In response to my Wall Street Journal op ed, a number of people have asked me to clarify my position on Health Savings Accounts (HSAs). Here goes.
Suppose we passed a law tomorrow prohibiting all insurance companies (including Medicare and Medicaid) from paying any medical bills less than $5,000. What would happen?
The medical marketplace would transform almost overnight. Within a couple of months, there would be no such thing as a primary care physician (PCP) who did not post prices – at least for routine procedures. PCPs would offer telephone and email consultations. They would keep patient records electronically (just like lawyers and accountants). Overall, there would develop a teeming, bustling, entrepreneurial marketplace for primary care, diagnostic tests and most prescription drugs.
Specialty markets would develop for the chronically ill, as doctors competed for their business instead of trying to avoid them. Patient education would become an emerging field, with providers offering to teach diabetics, asthmatics, etc. how to manage their own care. Internet drug sales would double, triple and quadruple, as brand drugs faced increasing competition from generic, therapeutic and over-the-counter substitutes. At the same time, overall health care spending would plummet.
(Just thinking about it makes you wonder why we haven't done this already.)
Now, can the widespread use of HSAs create this same transformation? Certainly HSAs and HRAs, along with an even greater number of uninsured and a still larger number of employees facing higher deductibles and co-payments, are already having an impact on the market. How else can you explain the exploding number of walk-in clinics, the growth of internet drug sales, and $4-a-month-for-generics at Wal-Mart and other big box retailers?
However, the impact of HSAs will be much more limited than the scenario described above. The reason: while HSAs free the patient side of the market, they do not free the provider side. Current law requires insurers with HSA plans to create an across-the-board deductible and specify what spending counts toward the deductible. In the process, HSAs do not become a radical challenge to the existing payment system. Instead, they become an extension of the current system.
As you approach your doctor's office with HSA in hand, your insurance company has already established with your physician which tasks are covered, which ones are not and how much will be paid. Of course in principle you can use your HSA to pay for telephone and email consultations, electronic medical records, patient education, etc. But since none of these expenditures count toward your deductible, doctors have weak incentives to change the way they practice medicine.
HSAs free patients and give them good incentives. They do not free the supply side of the market, however. They could, if we changed the federal law. What we need are completely flexible accounts that can wrap around any health plan.
See my BA: "Making HSAs Better" at: