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Reality-driven Health-care Reform

Cynthia Ramsay
Medical Progress Today
February 17, 2006

President George Bush has put consumer-driven health care at the top of his health-care agenda. One of his key proposals to expand the use of health savings accounts (HSAs) has garnered a lot of criticism, much of which runs counter to the evidence. Some of the alternatives offered are even more unsound.

Opponents of HSAs claim that they won't reduce health-care spending; they'll only endanger employer-provided health insurance and provide another investment tool for the wealthy. Paul Krugman of the New York Times goes so far as to describe Bush's reforms, including HSAs, as "ideology at odds with reality." But the rationale for HSAs far exceeds ideology and is steeped in reality.

If people are given something at no cost, or apparently no cost, they will use more of it, whether they need it or not: in insurance parlance, this is the problem of moral hazard. In the current system, health insurance shields consumers from the bulk of the cost of their care and they have little incentive to use the system wisely. Even if HSAs fail to significantly reduce individuals' spending, there is another reason to recommend them. If consumers direct more health spending themselves, what results is a more accurate measure of which goods and services are in demand and a more efficient system.

Two other pitfalls of the current health-care system are the number of uninsured and the non-portability of insurance plans. HSAs are the property of the individual, not the employer or the government; therefore, the accounts will decrease the number of people who become uninsured if they become unemployed. And, since the cost of high-deductible insurance is much cheaper, HSAs are a more affordable option. In a recent Wall Street Journal article, John F. Cogan, R. Glenn Hubbard and Daniel P. Kessler cite an Employee Benefits Research Institute survey finding that one-third of people with HSAs have household incomes of less than $50,000.

Since money spent from the savings accounts on medical care is non-taxable, HSAs help level the playing field in a system where once only employer-provided health insurance was exempt from taxes. Funds that remain in an HSA accrue interest and can be used in the future for the more expensive care that most individuals will need when they are older.

Interestingly, critics contend that these are the main problems of HSAs: because they encourage savings and require Americans to pay out-of-pocket for doctor visits and the like, they will dissuade people from going to the doctor, even for potentially life-threatening diseases. Such people will cost the system more, as their undiagnosed brain tumor or diabetes will land them in the hospital in need of expensive care. Even though there is little evidence to support that people forgo preventive care if forced to pay for it, there is no reason that HSAs cannot be designed to encourage wellness care if this is a concern and, in practice, several companies offering HSAs to employees have done so.

In his critique of HSAs, David Wassel of the Wall Street Journal argues that the sickest 10% of Americans account for 69% of health-care spending and that HSAs will not reduce their spending. Following this logic, however, HSAs could affect 31% of the approximately $1.7 trillion spent annually on health care and, if any of the relatively healthy population uses the same services as the sick 10%, then the prices faced by everyone will decrease, as more demand translates into lower prices. As well, it is worth noting that the "sickest" Americans are not the same people each year: a woman who gives birth and, therefore, incurs great health costs in that year, could only need a prescription or a physical exam the next year, i.e. she would not always exceed her deductible and could benefit from a HSA.

Granted, the health-care marketplace is not yet ready for millions of HSA-equipped consumers to be asking such questions as which is the best doctor for a certain procedure and which hospital provides the least expensive MRIs, but it will respond once the questions start coming. This is one of the greatest aspects of the market: its adaptability. Krugman holds up the Veterans Health Administration as a reform model, calling proponents of expanding the government-funded and government-run program "farsighted thinkers." But one reason the VHA is able to control costs better than can private insurers is its inflexibility. It restricts members' access to care most newly approved drugs and technologies, for example, are not available. This undoubtedly has an effect on quality of life, even life expectancy.

And this result isn't limited to the VHA. Another close-to-home example of a government-run system that doesn't work is Canada's much-idealized single-payer ("socialized") system. Despite being one of the top five spenders per capita on health care in the world, Canada has one of the lowest ratios of MRIs, CT scans and other medical technologies per million people, as well as relatively fewer physicians than most countries. Finding a family doctor in many cities is nearly impossible. Waiting lists for several surgical procedures especially orthopedic are months, if not years long. In addition to what the government spends on health care, Canadians also must purchase private insurance for everything that the "single payer" does not cover. Private sector spending (mostly on insurance and out-of-pocket expenditures) represents more than 30% of health spending in the country.

While the current design of HSAs could be improved by allowing differing deductibles, varying deposit and out-of-pocket maximums, experimentation with plans that cover the chronically ill or provide incentives to use preventive care and many other reforms are required to improve the health-care system, consumer-driven health care is a sensible goal. "Far-sighted thinkers" who believe that dysfunctional ideas like socialized medicine can save the system are the ones who truly need a reality check.

Cynthia Ramsay is a businesswoman and independent health economist living in Vancouver, B.C.

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