Tuesday, February 07, 2006

Health Savings Accounts--Doomed to failure?

President Bush prominently mentioned Health Savings accounts in his State of the Union and the Washington Post reports on additional adminstration efforts.

Of late, I have spoken a couple of times on health insurance, or rather the lack thereof, among a very significant portion of our population. I always favor market driven approaches to solving problems rather governmental regulation. Having said that while HSA are a good option to have on the table, they will not provide much alternative for most people.

While 45 million Americans without health insurance is a real problem, the biggest problem in health care is cost--plain and simple. Cost, as any student of basic economics will tell you, is a function of supply and demand. While America is blessed with more doctors per person than any other nation, we also use health care at an unbelievable rate. It is the utilization of health care services that drives up cost, because we demand more health care and thus health care providers charge us more because they can and we continue to pay.

The second part is the hidden cost of health care. Ask the average American how much it costs to go to the doctor. You will almost certainly get an answer in the $5 to $20 dollar range. In fact, that is only the co-pay. The average doctor visit, for 6-10 minutes with the actual doctor, hovers around $75, which means that between $55 and $70 is picked up by the insurance company, but most people never see that--only their co-pay.

Insurance is simply the process of spreading the risk of cost around to a large group of people. Health insurance use the risk spreading function to dilute the impact of large health care costs to a large number of enrollees, with those who are health subsidizing the care of those who are not. In the past, the model worked well because people usually went to the doctor once or twice a year for a check-up and then anytime they were sick.

Today, we as a nation go to the doctor far more often. Even those people who are generally healthy visit the doctor much more frequently. This demand for services means that insurance companies have to pay more $55-$70 checks and larger fees for prescriptions than had been the case 30 years ago. The healthy are no longer subsidizing the care for the sick, but are utilizing more of the money they pay into the insurance pool than ever before. Thus the funding needed by an insurance company increases since they must have a statutorily defined pool of money from which to pay claims. The more people drawing from that pool of funds, the more they have to charge people to keep the fund replenished. Thus you have a never ending spiral upward.

Controlling costs means that we must control the demand. Controlling supply has not helped since we graduate more and more doctors each year. But controlling demand seems unlikely, because we as Americans have become accustomed to getting our health care for practically no out of pocket costs.

Here is my solution and it is very simple--stop the practice of insurance companies paying doctors directly.

Everytime you go to a doctor under my plan, you pay the full price of the visit and then get re-imbursement from the insurance company. This process does a couple of things. First, the individual consumer sees, real time and in real terms, the cost of each doctor's visit. Second, there are transactional costs involved with getting re-imbursement from the insurance companies, like filling out forms and submitting receipts. While insurance companies cannot build walls to prevent claims, the fact that the consumer must deal with the insurance company makes it apparent the effort that goes into each and every visit to the doctor.

I am not suggesting that all medical bills be paid this way. Hospital stays, for example, could still be paid directly. My hypothesis under this plan would be a quick drop in the number of doctor's visits, thus significantly lowering the cost of health care, without any other significant changes to the delivery of health care services.

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