Monday, March 01, 2010

Indiana Saves $8m, 35% on Health Costs with HSAs

From today's WSJ "Hoosiers and Health Savings Accounts" by Indiana Governor Mitch Daniels:
Indiana's Health Savings Accounts: The state deposits $2,750 per year into an account controlled by the employee, out of which he pays all his health bills. Indiana covers the premium for the plan. The intent is that participants will become more cost-conscious and careful about overpayment or overutilization.

Unused funds in the account—to date some $30 million or about $2,000 per employee and growing fast—are the worker's permanent property. For the very small number of employees (6% last year) who use their entire account balance, the state shares further health costs up to an out-of-pocket maximum of $8,000, after which the employee is completely protected.

The HSA option has proven highly popular. This year, over 70% of our 30,000 Indiana state workers chose it, by far the highest in public-sector America. Due to the rejection of these plans by government unions, the average use of HSAs in the public sector across the country is just 2%. State employees enrolled in the consumer-driven plan will save more than $8 million in 2010 compared to their coworkers in the old-fashioned preferred provider organization (PPO) alternative. In the second straight year in which we've been forced to skip salary increases, workers switching to the HSA are adding thousands of dollars to their take-home pay.

Most important, we are seeing significant changes in behavior, and consequently lower total costs. In 2009, for example, state workers with the HSA visited emergency rooms and physicians 67% less frequently than co-workers with traditional health care. They were much more likely to use generic drugs than those enrolled in the conventional plan, resulting in an average lower cost per prescription of $18. They were admitted to hospitals less than half as frequently as their colleagues. Differences in health status between the groups account for part of this disparity, but consumer decision-making is, we've found, also a major factor.

Overall, participants in our new plan ran up only $65 in cost for every $100 incurred by their associates under the old coverage.

It turns out that, when someone is spending his own money alone for routine expenses, he is far more likely to ask the questions he would ask if purchasing any other good or service: "Is there a generic version of that drug?" "Didn't I take that same test just recently?" "Where can I get the colonoscopy at the best price?"

By contrast, the prevalent model of health plans in this country in effect signals individuals they can buy health care on someone else's credit card. A fast-food meal costs most Americans more out of pocket than a visit to the doctor. What seems free will always be overconsumed, compared to the choices a normal consumer would make. Hence our plan's immense savings.

The Indiana experience confirms what common sense already tells us: A system built on "cost-plus" reimbursement (i.e., the more a physician does, the more he or she gets paid) coupled with "free" to the purchaser consumption, is a machine perfectly designed to overconsume and overspend. It will never be controlled by top-down balloon-squeezing by insurance companies or the government. There will be no meaningful cost control until we are all cost controllers in our own right.

Americans can make sound, thrifty decisions about their own health. If national policy trusted and encouraged them to do so, our skyrocketing health-care costs would decelerate.
Update: "If you love the bargain Health Savings Account (HSA) that insures you just for the essentials, you may be shocked to learn that you could lose all of those good things under the rules proposed in the two bills that herald a health-care revolution." Read more here.

Thanks to Colin for the pointer in the comments below.


At 3/01/2010 3:21 PM, Blogger sethstorm said...

The HSA's only work as long as cash goes in. Once it stops, that plan becomes an impediment. PPO's don't have that nasty limitation of an extra-high deductible.

That "take-home pay" increase is also misleading, as it is targeted to health-care expenses.

Secondly, cutting corners in medicine usually cuts on quality. If you want to gamble, fine. But don't force us all to go to Vegas.

At 3/01/2010 3:24 PM, Blogger Colin said...

And not only are HSAs not being expanded under ObamaCare, there's good reason to think they could even be eliminated:

The bills threaten to eliminate the one part of the market truly driven by consumers spending their own money. That's what makes a market, and health care needs more of it, not less.

Hundreds of companies now offer Health Savings Accounts to about 5 million employees. Those workers deposit tax-free money in the accounts and get a matching contribution from their employer. They can use the funds to buy a high-deductible plan -- say for major medical costs over $12,000. Preventive care is reimbursed, but patients pay all other routine doctor visits and tests with their own money from the HSA account. As a result, HSA users are far more cost-conscious than customers who are reimbursed for the majority of their care.

The bills seriously endanger the trend toward consumer-driven care in general. By requiring minimum packages, they would prevent patients from choosing stripped-down plans that cover only major medical expenses. "The government could set extremely low deductibles that would eliminate HSAs," says John Goodman of the National Center for Policy Analysis, a free-market research group. "And they could do it after the bills are passed."

