How Health Savings Accounts Can Reform Health Care Better Than a Goverment Bill — Without Creating Any New Laws

One of the main reasons that we are in this health care mess is that nobody has stated a clear case for health savings accounts.

Health savings accounts just may be the “sleeping solution” to the health care problem. But people aren’t seeing this because most of the time when health savings accounts are discussed, it is in IRS language that most people tune out. It is very hard to find an explanation in plain language of how health savings accounts actually work, let alone how they make health care more affordable and less of a hassle for real people.

My aim here is to make the case that health savings accounts can take us a long way toward solving the health care crisis. To do this I’m going to discuss four things:

  1. How to go about solving complex problems like health care (move from easy to hard)
  2. How health savings accounts can improve health care for most of the nation
  3. The role government should play
  4. How health savings accounts help us deal with the more difficult issues in the health care debate

An added benefit to this approach is that it doesn’t involve creating any new laws, since HSAs already exist. It is simply a matter of increasing awareness of HSAs and using them correctly.

We don’t need to ram a 1,990 page bill through Congress. We simply need to start using what we already have, and then build from there.

How to Solve Complex Problems: Move from Easy to Hard

The health care problem is incredibly complex. One reason it is so complex is because there are a large number of “hard cases” to deal with.

But the best approach when you have so many hard cases is to work from easy to hard. In other words, first make sure you have a good approach in place for the easier and more common cases, and then that will build momentum and create insight that can be applied to addressing the harder cases more effectively.

The reason the current health care debate is such a mess is because the current administration is trying to create a plan that addresses the hard cases without first giving foundational attention to the less complicated and more common health care predicament.

But this doesn’t have to be. We should go one at a time and address the easier problems first. That, in turn, will provide lots of insight for addressing the harder problems.

(If anyone is stumbling at my use of the term “easy” in regard to the health care debate, note that I’m speaking in relative terms here. I mean “easier.” “Move from easier to harder.”)

How to Make Health Care Better for 85% of the Nation

There is a simple way to make health care better for 85% of people which will not only bring costs down but also position us to create a much better plan for the hard cases.

The solution has to do with health savings accounts, which we can best understand when we first look at how they function for what is probably the most common health care situation right now.

The Two Components of This Approach

The “easier case” for health care is an individual or family that uses some health care but does not need it extensively. They want to be protected from the financial hardship that a catastrophe would bring — a major accident or a debilitating disease. They also want to be able to handle routine life events, like pregnancies and sprained ankles, without breaking the bank. And they may have an ongoing condition like asthma or high cholesterol. But they do not need ongoing, extensive, uber-costly health care.

What does a best-case scenario for health insurance look like for these people?

First, they have a heath savings account (HSA) that is fully funded by their employer to pay for all expenses from $1 to $4,000. Second, they have a high deductible insurance plan that kicks in for all expenses beyond $4,000 — and kicks in at 100% (no 80/20 stuff).

How HSAs Work

Here’s how the health savings account works: The employer contributes $333.33 per month. This is pre-tax money, just like 401(k) contributions, with the difference that it isn’t taxed on the way out, either. Over the course of a year, this totals $4,000 — the amount of the deductible in the high deductible insurance plan.[1]

Any money not spent during the year remains in the account and carries over into the next year, and so forth for the life of the employee. The HSA, consequently, doubles as a secondary form of retirement savings. You can keep growing your HSA year after year, and by the time you reach retirement, you may have a decent chunk of supplemental retirement income.

Benefits of HSAs

Because all expenses up to $4,000 are paid for from their HSA, they can make their own decisions in the majority of their health expenses without the involvement of a third party. They are in the driver’s seat and have more freedom over their decisions.

Further, by eliminating the third-party payer for the majority of health expenses, painful complexity is reduced and prices can actually work. Prices actually work because you know what things cost, and thus have an incentive to spend wisely.

