The Intelligent HSA
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Health Care Reform Platform
California can more efficiently allocate current state and federal funding and resources and harness the private sector to rein in rising and unpredictable costs and expand health coverage. My platform describes the means with which to extend coverage to currently uninsured legal California residents, to control rising insurance costs and administrative waste using current California insurers and without invoking government insurance, to allow patients choice of physician and portability of coverage, and to allow doctors the ability to practice medicine within the parameters of quality of care established by their peers. This will require the cooperation and willingness of all parties (patients, physicians, insurers, employers and government) to control costs and will directly reward the patient for healthy behavior and cost conscious consumption of medical resources. This will be accomplished in a new era of transparency, eliminating the insensitivity to costs inherent with current third party payment schemes.
I will outline the issues and proposed solutions to these problems.
Describing California’s Health Care Crisis
According to the California HealthCare Foundation, 6.6 million Californian residents were uninsured in 2008. This figure includes those who have the financial means to buy insurance, but opt to self-insure instead, as well as those only temporarily uninsured while moving from job to job; when adjusted to exclude those uninsured for less than the full year and those who have the financial means to buy health insurance but opt to self-insure, the best estimate of the number of Californians regularly and involuntarily uninsured (the “real uninsured”) drops to between 1.1 and 3.2 million. Excluding illegal aliens, this figure likely drops to between 1 and 2.9 million.
However, even these adjusted figures indicate that paying for health insurance poses an enduring infeasibility for a substantial segment of the population. For such individuals and families, the prohibitive cost of health insurance has stymied their access to the health security enjoyed by the majority of Californians. As both private health insurance premiums and public health program cost continue to climb much faster than the rate of general inflation, the rate of involuntary uninsurance is sure to rise even higher. 
To increase coverage, California policymakers should set their sights on the underlying problems driving up the cost of health care. Previous efforts at the state level—most notably, Massachusetts—have demonstrated the pitfalls of expanding coverage before addressing cost. If policymakers can reduce sources of cost inflation for the entire health care system,
Proposed Health Care Reform
Contracting Private Providers to Provide Basic Universal Coverage
By seeking federal Medicaid waivers, the state can allocate state and federal matching health care funds on a regional basis. Private healthcare providers (such as insurers or co-ops of doctors and nurses) would bid on contracts to provide health care for all residents within each region, including those with preexisting conditions. Each region’s budget would be predetermined by the state based on that region’s population; for this given budget, bidders would then compete to provide “Evidence based and Outcome based Medicine” established by physician boards based on current standards of care which are regularly reviewed by a commission of physicians and public health experts. These contracts would be open for rebid on a time cycle long enough to ensure that insurers capture the benefits of investing in prevention and wellness as a part of medical care, but short enough to guarantee the benefit of competition. To encourage these contracted providers to keep costs within each region’s allowed budget, the provider would receive 10% of the amount not spent from the budget; likewise, the state would require the provider to absorb 10% of any additional cost above the budget. If the region’s annual costs exceed 110% of the allowed budget, then the provider will absorb all additional costs, and the state will have the right to reopen that region to other bidders. With 1,300 private health insurers potentially vying for contracts in only 58 counties, competition would be fierce.
This bidding process would be amongst current private insurance carriers and would not invoke a government option. Those who have been critical of the government unfairly competing with the private sector should find comfort in the fact that private insurers will be the ultimate recipient of the bid. Those who have been critical of government dictating medical decisions will also find comfort in this plan. Public utilities (as publicly traded companies) have been operating within a similar construct and sucha business model has not evoked a response of governmental control or worse yet socialism in that segment of the economy.
Physicians have been concerned with the potential of arbitrarily low or fixed reimbursement rates set by a single government payor. That would not occur with this model. As individuals assume more control of their health insurance dollars and pay more directly for services, physicians would find themselves setting their own rates and competing in a free market setting, similar to all other segments of the economy. Savvy medical consumers would finally see transparency in rates and shop according to quality, cost and ultimately value and service.
Under this proposed system, any California resident would then have access to those treatments offered by the winning bidder within his or her region. Patients receiving treatment would pay on a sliding scale according to income level, with Medi-Cal paying most for those with the lowest incomes.
