CDHPs and HSAs Will Heal Health Care

Consumer-driven health plans (CDHPs) and health savings accounts (HSAs) are the future of health care in the U.S.

Pro: A Workable Plan for Low-Income Americans

The only way to truly reduce health-care costs is to put as many health-care dollars in consumers’ pockets as possible through consumer-driven health plans (CDHPs), aka high-deductible health plans (HDHPs).

The empirical evidence of this is overwhelming: According to a study by the American Academy of Actuaries, premium costs for CDHPs have trended as much as 40% lower than managed-care insurance, and multiyear premium savings reached $21 million per 10,000 employees, according to a study conducted by Aetna (AET). These plans, utilizing a high-deductible health plan coupled with a tax-deductible health savings account (HSA), are reengaging consumers in managing their health care, with impressive results. Consumers with CDHPs are increasing their use of generic drugs, reducing emergency room visits, and increasing participation in wellness programs.

The managed-care model disconnects consumers from understanding what their health-care costs really are. Insulated from the actual price of care through co-pays and co-insurance, they have no way of determining the real market cost of the services they need. Using Web-based tools, people are seeking information and shopping for their care like never before. With this level of engagement, consumers are directly involved in their health-care decisions, and in reducing their overall health-care costs.

CDHPs turn patients into true consumers of health care and health insurance, in the same way they’re consumers of car insurance. This is the most effective way to reduce health-care costs.

Con: The Cost Can Make You Sick

The U.S. is half a decade into its experiment with High Deductible Health Plans (HDHPs) and health savings accounts (HSAs). Promoters promised these structures would be cheaper for employers by making consumers more careful buyers, with more skin in the health-care game. That is, they offload more financial risk onto patients.

So what’s happened? HDHPs are on a fast growth path—almost one-quarter of covered families now have them—though their affordability is likely responsible for that. As an employee-benefits survey by Towers-Perrin discovered, though, user satisfaction is low. Patients’ costs are high and they generally don’t get information for better decisions.

There are other problems. People with chronic diseases, who need regular care, may exhaust their HSA money nearly as fast as they deposit it, never building a surplus. (Many smaller employers don’t even offer HSAs in the first place). And a recent study by the non-partisan Kaiser Foundation found that only about 9% of uninsured households can cope with the onerous financial requirements of HDHPs.

HDHPs and HSAs have proven an acceptable solution for the healthy and the financially stable. If patients have access to inexpensive, comprehensive primary care, like on-site clinics, they could be much better solutions. But unless reforms include meaningful system restructuring, they will remain a heavy financial burden on the American people.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

Jacques Werth

HDHP’s and HSAs are for the wealthy.

When I was an employee benefits insurance agent, the only people who bought HDHPs were my wealthiest clients. In effect, they self-insured for deductible amounts of five to twenty thousand dollars a year because they could afford an occasional year like that.

However, they wanted an insurance company to pick up the very unlikely, but possible, health expenses that could run into millions of dollars. And, their average cost of health care insurance plus deductibles was lower than for people who could not afford to self-insure.

HSAs were designed to give people tax breaks on non-covered medical expenses such as high deductibles. That seldom benefits many working class families.

Jason

I disagree. HSAs and HDHPs don't benefit working class families. In many cases, these plans help employers offer insurance to them in the first place. Low-deductible or copay policies actually encourage use, and more importantly abuse. Check out the study the author of the article references. It's obvious these are good things.

Aimee

The bottom line is Americans need to do a better job of educating themselves on how to manage the costs of their own health care. One option is www.healthcarebluebook.com, the first free national consumer pricing guide to fair pricing for health care treatments, services, etc. If people know what they should be paying, they can do a better job of making sure they do not overpay. This service provides them with the average prices that PPOs pay their providers in their markets.