Which leads to one of the best things about HSAs: You have an incentive to spend the money wisely, because it is yours. You want to preserve it as much as possible since you get to keep it from year to year. But, you also have the incentive to spend it when you need to, because it also feels “given.”  It feels “given” because your employer contributes it.

Hence, you have the money there when you need it. But you aim to be wise in spending it.

We can testify to this directly because this is the type of plan that we have. We want to be wise in spending our HSA because we would prefer to see it build up. But we have never been reluctant to spend it when we really needed to — for example, when one of our kids bumps their head and needs to go to the emergency room — because we realize that medical expenses are the first priority for this money and that’s why it is there in the first place.

The Reason HSAs Have Not Caught On

This leads to the reason health savings accounts have not fully caught on. The reason that health savings accounts have not fully caught on is that most employers do not fund them fully. This is the one critical mistake that most employers are making in how they implement HSAs, which in turn keeps people from seeing the critical role they can play.

For example, I know another company that offers health savings accounts, but only puts $100 in them per month for the employee. This only adds up to $1,200 per year — not nearly enough to cover the typical deductible of a high deductible insurance plan for a family. The result is that you need to fill that gap yourself.

That ruins everything.

It ruins everything because people don’t want to have to pay for medical expenses with their own money. So they don’t find health savings accounts preferable if it simply means a savings account that they have to fund, and instead will opt for the lower deductible but ultimately more expensive plans without HSAs.

The higher cost of those plans, however, is more “hidden” because it consists of a higher premium that their employer pays (but which they still pay probably 20% of) and a more complex, clunky, and painful process for the ordinary medical expenses. And it contributes to the rise of health care costs because it introduces the third party payer too early in the process — that is, at too low of a cost level, thus mucking things up by involving the insurance companies in the payment of every expense rather than just those beyond a certain threshold.

Consequently, in order for HSAs to take off, employers need to be taught that the key to success with HSAs is to fund them fully–that is, fund them at a level where their annual input into the account will equal the amount of deductible that has to be filled.

But How Can Employers Afford to Do This?

Because high deductible insurance plans are relatively cheap. This is why HSAs go together with high deductible plans. The money saved by going with a high deductible plan creates the funding for the HSA.

At my place of employment, when they first explored this several years ago, the amount that the company saved compared to their prior plan was more than what they need to contribute to fully fund the HSAs.

In other words, they saved a bit of money and we all got a much better health plan.

That level of savings might not be the case everywhere. But HSAs with high deductible plans are incredibly cost-effective either way. For example, John Mackey, The CEO of Whole Foods, estimates the premiums plus other costs of their high deductible/health savings account plan at $2,100 per employee and about $7,000 per family. “This is about half what other companies typically pay” for other plans, he says. (See Stephen Moore’s interview with John Mackey after his op-ed piece on health savings accounts led some Whole Foods shoppers to threaten a boycott.)

The High Deductible Plan Needs to Pay 100% of Post-Deductible Expenses

In a typical year, we do not reach our $4,000 deductible. But some years we have a major expense, like having a baby, which puts us over. Once you get past the $4,000, the high deductible insurance plan kicks in. And it kicks in fully. It is not an 80/20 plan, leaving us with $2,000 to pay after a $10,000 baby delivery, for example. It pays 100% of medical expenses past the $4,000.

The Result

The result is that we have paid almost nothing out of pocket in about 6 years, when this plan began for us.[2] We have had two kids during this time (with a third due this week), 4+ emergency room visits, many routine doctor visits, many dental visits, and an ongoing prescription drug for my wife’s asthma. (Note: you can use HSAs for dental work and prescription drugs that are covered under the high deductible plan, so there’s another benefit.)

We have sought to make prudent health care decisions and saved money in many cases (like when I broke my toe and decided not to get any treatment — more because of time than anything else), but always spent the money when we felt we needed to.

The effect of paying almost $0 out of pocket has freed up that money for other things, without requiring us to compromise on health care.

What Government Needs to Do

So that’s how health savings accounts can improve health care for a large number of people and bring the overall costs down at the same time.

What is the role of the government?

The government does not need to create a complex, 1,990 page health reform bill that creates 111 new agencies to administer all the provisions. The Obama administration and Democrats in Congress do not need to step in, mandate a solution, and utilize a command-and-control approach to solving the health care problem — an approach which will probably create far more problems than it actually solves.

Instead, the role of government should be to point to HSAs and how to utilize them effectively (e.g., employers should fully fund them). In other words, instead of creating a new, complicated, virtual take-over of the health care system, it should support the increasing adoption of HSAs throughout the nation. As I mentioned earlier, this can be done without creating any new laws. Then it should build on this by removing any laws that prevent employers and insurance companies from fully capitalizing on the benefits of high deductible plans with health savings accounts.

The plan that I’ve outlined here for HSAs is already possible. I know this first hand, because my company has been doing it for six years. But why aren’t more companies offering the combination of HSAs and high deductible plans, and fully funding the HSAs? Perhaps there are regulations or laws in the way that are creating an obstacle to this. Or perhaps many companies don’t know how effective this option is, and how it can save money or at least be equal in cost to their current plans — and better for the employees.

It would be smart for the government to invest time in promoting the HSA solution, rather than passing a very complex health reform bill that ultimately takes the power out of the hands of the people.[3]

Addressing the Hard Cases

The approach outlined here would be less expensive than most current plans or about equal to them, would enable people to make most decisions without relying on a third party payer, and would reduce out-of-pocket expenses to almost zero for a large number of American individuals and families.

But what about the “hard” cases? This approach is the foundation for the solution there as well. Let me give four examples.

Those With Significant Health Care Needs

What about those who are battling significant health issues and thus need to utilize a large amount of health care?

The HSA and high deductible plan still meet their needs better. For one, the HSA still covers the gap all the way up to the point where the deductible kicks in. So out of pocket expenses are still minimized. And you can pay for prescription drugs out of your HSA.

One challenge in these situations, though, is that the HSA will likely never build up into a secondary source of retirement income, since the person will be using it all up each year. But that’s fine, as under most current plans there is no opportunity to build up a secondary source of retirement income at all. Retirement income is only a secondary purpose, not the main purpose of the HSA.

The biggest challenge in this case is that the HSA is funded on a monthly basis. So if a $2,000 bill comes due, but it is only March and so there is only $1,000 is in the account (assume that the person had no surplus the previous year), there is a temporary $1,000 difference.

We were in this situation ourselves when we had our first two kids. When this happens, it is easy to set up a payment plan with the medical provider to pay off the bills as the HSA funds come in. Also, a company can choose to fund the HSA accounts every six months instead, or even in a lump sum at the beginning of the year. So there are many options here, but the point is that any shortfall here is only temporary. For the year, the amount of funding going into the HSA equals the full amount you have to pay before the deductible kicks in.

Those Who Are Uninsured because they Don’t Want Insurance

This approach outlined here does not attempt to give a full solution to the problem of the uninsured. But it does represent a significant start.

We should first recognize that some of the uninsured choose to be. They may be in their 20s, regard themselves as healthy, not have a job that provides insurance, and not want to pay for insurance.

The high deductible plan is a very affordable option for these individuals. It would give them the perfect balance of providing coverage in the event of an unexpected catastrophe that could impose significant financial hardship without requiring them to pay for a more souped up full coverage plan. Many of them already do this.

The need in this case, then, is perhaps to simply promote this approach more fully so that everyone in this category knows about it. These individuals could still contribute to an HSA using their own money if they deemed it important, but most would probably choose not to because their main aim is coverage for unexpected and severe health expenses, rather than funding more routine expenses. And that’s OK.

Those Who Are Uninsured because they Cannot Afford Health Insurance

The second category of the uninsured is those who do not have a job that provides health insurance and cannot afford to purchase it themselves.

