PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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Reflections on Impending Obamacare
Reform was surely needed to remove distortions imposed on medical care by its financing. The next big questions are what the Affordable Care Act really reforms; and, whether the result will be affordable for the whole nation. Here are some proposals, just in case.

Loud and Clear: Health Savings Accounts

Health Savings Accounts. Medical Savings Accounts must be distinguished from Medical Spending Accounts, which unfortunately include an annual "use it or lose it" feature. These spending accounts recently styled themselves Flexible Spending Accounts, while Medical Savings Accounts became Health Savings Accounts. In time the confusion may subside, but the distinction remains important. There has recently been an employer initiative to make the payments of Spending Accounts tax-exempt, apparently intending to equalize them with Savings Accounts, but tip-toeing around the larger issue of failing to include individually purchased health insurance in the tax exemption.That would be an unfortunate splitting of political forces.

Health Saving Accounts (HSA), or Medical Savings Accounts (same thing) supplement other IRA (Individual Retirement Accounts) or 401 (k), but address medical expenses .

Tax-deductible, Health Savings Accounts do indeed accumulate unspent balances from year to year, gathering income for a future rainy day as they go, while allowing funds to be spent immediately if the rainy day comes early. If wisely invested and left untouched, they can accumulate a surprisingly large amount of money over a lifetime. They don't quite make everybody a millionaire but that isn't completely impossible if you don't get seriously sick, and pay small routine medical expenses in cash. Just why employer groups have failed to seek ways to convert their use-it-or lose-it plans into Health Savings Accounts -- which wouldn't lose it -- is not entirely clear. But it is highly recommended that this be explored, if for no better reason than to put a stop to wasteful spending at the end of the year, just to use the money up. This book proposes to put that money to work pre-paying medical expenses in the far future with the investment income, which is a goal you would suppose is in the employer's interest. Almost enough has already been said here about this idea, so some attention needs to be devoted to those people who have HSA plans and do get sick, and can't afford their medical costs without invading the fund. If such a person does get sick, the money to pay for it is available. This feature responds to the fact that some people have major illness early in life, while some other people stay well for decades before they have a serious illness; for most people, it is a toss-up which it will be. It isn't very common for someone to be very sick for six decades, by the way, but stop-loss insurance would even cover this contingency, and it isn't very expensive because that sort of casualty is uncommon.

Because we all get tangled in this sickness lottery, the Health Savings Account is intended to be linked to a high-deductible health insurance policy. The higher the deductible, the cheaper the insurance premium will be, so progressively more money is left over to add to the Health Savings Account, compared with buying ordinary health insurance. At the moment, the best level of deductible is at least $5000, varying with inflation. The person who buys this package is on the hook for $5000 until the Health Savings Account builds up to $5000, which usually takes about three years. Those who don't already have that much savings or reserves are taking a chance for three years. That's one of several reasons why this package is most appropriate for young, healthy people.

These two linked promises are meant to discourage unwise spending, even for health, but it's your choice. What induces you to contribute annually, and discourages early withdrawal, is the income tax deduction. That's all there is to it, and it's already quite legal. From its very beginning, an HSA was intended to be linked to a high-deductible health insurance policy bought independently. The pre-funded last year of life was an afterthought for what you would do with the money if you enjoyed good health, and the accordion is provided just in case we get a cure for cancer, or some other wonderful development.

There are problems to be tinkered with. Nowadays, it usually goes the other way; the Health Savings Account is suggested and explained to customers by salesmen for high-deductible ("Catastrophic") health insurance, who could also suggest a bank with a debit card to make make claims and payments both convenient and smoothly integrated, but often don't do so because there is no commission for added features. Brokers earn commissions on the insurance part, but not on the HSA part, and that's probably a flaw. Some brokers suggest the whole package, but pressuring individual banks to waive fees for maintaining them, is just asking too much. Providing for sales commissions might improve public adoption. Technically, that's all there is to HSA. The only known opponents to high-deductible insurance are a few labor unions who fought to pass state laws mandating specific small-expense items into all insurance policies in their state. Somehow they imagine circumventing those victories (by HSAs making them unnecessary) would diminish their own stature. In any event, these small-expense state mandates ought to be repealed or pre-empted. They eat into the fund which might need money later for more serious sickness, and they inhibit the sales of high-deductible. Hospitals are very little affected by this approach, except in the reform of the ratio of charges to costs. Therefore, most of the external supervision of the program should come from physician representatives, who will be the first to notice when changes are needed.

