How to make health care more affordable: Part 1

 

According to a study by McKinsey & Co., once the federal government begins to penalize businesses for not offering health insurance to their employees and subsidizes individual health insurance plans under Obamacare (starting in 2014), “almost one-third of U.S. employers are likely to stop providing health coverage for workers.” The logic behind an employer’s decision to take such a drastic and harmful action is simple: that the cost of not insuring their employees under Obamacare (a fine) will be much less than the cost of paying for their employees’ health insurance.

The conservative response to this and various other implications of Obamacare has been to sue to overturn the law in federal court and seek to repeal the law in Congress. While this may be sound political strategy, it will not actually solve the real policy problem driving employers to drop health insurance benefits: out-of-control costs of health insurance and health care.

In Utah, for instance, comprehensive health insurance premiums rose by an average of 8.7 percent per year between 1999 and 2008. To illustrate what that means, if an annual comprehensive health insurance premium was $5,000 in 1999 and rose 8.7 percent a year, by 2008 that same insurance policy would cost almost $10,600 – an increase of nearly 112 percent! Utah’s increasing insurance premiums, like rising insurance premiums across the country, have been driven largely by the rising costs of providing health care services.

Even if Obamacare is overturned or repealed, if the costs of health insurance and health care continue to skyrocket then many people will still lose their health insurance coverage because they and/or their employer can no longer afford it. But how do we rein in the costs of health care and health insurance?

For those who believe in the principle of the free market, a big part of the answer lies in getting the incentives right. Currently, there is little incentive to try to control health care costs because: (1) the best way for most doctors and hospitals (health care suppliers) to make money in the current system is simply to provide more, or more expensive, health care services, even if they aren’t necessary, and (2) most patients (health care consumers) are directly responsible for only a fraction of the cost of the health care services they receive. When families and individuals aren’t paying for most of their health care costs, and when doctors’ and hospitals’ best business decision is to provide a lot of high-cost services, you have a system which not only encourages but rewards increasing costs.

One possible solution to the patient side of this incentive problem is health savings accounts (HSA) – a consumer-driven, free-market approach to paying for health care. An HSA is an account to which an individual and/or an employer may contribute money for the individual’s health care expenses. Once established, it is owned by the individual, meaning the money is still the worker’s to spend if he or she loses the job, and it is not subject to “use it or lose it” schemes.

Additionally, deposits in HSAs earn interest over time, just like other savings methods, so unspent money generates more money for the individual to use to pay for health care services in the future. Typically, an HSA is coupled with a high deductible health insurance plan (HDHP), which requires a patient to pay all of his or her health care costs up to the deductible (usually several times higher than a typical deductible) before insurance kicks in to help pay the bills.

The HSA/HDHP approach corrects the incentive problem for consumers by giving them more direct responsibility for their health care costs. Further, it does so in a way that still allows employers to help their workers pay for health care. The implications of this approach for making health care and health insurance more affordable are significant.

According to a recent report from a national association of health insurance companies, the average yearly premium for an HSA/HDHP plan in Utah is $2,244 for in individual and $7,176 for a family. The average yearly premium for a typical employer-based health insurance plan in Utah, on the other hand, is $4,257 for an individual and $11,869 for a family, according to the Kaiser Family Foundation. That’s a decrease in premium cost of 47 percent for an individual and 40 percent for a family, which could instead go into a savings account to pay for health care services, and would be earning interest to boot!

Additionally, an HSA/HDHP plan rewards consumers for seeking out the most cost-effective health care services by allowing them to keep the money (with interest) they would have otherwise spent on unnecessary, “gold-plated” health care services (e.g. getting an MRI when a simple X-ray will do). And the more patients demand low-cost, high-quality health care services, the more incentive health care suppliers (doctors and hospitals) will have to provide them. This means that as the HSA/HDHP approach expands, it will also encourage doctors and hospitals to lower the cost of their services while maintaining or improving quality.

This is how and why a system grounded in the principle of the free market improves the lives of families and individuals: it encourages people to seek out low-cost, high-quality goods and services, which in turn incentivizes businesses and producers to provide those low-cost, high-quality goods and services in order to make a living, grow and prosper.

Rather than endlessly pursue the next-best government-driven solution to Utah’s health care problems, such as Medicaid and Obamacare, Utah policymakers should be truly innovative and look to the private sector for solutions to health care problems. They should also craft policies that encourage rather than obstruct these free-market solutions since, often as not, government is the problem. Then we might actually start to solve some health care problems.

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