For those treatments that fall outside the spectrum of “Evidence and Outcome Based Medicine” as established by physicians, the California residents would cover their expenses from Health Savings Accounts (HSA’s) or out of pocket. This highlights the individual freedom within the HSA model while emphasizing the individual’s personal financial involvement in controlling costs. In the event that a California resident were to present herself or himself for health care without having purchased a High Deductible Health Plan (HDHP), or her or his own preferred alternative health insurance plan, that person would receive the treatment as though she or he had such insurance; however, the successful bidder would have the right to sue that individual for all actual costs incurred. The amounts still not collected would constitute a financial risk that the successful bidder would have to take into account in making its bid.
Opening California’s Health Insurance Market to More Competition
Policymakers may also seek the benefits of heightened competition by opening the state’s health insurance market. The state may permit well-capitalized out-of-state insurers to offer coverage in California, thereby exposing in-state providers to greater competition and allowing residents to choose from a wider range of coverage options. To protect consumers against undercapitalized or predatory out-of-state insurers, each out-of-state insurer offering coverage to California residents would be required to purchase a license bond against the prospect of insufficient capitalization. Furthermore, California could propose the repeal of the McCarran-Ferguson Act, which exempts insurance companies from federal anti-trust legislation. By reversing this exemption, California would prevent insurance companies from restricting competition through collusion.
Reforming the Tort System to Discourage Defensive Medicine
There are few penalties for those who abuse the tort system for personal profit. To discourage frivolous malpractice lawsuits and reduce the attendant expense of defensive medicine, California could enact a modified English Rule: when a court rules in favor of the defendant in a medical malpractice case, the plaintiff would be required to remunerate the defendant for all court costs, as well as attorneys’ fees up to the level spent by the plaintiff on his or her own attorney or some other equitable amount awarded at the discretion of a judge.
Health Care Paradigm
Cost Driver #1: Chronic, Preventable Diseases
According to the CDC, “chronic diseases” include heart disease, stroke, diabetes, and cancer. Chronic diseases are responsible for over 70% of all deaths and 75% of all health care costs. Of these diseases, heart disease and stroke account for 20% of health spending, while cost estimates for obesity range from 5 to 9%. Nonetheless, aggressive prevention measures can greatly reduce the incidence of chronic disease. Advances in medical knowledge have demonstrated that chronic cardiovascular and pulmonary diseases spring from behavioral and even environmental causes, while diet and exercise may stave off obesity and diabetes. However, Californians continue to underutilize preventive care. By contracting regional providers for sufficiently long time cycles, California can incentivize the coverage of preventive services, wellness programs, lifestyle counseling, and other measures targeting chronic diseases.
Additionally, in the proposed HSA model the individual sees the sometime immediate and direct reward of involvement. No incentive to an insurer or employer alone will make an individual want to eat right, live healthy, take medications and obtain screening. However, the individual’s ability to retain their own HSA dollars, as their personal investment in healthful living pays dividends, is more tangible.
Cost Driver #2: Over-Utilization
While conventional wisdom would indicate that more health care confers greater medical benefit, a growing body of empirical research demonstrates that a substantial portion of health care spending has no positive impact on health outcomes. In one leading nationwide study of Medicare reimbursement rates by geographical area, researchers found wide variation in per capita spending on patients over the age of 65—with no corresponding increase in patient health. In fact, patients residing in high-spending areas receive 60% more care with zero (or even negative) impact on their health outcomes, whether measured by survival rate, ability to function, or patient satisfaction with care. Such wasteful over-utilization was found to account for 30% of total Medicare spending.
Over-utilization of health care can stem both from oversupply of expensive care and consumer insensitivity to its cost. Addressing both supply- and demand-sensitive costs thus will require policymakers to combine management tools and consumer choice to constrain cost.
Managed Care Addresses Over-utilization of Supply-Sensitive Care.