At 3/01/2010 3:59 PM, Blogger misterjosh said...

sethstorm, let me reword a couple parts of your statement:

The PPO's only work as long as premiums stay low. Once they go up, that plan becomes an impediment. HSA's don't have that nasty limitation of a high fixed expenditure.

Secondly, placing no limits in medicine usually increases costs. If you want to spend more than you have to on health care, fine. But don't force us all to pay for YOUR health care.

At 3/01/2010 4:03 PM, Anonymous Anonymous said...

The HSA's only work as long as cash goes in. Once it stops, that plan becomes an impediment.


PPO's don't have that nasty limitation of an extra-high deductible.

I had a PPO before switching to an HSA. The "extra-high" deductible on my plan actually results in similar out of pocket expenses when the deductible and 80/20 co-pay for the first $3000 on the PPO are factored in. The difference to me is that I save a large part of the money I would have otherwise spent on premiums in my tax deferred account. And since I'm writing the checks for the first $5000, I pay careful attention to how much I'm charged. My HSA covers (2) physicals a year and other preventive medicine. Once you have one of these accounts, you will never want to go back.

At 3/01/2010 4:07 PM, Blogger sethstorm said...

sethstorm, let me reword a couple parts of your statement:

For the first one:
Perhaps in MA and places where they have political cover to make them high.

You don't address what happens when the money stops. You might as well have a gap that makes the Medicare donut hole look small.

For the second one:
So benefits of scale are only for select individuals? Try again.

At 3/01/2010 4:16 PM, Blogger misterjosh said...

And can I just say oh my god that's a nice plan. I pay $182 per year in premiums & get nuttin' towards my HSA, but it's cheaper than my previous plan - $1820 in premiums + 250 deductible & $10 co-pays.

I work for a big company that's supposedly highly rated for its benefits!

I hope guv't employees know how good they got it.

At 3/01/2010 4:16 PM, Blogger misterjosh said...

This comment has been removed by the author.

At 3/01/2010 5:54 PM, Anonymous Lyle said...

One plan I recall from auto insurance in the 1950s is the disappearing deductible. Say you have a $2000 deductible, once your expenses exceed say $4000 the insurance company reimburses at 110% of the amount above the deductible.
So that by the time things get catastrophic (total expenses of 24,000 you effectively have no deductible for the incident and follow ons. I have not heard anyone talk about this but it seems an interesting idea.

At 3/01/2010 8:34 PM, Blogger KO said...

sethstorm said...

The HSA's only work as long as cash goes in. Once it stops, that plan becomes an impediment. PPO's don't have that nasty limitation of an extra-high deductible.

PPO's stop the instant premiums stop. HSA savings accounts belong the the individual forever.

In just a few years, I have saved up over $11,000 in my HSA savings account. Had I paid for a regular health plan, it would have cost about the same as the HSA premiums plus the money I put away. But with a PPO, the insurance companies would have that money not me. Of course I could also have just paid the much lower premiums and not put anything into savings.

Even if I go work somewhere with a regular plan or cancel my insurance today, I'll still have the savings account. Should I chose to pay the tax penalty, I literally can go to Vegas and blow it all.

At 3/01/2010 8:54 PM, Anonymous Lyle said...

So as OA has phrased it well, the question is who keeps the excess premium one pays if one does not need to collect on health care, oneself or society? With lower deductible insurance, the other policy holders effectivly collect with an HSA the saver collects. One could tighten the HSA a bit to say that it could only be used for medical benefits and face a 50% tax penalty if used other than on health care (an incentive for contact lenses and the like).
The problem becomes that some have come to believe that more medical care is always better, while some studies on screening show that the number of false positives is high enough that there is a cost for these, as well as the overall cost of screening per life saved.
Some object to the cost per life saved metric, but that is used in engineering all the time. The two recent earthquakes show how the cost per life varies from country to country. The folks in Haiti knew about the earthquake risk and civil engineers know how to reduce it, but the relative cost of a lost life in Haiti is low relative to the cost of quake resistant construction so the buildings were not well built. In Chile, in contrast the value of a life is Higher, so that more was spent on quake resistant construction. I recall hearing from an engineer from Douglas in the 1970s that there was always a tradeoff between aircraft safety and cost. We see this in autos as well. The government in making safety regulations does cost benefit analysis all the time, and this requires that one input a number on the cost of a lost life, times the number estimated for an option to get the benefit if the safety option is adopted. This number is then placed next to the cost to achieve the safety feature, and a decision is made.
For example we could build cars with carbon fiber bodies like formula 1 cars, and one could survive a 70 mph head on crash and walk away, but the car might well cost 500,000 to 1 millon dollars. That is clearly not economically viable.


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