Slowing Down Costs - the HSA Approach

The 2011 numbers are in - for the third year in a row, U.S. healthcare spending continued to grow at a relatively slow rate; just 3.9 percent. Though the initial slowdown was, in some part, due to the recession, national health spending came in about four-tenths of a percentage point lower than GDP growth for that same period - clearly, more than just the economy was in play.

A 2012 study by the RAND Corporation offers some insight into one potential cause - the growing use of High Deductible Health Plans (HDHP). An HDHP places more control over healthcare spending in the hands of consumers by offering lower monthly premiums but requiring a higher deductible for medical services. The study found that these plans (often paired with a Health Savings Account (HSA), which allows consumers to use pre-tax dollars to pay for routine medical expenditures), make consumers more cost-conscious about their care; spending for families who switched to HDHPs was 21 percent lower  than for similar families who remained in traditional plans.

And there is reason to believe that these consumer-directed plans did play some role in slowing the growth of health spending as adoption of these plans grew significantly over the three years of relatively modest spending growth.


From 2009 to 2011, the use of HDHPs has grown by nearly 43 percent across all markets; even in the individual market, which is usually the most expensive (and the market that Obamacare expands in its exchanges), enrollment grew by about 27 percent.

The results of the RAND study, along with the realities of growing use of HDHPs offer a good case for at least partly explaining the slowdown in cost-growth. Giving this view even more weight, a survey conducted by consultancy Mercer last year, found that the growing use of HDHPs by employers has helped drive their cost growth down to the lowest in 15 years.

The broader takeaway is that getting more skin in the game, financially, from consumers may help keep overall healthcare spending down. Ultimately, however, those covered by HDHPs only represent about six percent of those covered by private insurance - so the effect on overall healthcare spending will likely be minimal. Still, the impacts of higher-cost sharing are becoming visible, as out-of-pocket spending grew by 2.8 percent in 2011, compared to 2.1 percent in 2010, reflecting higher cost-sharing requirements across all plan types.  (However, the RAND study found that if the proportion of people with employer-sponsored coverage with HDHPs rose to 50 percent, annual health expenditures would fall by about $57 billion - accounting for more than half of the 2011 increase in health care spending.)

While the cost-reducing effects of HDHPs are clear, some critics, like Aaron Carroll at the Incidental Economist, have argued that HDHPs may lead people to avoid care that they might need. Indeed, The RAND study found that the savings were driven, in no small part, by reductions in the use of services. (An unexplained phenomenon in the RAND study, however, is that much of the reduction in services was in preventive care which has been covered by most HDHPs even before Obamacare's requirements). These concerns are certainly valid, and health outcomes for individuals with HDHPs will have to be monitored over the years.

As we learn more about states' health insurance exchanges and the types of plans that insurers will be offering, we should hope to see continued growth in HDHP use. Despite critics' concerns, HDHPs offer a market-based tactic for bringing younger, healthier patients into health insurers' pools - and more healthy people in the pools means lower costs for those with chronic ailments as insurers are better able to spread their risk. And while consumer-directed plans shouldn't be seen as a panacea for our healthcare spending (now standing at 18 percent of GDP), for those concerned about the cost of our system, they offer a great starting point.

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