Supply-sensitive care encompasses those expenditures determined by local capacity. Regions with high per capita Medicare reimbursement rates are characterized by higher concentrations of medical specialists, general internists, surgeons, and hospital beds in acute care hospitals and intensive care units, but fewer general practitioners. As a result of local oversupply, primary-care physicians in areas with higher resource inputs were more likely to refer patients to specialists, were more likely to recommend surgery, and relied more heavily on inpatient care, even though these practices did not result in improved health outcomes. While sensitivity to local supply of cost-intensive care is seen across the country, California is one of the worst offenders, suffering from a medical culture heavily dependent on acute care hospitals for care (like chronic disease management) that could be provided more effectively—and more efficiently—in alternative venues (like hospice or in-home care). As an illustration, the typical Californian spends 4.6 days in an intensive care unit (ICU) in the last six months of life, second only to Florida (4.7 days) and nearly 2.5 times as long as the typical Oregonian. Californian end-of-life patients also see a physician twice as many times—34.9 visits, to Oregon’s 17.9—in the last six months of life. California also ranked second highest for per capita deaths in ICUs; while patients in many states opt to die at home or in hospice care, Californians tend to spend aggressively during their final days of life, even though end-of-life care in hospice is ranked higher for quality of care. Passing on in the presence of family and friends in the comfortable surroundings of home or hospice rather than the sterile environment of an ICU ranks high for quality of life and cost-consciousness. Currently, Californians spend 32% more Medicare dollars in the last two years of life than the national average.
Strikingly, those under the age of 65 also overuse supply-sensitive care, indicating that costs associated with defining the acute care hospital as the locus of care extend to the privately insured population as well. To reduce dependence on acute and intensive inpatient care, California would incentivize providers to invest in more cost-effective, high quality care coordinated among different treatment centers by making contracted insurers accountable for the long-term health of residents within each region. Such “accountable care” models offer much promise for reducing cost while improving quality of care.
Consumerism Addresses Over-utilization of Demand-Sensitive Care.
On the other hand, over-utilization of demand-sensitive care is driven by the inherent misalignment of incentives in a third-party payment system. When an insurance company or government agency covers most costs for treatment, neither the physician nor the patient have an incentive to choose cost-effective medical solutions, with the result of over-utilization. As Milton Friedman explains,
Two simple observations are key to explaining both the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party—an insurance company or employer or governmental body. The second is that nobody spends somebody else’s money as wisely or as frugally as he spends his own.
Over-utilization caused by Californians’ insensitivity to the cost of their health care thus argues in favor of increasing consumer exposure to payment for commonly overused treatments and diagnostic testing outside the spectrum of Evidence and Outcome Based Medicine. When utilization is controlled internally it is referred to as conservationism, but when utilization needs to be controlled externally it is called rationing. Every incentive should be made to reward the individual for intelligent decision making to avoid rationing and the HSA model argues in favor of that. As consumer-driven health plans become more prevalent, Californians will become more discerning consumers, choosing treatments that are cost-effective and temper over-utilization.
Cost Driver #3: Defensive Medicine
Over-utilization caused by patient insensitivity to cost is compounded by the perverse incentives governing physician behavior. Doctors serve as advisors with special knowledge and insight, interpreting difficult-to-understand medical information and presenting patients with sets of options and professional recommendations for further care. To preserve this delicate and asymmetrical relationship between doctor and patient, physicians must be exclusively sensitive to the medical interests of their patients. Unfortunately, this is not the case in practice; motivated at least in part by the desire to limit their own liability in malpractice lawsuits, physicians commonly order diagnostic tests and other procedures beyond what they deem reasonably necessary for the optimal health of their patients. As a result, overtreatment caused by “defensive medicine” may account for as much as 10% of all health costs nationally, an expense that is passed on to patients through increased insurance premiums and to taxpayers through higher Medi-Cal expenditures. What is more, the tort system has proven to be a poor mechanism for remediating victims of malpractice: evidence shows that only 2% of patients injured by physicians’ negligence ever file suit, yet only 17% of malpractice suits involve real physician negligence. The other 83% of cases—those without merit—demonstrate the need to enact a modified English Rule to deter frivolous malpractice suits.
Additionally, by adopting the concept of a “medical coach” (independent of the doctor –patient relationship) within the HSA model, informed decisions by the patient would be more free of bias. Patients would be more inclined to obtain only what is needed and would be rewarded financially for keeping frivolous exams and treatments to a minimum. This concept also reinforces the premise of “Evidence Based Medicine”.
Signs of Progress
Already, federal and state lawmakers have implemented some successful measures to address rising health care costs. These positive steps suggest that prudent policy can constrain costs without sacrificing quality or access.