The real value of Health Savings Accounts is not what they provide, but what they make possible. One immediate consequence is to silence knee-jerk objections to a high deductible. By implication, deductibles discourage the co-pay approach by competing with it for the premium dollar, and we have earlier discussed why that would be desirable. On first learning about HSA the first reaction of many people is that no matter how small the deductible is, some poor patients could not afford it. A high deductible sounds even worse. However under the Affordable Care Act, everyone must now carry some form of health insurance, so a high deductible makes it cheaper to finance and to buy. For some poor people, a subsidy is required, so Constitutional equal justice is, so far, in doubt here. Health Savings Accounts merely aspire to receive equal subsidies for poor people compared with other insurance, but meanwhile provide a tax-exempt incentive for working people to accumulate funds internally to cover a deductible. With HSAs, money to cover the deductible is in the fund after about three years, and sooner if it is subsidized. In any event, subsidies would mostly be temporary, because those who do not get sick would see annual increases in the Savings Account, soon making further subsidy unnecessary. Anyone with tight finances might be advised to start with the catastrophic insurance, adding the HSA component when they can, and resulting cost savings would not be negligible, even during the present episode of abnormally low interest rates, because the contributions themselves are tax-deductible. The temptation to delay or deplete the fund should be resisted, particularly by governmental payers of last resort, because the expense is so likely to reappear as a bad debt when indigent patients get sick. Temporary front-end subsidies for HSA, while initially objectionable to conservatives, are a far better solution than the present unsustainable expedient of cost-shifting. The first function of a high deductible is to make insurance cheaper, in this case cheaper than simply enrolling through an insurance exchange. Because of current low interest rates, a few banks currently charge a small fee for debit cards with a low balance, but many banks do not. Young people are apt to incur small medical expenses, not covered by the high deductible, but they can all look forward to higher expenses, when they will be glad they had set the money aside. Starting out with buying both features should squeeze major financial health risks permanently out of consideration after two or three years of good health. Existing health insurance companies may thoughtlessly resist such a change, but the impending startup turmoil about the Affordable Care Act should soften them up considerably.

Speaking of fairness, HSA finally catches up with the Henry Kaiser World War II provision (see above) by extending healthcare tax exemptions to all working people, not merely salaried employees. It now could readily match a temporary subsidy for the poor to whatever permanent subsidy the government provides under the Affordable Care Act, whenever that gets untangled from the conflicting provisions of ERISA. Those are decisions independent of insurance design; if Congress changes either the subsidy or the tax exemption, the insurance can adjust correspondingly. A future budget search for smaller subsidy costs would not cripple Health Savings Accounts, as it might well cripple Obamacare. A few conservatives are so antagonized by Obamacare they would not mind crippling it, but their long-run interests are better served by creating a more workable system. That point may not be obvious, revolving around the difference between indemnity and service benefits. An indemnity (or the patient) states in advance what is affordable and hopes to negotiate the rest, whereas a service benefit describes what services it will pay for, regardless of cost. If you were a healthcare provider, how do you suppose you would react to that proposal? Indemnity is designed for ambulatory adults to bargain with; but is largely inappropriate for sicker people in a hospital bed. In the HSA system, the distinction between ambulatory and bedridden appears at the level a Health Savings Account stops paying, and the deductible health insurance starts paying. That is, it depends on a shrewd choice of the size of the deductible. For this reason, Health Savings Accounts have always attempted to match the size of the deductible to the average cost of a fairly inexpensive hospital admission. And for this reason it should not be tinkered by other considerations; if the deductible is raised above the level of the median hospital entry, it should apply to a separate stop-loss policy for hospital outliers.