If an individual or family in this situation does not have pre-existing conditions that render their premiums out of the ballpark, a high deductible plan is a very affordable option. So health insurance is within reach of more people in this group than we realize. With a high deductible plan, they would have to pay for expenses beneath the deductible either out of pocket or by funding their HSA with pre-tax dollars.

And this is a start. One thing we need to remember is that health care is not a right, like freedom. It is a need, like food. You posses your rights simply by virtue of being human, but you have to earn your needs. For example, we don’t say that people have a “right” to be supplied healthy food by society. You have to earn the food that you eat. That is as it should be. Likewise, it is right and appropriate for health insurance to be something that people have to earn by either paying for directly or as part of the compensation package their employer provides.

If someone simply cannot purchase insurance or pay for routine expenses like doctors visits, I’m not saying that I want to see them go without medical care that they need. I’m saying that I’m not fully addressing that problem here, but that we have a start on it if we address the easier and more widespread problem of incredible inefficiency and complexity drives up prices in the majority of cases where people can afford health insurance.

And we mustn’t forget that if a person without insurance does experience a catastrophic event, they will not be turned down treatment for lack of the ability to pay. We have always had “universal health care” in this sense. I realize that this does not solve the problem, which is not my aim here anyway. It does, however, mean that there is a rock-bottom safety net already in place.

Those Who Lose Their Job

In the current system, if you lose your job you have to extend your insurance through COBRA. This is often more expensive and has a time limit (18 months in most cases). HSAs are very helpful in this case, because if the individual has saved up money in their account, they will have this to use in their transition period between jobs. Additionally, the high deductible insurance plan that went with the HSA will be less expensive for the employee to extend using COBRA.

This can be taken even further if the laws are changed a bit. Right now, you can use your HSA to pay for medical expenses, but not for insurance premiums. If it were made permissible to use HSA funds to pay for the insurance premium when in between jobs, HSAs would become a very useful financial security net that can come into play in the event of a job loss.[4] But this type of change would be phase 2. It is not necessary to start there.

Next Steps

We have here a clear and simple way to address the “easier” (and more prevalent) problem in the health care debate. This solution, in turn, provides the foundation on which to address the harder problems.

So what’s the next step? The current bill in congress already has momentum. But most of the people in our nation disagree with it. So we have a hard situation, but there is hope. The biggest change starts with the smallest actions. I propose two:

  1. Contact your representative and encourage them not to support the current health care reform bill.
  2. As much as possible, try to bring into the debate the significant role that health savings accounts can play in addressing the issue.

Further Resources

John Mackey (CEO of Whole Foods), The Whole Foods Alternative.

An interview with John Mackey.

Mike Rogers’ Opening Statement on Health Care Reform.

Notes

1. The number doesn’t have to be $4,000. It could be $3,000, $5,000, or something else. If the deductible is lower, then less needs to be deposited into the HSA; if higher, then more. The maximum that can be contributed to an HSA from all sources each year, however, is $2,900 for individual coverage and $5,800 for family coverage. In my $4,000 number, I have families in view. Given the $5,800 contribution limit, it wouldn’t make much sense to go with a deductible above that amount. I think the most efficient combination of deductible with a contribution level that fully bridges that deductible is presently around $4,000.

2. If you want to call HSA expenditures “out of pocket” I suppose you can, but it is not the same kind of “out of pocket” as if we had to save up that money ourselves. Since the employer funds the HSA with the money saved by going with a high deductible plan, it feels like it both is and isn’t our money. So we want to conserve it (it feels like ours) but we are willing to spend it if necessary (it doesn’t feel like ours).

3. I was hesitant to use the word “crisis” in the title of this article. I think we have had a health care problem in America, not a crisis. The reason it’s a crisis now is because of the legislation that the Democrats are trying to pass. This legislation turns our health care problem into a crisis because it will massively expand the power of government, ultimately require substantial tax increases to pay for (thus crowding out economic productivity), and lead to a much worse health care situation. They are using a bulldozer when a hammer will do.

