PPO plans. The HSAs are offered through the same insurance company and as I understand it are offered with the same network and provider terms. So, the HSA policy holder gets the same price as someone in a more traditional plan.

HSAs have benefits, in my view, but most of the incentivizing benefits are now being built into more traditional plans. My current plan, for example, provides free generic drugs but has a graduated copayment for name-brand prescriptions. Visits to a primary care physician are less expensive than visits to a specialist, which in turn are less expensive than a visit to the emergency room. I have a 10% copay on all costs to my deductible, so I have some incentive to think about the necessity of, say, that second MRI. I don't doubt that there will be further refinements to the insurance company's model.

Posted by: Thomas | Nov 27, 2006 8:35:57 PM