Jim

I have had a HDHP with an HSA for over one year now and only wish that I had this 20 years ago. I think how many years I have paid big money into the insurance companies and never had a claim. I could have easily saved up some substantial money to take care of myself as I get older. Everyone should take advantage of the opportunity. I am maxing out my allowed HSA contributions while I still can.

sue

The HDHP sounds like a good idea for consumers who don't use their health care very often. It sounds like a bad deal for the chronically ill.

Bill

Whether you agree or disagree with the value of HSAs, getting the consumer back into the healthcare transaction is critical to our reform efforts. Involvement reduces the cost when a transaction occurs, but more important, it can reduce the number of transactions.

This is the home run, not public options, exchanges, and all of the reform efforts being addressed in Congress.

Roy

HSAs are great for the chronically ill. First, HSAs are the only type of insurance plans that are required to have annual limits on out-of-pocket expenses, and these limits must apply to all medical expenses, including prescription drugs. Most insurance plans have no out-of-pocket limits on prescription drugs. Second, most of chronically ill people don't realize how many out-of-pocket expenses they have, especially for prescription drugs, that they are paying with after-tax dollars. The HSA provides a great way of saving taxes dollars on the money they would already be spending. Third, the evidence clearly shows people with chronic conditions who enroll in these plans use more preventive care and have higher compliance with recommended treatment, resulting in lower use of ERs and inpatient admissions.

Right Direction

HSAs and CDHPs have enormous potential to control escalating healthcare costs, but Americans are very dependent on the current system of using insurance to leverage one's health-care dollars. Health-care costs would need to come down first, which isn't happening soon. By the way, how about health-care reform that increases the supply of doctors, hospitals, clinics, etc., rather than focusing on the demand side?

Jamie

Appreciate the comments, but still looking for a little more. I am currently transitioning my employment from a company that has not offered a CDHP/HSA to a company that does. My situation is this...I have been paying near $2,700/year into a traditional medical plan for my family. I now have the option to pay $540/year for a CDHP which carries a $2,400 deductible. My employer will add $1,200 to the HSA account. This seems logically like the best way for my family to be insured. I doubt, thankfully, that we've incurred the $2,700/year in medical expenses year-after-year that we've been paying into a traditional insurance. I recognize the first part of the year we will likely be shell-shocked by the costs, but isn't putting pre-tax dollars aside and only paying for what is truly incurred the way to go? I sound as though I've talked myself into this CDHP, right? Here are my concerns. (1) We have two small children, ages 18 months and 4 years, (2) let's be realistic. If my doctor says my kids need something, anything, I am not going to refuse it regardless of whether or not I can afford it, (3) let's even be more realistic...I do not have the time or the desire to research medical journals or peruse the local yellow pages calling on quotes for costs of certain procedures. My husband and I certainly may be more willing to delay an evening trip to urgent care due to a sore throat, but will our need to take care of our children's well-being be the downfall of us financially if we sign up for a CDHP?

Sarah

Excellent questions, Jamie. I now find myself in a very similar situation. I would like to hear someone respond thoughtfully to your questions and comments.

Tom

The reason reason CDH plans show lower costs is because the health consumer cannot pay for any non-covered higher cost services, and the average is pushed lower as a result. This means those people don't get the health care they need, and their quality of life is poorer, and also they die younger, and suffer financial disaster, regardless.

Mark `

I work for a company that is switching salaried employees to high deductible plans. Here are a few things about it that I did not learn until we had employee meetings to discuss the plan. In our case we can pick similar plans from 2 insurance administrators. We are now supposed to be "smart consumers" however: 1) Although we can choose any doctor in either network, the administrators will not tell us what doctors charges will be with each network for each doctor, as I understand it each practice negotiates with each insurance company so the rates vary from doctor to doctor and plan to plan. So now you can choose a doctor but you will not know what it costs until you get the bill, it is like going to store and purchasing something and not finding out what it costs until the credit card bill arrives. 2) We are required to purchase prescriptions from a single mail order company if we want the prescription cost to count towards the deductible (we can not shop for a lower price). Another item of interest, I spoke to a friend who is a doctor who pointed out that these plans are a lot more work for them (explaining bills and sending out bills to individual patients). Also since consumers pay fully for most services there is less incentive for the insurance companies to negotiate with providers.

