Yeh, right!
One of the theories as to why healthcare costs continue to rise at an alarming rate is “overcoverage“. Basically stated since insurance companies primarily pay the costs for healthcare, consumers have little knowledge or concern in regards to the costs of these services. Since ‘someone else’ is paying the bills, who cares how much it costs? However, if the money came directly from the pocket of the consumer, providers would have to compete more for healthcare dollars and consumers would have to budget their use of those services.
Health Savings Accounts (HSAs) were created with the purpose of solving this problem. How?
First it might help to know a little about the recent history of health care. If you are like the majority of Americans who have, or have had in the past, an HMO, you probably won’t be surprised to know that most people were less than satisfied with the plans.
Basically, HMOs were created for the purpose of bringing down the cost of health care expenses through the use of case management. HMOs signed up physicians to be a part of their network. The physicians provided discounted care to HMO members and the HMO would provide new patients to the physician. The belief was that the expenses paid by insurance companies would be reduced given that overpriced physicians would be removed from the group and unnecessary and expensive visits to specialists would be controlled through the Primary Care Physician (PCP).
That objective was successful from the standpoint of lower expenses for insurance companies; however it became very unpopular with patients. For one, it was often very difficult to get an appointment with one’s PCP since they were often overbooked by the networks which would require that a minimum number of patients be assigned to each PCP.
Second, the PCP was not able to dedicate a lot of time to complicated cases because of the number of patients scheduled to be seen from one day to the next. Moreover to discourage expensive visits to specialists, bonuses given to PCPs were reduced whenever a PCP referred a patient to a specialist.
Another complaint was that HMOs would many times offer lower rates at the start to attract new employer groups then raise rates mid-year. Employers who paid a percentage of the premiums for their employees were more likely to switch HMOs if they were offered a better price by another plan. When an employer switched plans it often meant the employees would have to switch PCPs and/or any other doctor that may have been treating them, in order to receive coverage. The same was true if a provider was unhappy with the HMO and left the network, or vice versa; either way the patient would have to shop for new care providers.
Preferred Provider Organizations (PPOs) were the next hoped for solution. They allow patients to choose to stay within the network or go outside the network for their provider(s). Since providers outside of the network used by the insurance company are more likely to charge more for their services, the insurance company passes the cost on to the patient by requiring a higher copay or deductible. The premiums are also generally higher for PPOs as opposed to HMOs.
However, although HMOs and PPOs have slightly slowed the rising cost of health care or health insurance, the rate of increase continues to be 2 and 3 times the rate of the cost of living. In fact, the number of individuals who cannot afford insurance continues to rise. When this occurs, one way or another the government (i.e. the taxpayers) ends up paying, either through Social Services programs or through Medcaid when the individual becomes medically needy.
So how do you encourage individuals to get insurance coverage that they can’t afford? This is where HSAs and HDHPs (High Deductible Health Plans) come in. Where someone may not be able to afford the premiums on a policy with complete coverage, a HDHP at least provides coverage in case of catastrophic events and leaves the outpatient expenses and prescription costs for the individual to pay. Since HDHPs only begin to pay once the high deductible has been met, the premiums for these policies are significantly reduced. With premiums reduced employers who otherwise would be forced to discontinue offering health insurance can continue offering group health insurance without medical underwriting. In addition, the consumer receives negotiated pricing for the visits to in-network physicians even before the deductible is met.
So, Uncle Sam doesn’t get stuck for a catastrophic health event, the insurance company doesn’t have to worry about how many doctors or which doctors a person visits, since the HDHP can be HMO based, PPO based, or other; and the consumer enjoys lower insurance premiums. But if a person could not afford complete coverage in the first place how will they pay for sudden doctor visits, and prescriptions before the HDHP begins paying?
Here is where HSAs (Health Savings Accounts) come in. Of course, HSAs do not give individuals the money to pay these expenses; nothing is perfect. However, HSAs provide both a mechanism and incentive for employees to save for those expenses. The method is a government approved savings account that works in conjunction with the HDHP. Depending on the amount of the HDHP deductible and how much the employee estimates his yearly out-of-pocket medical expenses will be, a set amount is withdrawn from the employee’s paycheck each pay period and deposited into the account. Whenever a medical expense occurs (doctor visit, prescription charge, etc.) the expense is deducted and paid for from the HSA.
The amount deposited into the HSA from the employee’s check is tax free so depending on the tax bracket of the individual the savings can be significant, from 20% to 40% or higher. So in a way an HSA (or rather the federal government) does provide at least some of the money for those expenses through tax savings.
Okay, that’s good news for those whose employer offers HSAs and HDHPs, but what about the self-employed or individuals who cannot get group coverage through their employer? Fortunately HSAs and HDHPs are available for individuals. Of course, as with all plans offered outside of group plans any preexisting conditions may result in denial of coverage or exclusion of coverage for the condition. (So what else is new?)