4. One other change that would make things even better would be if insurance plans altogether became portable, like 401(k)s and HSAs. In that event, if you lost your job you wouldn’t lose your insurance any more than you would lose your 401(k). You would lose the employer contribution to your insurance premium (and HSA if your employer is using that approach), but your insurance would not be tied to your employer. The benefit the employer provides would become funding the premium (or a portion thereof) and the HSA, rather than supplying the actual insurance.

November 3, 2009 | Filed Under Health Care | 16 Comments 

Comments

  • http://www.mineandthine.com Chris Dattio

    Matt, Great article! The problem is, is what you wrote is so complicated most won’t understand it. This is what happened to John McCain’s plan, no one understood it. How do you have a plan like yours but make it easy for people to get behind?

    Case in point, my husband and I recently spent 3 hours on a Sat. looking at our healthcare options. His company only pays $500 into a HSA and our account can be $5000. We had to figure after-tax savings, guess our healthcare needs for the year, cost of HDHP plan vs. traditional, loss of Flex-plan benefits for everything but vision and dental and the fact that we would have to pay hundreds of dollars for prescriptions each month not covered under preventative-fomulary schedule before our HSA would start reimbursement.

    It took two calculators, 2 spreadsheets, visiting and reading 4 websites with necessary details, comparing pre-fomulary with regular formulary,old-tax forms, W-2’s, tons of paper and a lot of hair-pulling.

    In the end we choose HSA w/ HDHP with Flexible Spending Acct of $1000. I don’t think most people would take this type of effort to figure it out.

    Thanks for your efforts. Wish I’d read your post first!!

  • http://boldandgentle.blogspot.com Glenn

    Matt, terrific article, thanks for carefully writing these thoughts out. I firmly appreciate your suggestions to work from the easier to the harder as we think about reforming health insurance options.

    With respect to Chris’ comment, yes, thinking carefully does require some effort. A hypothesis that fits the data is this: those in power in the federal and state governments and in government agencies do not want you to think clearly or carefully about this. They benefit enormously from weak-minded citizens.

    I also believe Christians should emphasize the role of family and community and churches in helping those who cannot pay for their health care at some point. (See Gal 6:9-10) One hugely complicating factor in the health care debates today is that we’ve abandoned individual responsibility and assumed no one is accountable to or helped by family and community.

    Thanks again, Matt!

  • Judd Rumley

    Matt,

    Thanks for this. Here is what my agent said:

    Great article! I am a big fan of HSAs, having followed them since they were just a twinkle in a legislator’s eye, all the way back when they used to be called MSAs.

    I would add another reason to the author’s as to why they haven’t caught on. Most agents don’t like them because they are less expensive than the loaded plans. I’ve had agents tell me to my face that they won’t sell them, won’t educate their customers on them, because the lower premium cuts their commission! So insurance agents bear part of the blame as well.

    Thanks for sending this,

    PT

  • Ian

    I serve as pastor of a small church. I am married and have 4 kids. I would love to go to a HSA and a catostrophic insurance policy. I think it could save the us quite a bit of money. How do we deal with the issue of negotiated rates for services. From what I understand hospitals and doctors charge self pay people a lot more than the rates that the insurance companies have negotiated. Maybe this has been exaggerated. Thanks.

  • http://www.mereorthodoxy.com Matthew Lee Anderson

    Matt,

    I’ll echo the previous comments: a fantastic job here.

    While I’m a huge fan of HSA’s and I think they have been underutilized and over-restricted. I’d like to see the limits on contributions increased and some of the tax advantages increased as well. For instance, if the parents pass away, it becomes a part of the estate and ceases to be an HSA and so becomes taxable income to the heirs. Removing that would incentivize parents not only to pay for their own health care, but to take care of their children’s as well. But that’s where we still approach paying for health care in individually oriented, ‘rights’ laden terms, which narrowly constricts our imagination.