Melissa

Jamie--I also have two young children and a High Deductible Health Plan along with a Health Savings account. The family deductible on my plan is $5,000. Once the deductible is satisfied, the insurance carrier begins paying in-network (preferred) claims at 80% until I reach a family out of pocket of $8,000. I'm leaving out-of network services completely out of the discussion, because in an effort to make our health-care dollars go further, we stick to in-network providers. My employer gives me $2,500 annually toward my Health Savings Account. I contribute an additional amount up to the IRS limit, which for 2010 in $6,150 for families. Here is why the plan makes sense for us.

My contributions for my plan are $90 per month vs. the $390 per month for the PPO plan. The $3,600 I save in contributions I deposit pre-tax into my HSA (plus an extra 50 which combined with my employers contribution gets me to the full family contribution).

For 2010 I will accumulate $6,150 to pay for services tax free from my HSA. Let’s assume we have a moderately bad year medically and have $12,000 in medical bills. The first $5,000 is totally my responsibility. However, after that, I am only paying 20% up to my out of pocket amount, so the remaining $7,000 at 20% is $1,400. Of the $1,400 I will have an additional $1,150 in my HSA, leaving me to come up with only $250 out of pocket. However because my employer gave me $2,500 in my HSA, only $6,130 came out of my paycheck or pocket in the form of contributions to the plan or medical payments.

Under the PPO plan, I would have spent $4,680 in contributions, plus $500 deductible, plus $2,300 for coinsurance (my 20% after deductible is met, as the Out of pocket on this plan is $3,000 and doesn’t include deductible.) My total out of paycheck and out-of-pocket expenses under the PPO would be $7,480.

Even if I were to have a worst case scenario under the HDHP and incurred medical bills in excess of $20k, the most I would be out of my own pocket after using my HSA dollars is $1,950. Mind you, this might mean a lot of peanut butter and jelly sandwiches, but we could pay it if we had to. But because on the HDHP the deductible and out of pocket maximums for family are aggregate (which means the insurance company pays nothing until the entire family deductible is satisfied) if one person in my family had a catastrophic situation, no one else in the family would have to satisfy the deductible or the out-of pocket amount. We wouldn’t have to pay for additional services. The same is not true on a PPO plan where the deductibles and out-of-pocket maximums are embedded for individuals up to a maximum of usually 2 or 3 times the individual amount for a family. On the PPO plan offered by my employer, that means if one person satisfies their out of pocket of $3,000, my family is still potentially on the hook for another $3,000 after deductibles.

The great thing is, if we incur fewer claims, then we carry money over to next year. So its potential savings on the HSA vs. guaranteed spending on the PPO premiums.

Also, don’t think that because you pay that first $5,000 up front that those services aren’t at the negotiated rate. As most (not all) HSA compatible HDHP’s are truly PPO plans that meet the IRS definition of an HSA compatible plan, the use the same network and your claims receive the exact same network discounts they would if you were on the PPO plan (provided you are using in-network physicians and services). Including prescriptions. I have not had a single service yet, where the physician or emergency room or ambulance did not wait to receive the carrier’s explanation of benefits before sending me a bill for the discounted amount.

And Mark--There is a way for you to find out what the doctor charges for the procedures they perform. Ask the doctor’s billing office. They should be able to tell you in advance, at least if they have someone competent working there (although I realize, many of them don’t). It isn’t just a bunch of carrier mumbo jumbo and magic, the practice is also somewhat accountable for what they are negotiating with the carrier and for what they are charging their patients. I wouldn’t buy groceries from a store that didn’t know what to charge me until it had consulted with an outside party, and I don’t think I should do business with a doctor’s office that has no idea what it should charge me until it receives an EOB from my insurance company. That would make me an irresponsible consumer.

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