In a well-designed system using debit cards, transition between the two types of treatment venue could almost be imperceptible, but that also creates a hazard of changing it carelessly. As mentioned, it is in the interest of everyone to maintain the amount of the deductible below the great majority of hospital inpatient bills, while remaining above the average annual cost of office care. If that is unachievable, only the hospitalization cost should be matched. To forestall gaming of the insurance by cost-shifting, hospital outpatient costs should be treated as office visits, and Emergency Room costs as well, provided the patient is not subsequently admitted.

The Health Savings Account is thus tax-exempt and accumulates from year to year, together with the interest it earns; its sources are a portion of wages, or tax credits, or possibly in time government subsidies, varying between individuals. To prevent gaming, expenditures might be limited to health care, but there is no earthly reason to limit contributions to a system which is starved for revenue. In practice, the account is used primarily to pay for outpatient (office) services; assuring the ability to pay the deductible of a linked catastrophic insurance policy is very important, but much less frequent. It is not contemplated that it will have any co-pay or coinsurance (see above). It also might contribute to an optional pool (or re-insurance) for the less frequent risk of paying for a second instance of an annual deductible, providing sufficient funds have not re-accumulated in the Savings Account. Its essential point is to distinguish between small negotiable costs and large unnegotiable ones, not between paying hospitals or doctors, as Medicare and others do. The internal accumulation of compound interest income matches another unspoken reality; young people have few medical costs and can accumulate, while older people are mostly spending. This somewhat answers the common grievance of young people that they are subsidizing old people; they are in fact subsidizing themselves for when they are the old ones. The degree to which unmentioned problems fall into place, is a great testimony to a system whose most attractive feature is simplicity. In practice it does employ an essentially different insurance methodology between most office doctors, and hospitals, and between most young and old. It just doesn't specify it.

Marketplace Presumtive Costs (MPC). Payment by diagnosis rather than itemized bills (beginning in 1982) was a great improvement for patients too sick to pay much attention to finances, which generally describes hospital patients who need to be there. Since Canadian hospitals demonstrated (by eliminating them) that itemized bills were the main information system for cost-effective management, they are still produced in American hospitals. Although such posted charges are largely useless because of the 500% disconnect between prices and their underlying cost, the volume of individual services is depicted accurately, and could be used to link marketplace prices (reported by aggregated regional Health Savings Accounts), to the item volume within the Diagnosis Related Groups (DRG), as well as the particular patient's item volume (his bill). The result would be a new cost figure not previously available, which we will here call the Marketplace Presumptive Cost (MPC). If to that is added the unique surcharges for administration, teaching, charity, and research and development, the evaluation of what these costs are all about could be brought into the open. Compared with that step forward, the relatively trivial costs of wasted paper in bills-no-one-can understand, can be ignored. Until some such transition can be accomplished, itemized bills must not be abolished in the name of efficiency, or any other motive. With the MPC, doctors would finally have a meaningful speedometer to guide their cost decisions. No sentient doctor now pays the slightest attention to the hospital bill, because it reflects nothing approaching the true cost of the service, or the true cost of individual physician performance. The underlying cause of this disconnect is the enormous amount of cost-shifting taking place, but a certain amount of cost-shifting is nevertheless essential to running a hospital. The issue is to detect when it has become excessive, without necessarily changing it. The present reliance on direct costs, and the present rhetoric about posted charges, are both futile. A cost-to-charges ratio is therefore doubly useless. The need is to examine indirect costs, make comparisons among competitors, and decide what is necessary, what is excessive. It's fairly clear in advance that will demand some definition to indirect costs.