    Also, I think this line is really telling: “It ruins everything because people don’t want to have pay for medical expenses with their own money.” While a fan of HSA’s, I was persuaded by a recent article in the Atlantic that until this mentality ends, health care costs will continue to rise. That article (beware: 10,000 words) is here: http://www.theatlantic.com/doc/200909/health-care

    Great stuff. I hope you’re well!

    Matt

  • janejo

    I just needed to pick individual insurance because my company changed it’s offering to a very unacceptable plan as of Nov 1. I spoke with an insurance agent after doing some research on-line to understand terminology. My self study left me confused and the agent sorted it out painlessly. I then talked with my tax CPA and clarified the tax benefits of a Health Savings Account. Those two, commonly used advisors helped me make sense of the insurance and tax aspects of self purchased health insurance given my income level. I did choose a high deductible, with a 100% coverage after deductible is paid, (not 80/20) and a HSA that I’m going to open and start funding today! Great article. It’s nice to see that your research results match mine. Let’s blitz Pelosi and congress with this article and a note to knock off their ‘stupid attack’ they call reform. Jane

  • Matt

    Thanks for all the great comments. Ian: Because of the high deductible plan, you should still get the negotiated rates. Even though the first $4k is paid from the HSA, because the expenses are counting toward your deductible you get the rates that the insurer has negotiated.

  • Penny

    Very interesting. I, too, had the same question about the negotiated rate, and that was answered. Having worked in the trenches with society’s “darker” side, I’ve seen abuse of well-meaning programs. Is there a way to ensure that the money in the HSA actually goes to legitimate health care?

  • Matt

    Penny: Good question. We have to keep all receipts for HSA expenses so that we can demonstrate the money was spent on qualifying medical expenses.

  • Rob

    “It ruins everything because people don’t want to have to pay for medical expenses with their own money.”

    Great article, but this quote is what is fundamentally wrong with health care today. There is no consumer incentive to shop for a better price because they are price insulated. In almost every market, even health care, where price is a factor or consumers, prices tend to go down and quality goes up. just look at Lasik and plastic surgery, both health care markets where their is little to no insurance coverage. What has happened when there is no insurance? Are costs out of control? No, just the opposite, costs have come down and quality has gone up. Why? because the providers and manufacturers must COMPETE in a consumer driven market (same as HDTVs, DVDs or any other commodity).
    The HSA solution which provides catastrophic coverage and market incentives is the correct one, but HSAs participants need to have some “skin in the game” so they are just not playing with monopoly money IMHO.

    Thanks for the great post. First time contributor, long time lurker.

  • Matt

    Rob,

    Great points, and thanks for contributing!

    Matt

  • Renee

    To Ian,
    ” From what I understand hospitals and doctors charge self pay people a lot more than the rates that the insurance companies have negotiated. Maybe this has been exaggerated. Thanks.”

    That isn’t really true. Hospitals and doctors charge self pay patients the same (although many understand the hardship and will offer discounts when they can) as insured patients. The difference being insured patients don’t actually pay that amount up front, their insurance does, while they pay monthly premiums to their insurance company.
    Example:
    A healthy non insured patient will pay around $60 dollars for a routine visit.
    An healthy insured person will pay $20 for the doctor visit (co-pay), and $300+ per month to their insurance (the insurance company then pays the doctor the other $40).

    Hope that helps.

    To Matt,
    This is a wonderful post, as are several of the others I’ve read on your blog today. It’s always nice to read the work of sensible people on the internet :)

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    I don’t know who you are but definitely you are going to a famous blogger if you aren’t already ;
    ) Cheers!

  • http://www.darkstyle.fr/blogs/post/44 Sherri

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  • Gordon Woods

    Good article, howsoever, it is about paying for medical services, while Obmacare has never been about medical care or paying for medical service; it has always been about controlling people, Obamacare is the magician’s distracting hand while the other performs the “trick.”