The Clash between Mandatory Coverage and Marketplace Benchmarks. Insurance was never meant to be universal, and the closest thing to it, mandatory auto insurance in no-fault states, gives a widely familiar example of what happens when insurance is overextended; the insurance adjuster rules but prices go up anyway. At least in auto repair, an extended market for metal workers, painters, electricians, and mechanics exists to create some basis for argument. By contrast, if every patient carries insurance, how can the price of almost any service be determined? How about a new operation to transplant brains, or an ingenious repair of someone who fell off a cliff? How about a badly needed distinction in compensation between doing your first operation and doing your thousandth one? Or, just sitting at the bedside, comforting the dying. Everywhere you see a disturbance of the marketplace you see a disturbance in prices, and if prices are forcibly constrained, then candy bars well known to shrink in size. Eventually shortages appear, as they recently have with generic drugs driven off-shore, creating a monopoly for irresponsible manufacturers. The only feasible way to retain a vigorous marketplace in health care costs, is to allow the market free play under a large deductible. A sufficiently large co-pay might be thought to do it, but Greshams's Law shows it is impossible to maintain two prices for two halves of a service. Since many services performed in the hospital are also performed in doctor's offices, a considerable base for determining the price of DRGs (diagnosis-related groups) is readily established, and adjusted for local and regional differences. That will be automatic if the market is allowed to adjust to costs in nearby offices, and the necessary data links are created. A blood count is a blood count, an EKG is an EKG, whether inside the hospital or inside a tent. Hospital administrators complain they have high overhead; but that's just the point, isn't it? A high deductible is the only imaginable way to preserve a marketplace within a totally insured world, and it will be a tragedy if Obamacare fails to recognize it.

The catastrophic insurance policy is thus included by the Affordable Care Act only in the sense that some kind of health insurance is mandated. Used as part of a package with Health Savings Accounts, its split usefulness in two venues relies on health costs jumping sharply as soon as a patient is sick enough to go in a hospital. We also discuss in another place, the advantage of employing internal interest build-up in the Last Year of Life proposal. At this late point in the discussion, it is only useful to mention the fortuitous advantage that indemnity plans fit together, creating a strange ability to offset outpatient health costs against terminal care costs.

In any event, politicians must note that boundaries somehow have to remain flexible enough to adjust to changes. Service benefits are so flexible they could bankrupt us, so any replacement must not go that far. In the crudest brief description, Medical Savings Accounts seek to take advantage of the cost restraints of high-deductible ("catastrophic") health insurance, while easing the necessary pain by providing some patients with the money to do it with. It probably can cover all patients only if there is some temporary subsidy for the poorest. Some may need charitable assistance, and none can expect to enjoy the benefits of compound interest until interest rates return to normal.Pooling of investments in order to have professional management seems highly desirable if investment diversification is contemplated. Experience with these plans has shown that paying the money out of a tax-exempt fund has almost as much spending restraint as paying bills fully with cash, so costs are reduced by about 30% in actual experience. There might also be a reinsurance pool to pay for the occasional patient who exceeds the money in his account repeatedly, but the medical perception is that once you start going into the hospital, you either soon get better or you don't. Either way, there are few chronic diseases left; cancer and Alzheimer's disease, and that's about it. The strategy of giving poor people the three-to-five thousand dollars was originally envisioned to level the tax playing field with employer-based insurance, which still only provides tax avoidance for salaried employees. In recent years, a number of other ways to give away money by another name (especially funded tax credits) have been devised. They are not discussed further. HSA progress has been resisted for thirty years, but one consolation is that during the interval dozens of examples have been tried out, medical costs have regularly declined for workers, and both doctors and patients are satisfied with the arrangement. These savings come disproportionately from the outpatient arena, since reimbursement of hospital inpatient costs often depends on negotiations between the insurer and the hospital. The use of market-based out-patient costs (MPC) as a basis for guiding physician decisions to cost-effective diagnosis and treatment, allows indirect hospital costs to be negotiated separately with third parties without fanciful allusions to linkages to billable services. Some hospitals could withstand this type of review, others could not. But it is certainly past time to have the discussion.

The Billing Mess No reimbursement system can be entirely satisfactory until provider accounting and billing are reformed. Health Savings Accounts were once resisted by those outsiders who benefited from uniquely tax exempted coverage, but current climate is now favorable to deductibles almost everywhere. At least this much has been accomplished. Progress since 1980 has been retarded, not by lack of success, but by abnormally low interest rates at banks imposed by the Federal Reserve, and by state laws mandating coverage of specific low-cost services. Itg is possible that the latter are motivated by a desire to exert indirect price control, and thus provide an opportunity for negotiations. It is also unwise to mandate coverage for birth control pills, cough medicine and like, because experience in nations with nationalized health systems shows a tendency to be generous with low-cost items so as to conceal appalling harshness about expensive care. Doing so also brings to the fore such contraptions as the widespread three-insurance system for paying your bills. One policy now pays about 80%, another policy pays about 20%, while a major medical policy cleans up loopholes. This costly contrivance is even used to bill for individual refills in a drug store. The resulting chaos means most medical bills are not finally settled for several months, generating mountains of paperwork beyond average comprehension. With a Health Savings Account, the patient generally pays cash and gets a receipt for it, although the use of debit cards smooths that, and adding inpatient payments to the debit card would smooth it further. Useless itemized hospital bills should be revised to substitute market-based prices for inpatient items, thus restoring their usefulness for physician and patient cost guidance. Indirect hospital costs need not be shown on the bill at all; rather, they could be subjects for negotiation with third party payers alone. Combining direct costs and indirect ones serves no identifiable purpose, since actual payments are now DRG, or diagnosis-based rather than item-based, and indirect costs have become so large and cost-shifted that the combined figure is totally misleading for the analysis of cost effectiveness. Periodically, the item composition of DRGs does need to be re-compiled, but this can be produced on demand for monitoring purposes, and would often be more useful if aggregates were examined rather than individual cases. The "grouping" of items in the DRG with similar costs rather than medical characteristics may have convenience for the billers and payers, but the process is highly approximated, at best, for any other use. For serious analysis, the entire ICD coding system needs to be abandoned, and to revert to an updated version of the original Standard Nomenclature system, now mainly in use by pathologists (SNOMED3). Many of these small reforms may seem technical and obscure, so a sentence needs repeating: No reimbursement system can be entirely satisfactory until provider accounting and billing are intensively reformed.

Summary of Improvements useful to integrating Obamacare with Health Savings Accounts.

  1. Enable commissions for salesmen of high-deductible health insurance to bundle their product with HSAs, debit cards, and reinsurance. This would not merely encourage this product, but assist the primary sales adviser in discouraging opportunistic fees and costs from banks who manage accounts..
  2. Encourage state governments to eliminate small-cost coverage mandates, which conflict with the high-deductible approach.
  3. Discourage co-pay coinsurance, which has shown little cost-restraining effect, but tends to encourage multiple claims costs.
  4. Charge some agency with monitoring inpatient charges, for the sole purpose of suggesting needed changes in the deductible amount of insurance to match them.
  5. Provide a system for subsidizing unpaid deductibles for poor people, which phases out when HSA accounts build up to the deductible amount, but does not contain a disincentive to contribute to the Account.
  6. Study the need and cost of a reinsurance system or pooling arrangement, for those who exhaust their HSA balance, and thus require additional subsidy. Combining this with item 5. would be ideal.
  7. Establish a mechanism for using HSA (or other) information to establish the publication of national (and possibly regional) marketplace prices for medical items outside of institutional care.
  8. Charge a commission with determining relative pricing for items unique to hospital inpatients, building on values relative to outpatient charges..
  9. Re-cast DRG prices to conform to 7. and 8, with indirect institutional costs to be subject to unrelated audit and negotiation.
  10. Recast hospital bills to reflect 7, 8, and 9. in an easily intelligible way, including amounts actually paid by third parties.
  11. For DRG purposes, phase out the ICD diagnostic coding system, replacing it with SNOMED3 (formerly SNODO), or else use two codes for two dissimilar purposes.
  12. Charge some Committee of Congress to determine in advance what the rules should be for unspent surpluses of HSA accounts, at the death of the owner.

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