Health Savings Accounts paired with High Deductible Health Insurance Plans (HSAs/HDHPs) Lower Costs, Increase Quality
In December 2003, the federal government enacted the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), establishing Health Savings Accounts (HSAs) as tax-protected accounts to encourage personal savings for medical expenses. Under the MMA, Americans were granted the option to deposit money from their paychecks into an HSA without paying federal income tax. Money saved in HSAs can be spent on out-of-pocket medical expenses, including inpatient care, prescription drugs, dental, vision, and chiropractic care, durable medical equipment like eyeglasses and hearing aids, and non-prescription (over-the-counter) medications. Funds may be withdrawn for purposes other than health care; however, these withdrawals are subject to federal income tax and a 10% fine. This penalty is waived for those over the age of 65, effectively rendering the HSA a tax-deferred IRA account. The unspent balance of an HSA at the end of each year rolls over into the following year.
For critics of HSA’s who argue that
- the patients will incur more financial exposure
- patients will withhold care to save money
- there will be adverse selection of the healthy and wealthy choosing HSA’s creating an upward premium spiral for the sickest who stay behind in typical indemnity plans
- individuals are unable to be truly savvy and discerning consumers of medicine
we offer the follow data:
The increasing prevalence of HSA-HDHPs has begun to address several policy goals. First, consumer-driven health plans like HSAs encourage price-conscious consumption of health care. In a McKinsey study examining different health plans, those with consumer-driven plans were 50% more likely to ask their providers about cost and three times more likely to spend less money. HSA-like plans have also demonstrated positive impacts on other facets of consumer behavior; Consumer Directed Health Plan (CDHP) consumers were 25% more likely to engage in healthy behaviors and more than 30% more likely to seek an annual check-up because they thought it would save them money in the long-term. In another study, HSAs demonstrated a positive impact on retirement savings. Even after taking into consideration the health care expenses incurred over the life of a typical worker, 90% of men would have saved at least $150,000 in their HSAs by age 60, while 90% of women would have saved at least $100,000. Furthermore, HSAs provide consumers with a greater degree of freedom, security, and ownership than other employer-funded health benefit programs; because HSAs are fully owned by the consumer, they are portable and permanent, even in the event of unemployment or employer bankruptcy.
If individual HSA’s are funded by the employer or government (contingent on income), individuals exposure should not be that different from current out of pocket expenses (premium sharing, co-pays or deductibles) in the indemnity model. Monies which normally go toward insurance premiums (and would not be returned to the individual as dividend if unused) would now be controlled and retained by the individual when adopting preventative and healthy lifestyle choices and cost conscious medical consumerism. In the worst case scenario of catastrophic illnesses or major procedures, this plan could be developed such that HSA’s and HDHP maintain nearly equivalent exposure while allowing all the upside potential for reducing overutilization. As utilization eventually decreases, premium expenses ultimately decrease.
Critics contend that high deductible plans favor the healthy over the chronically sick, and tax-sheltered accounts help the rich more than the poor. However, empirical studies show that HSA-HDHPs offer advantages to all four groups. In the most rigorous study of different health plans to date, the RAND Corporation assigned thousands of families to different insurance schemes, ranging from consumer-driven to universal free health plans. While those assigned to HDHPs had outcomes equivalent to those receiving entirely subsidized care, HDHP recipients consumed 40% less care. This finding held true regardless of income level or the level of initial health. Moreover, those with chronic illnesses defied critics’ expectations in 2008 when “sick and savvy” consumers made more use of HSAs than any other consumer demographic, despite their higher-than-average usage of health care.
In addition to the upside potential of retained health care dollars for retirement and that patients with chronic illnesses did not withhold dollars but defied expectations by being “sick and savvy”, the argument of adverse selection becomes moot if the proposed business model is adopted in the setting of universal care in California. It works to everyone’s advantage, including the insurance industry, to have everyone covered by this plan to spread out actuarial risk.
The concept of the medical coach independent of the doctor patient relationship will allow all Californians who wish to be engaged in the process to reap the financial benefits of being a savvy consumer. This concept is not mandated of individuals who wish to be less involved.
Finally another upside benefit of the HSA/HDHP setting is both portability and choice (physician access). Currently, physician panels align with specific insurers. If your insurance changes, there is the potential effect that your physician will change. In the HSA model, as the health dollars are aligned with the individual who directly purchases health care, choice is universal. HSA dollars move with the patient should they change jobs and if reciprocity is developed between HDHP providers portability is further enhanced.
Caps on Noneconomic Damages Have Lowered Costs, Improved Patient Access
In response to concerns about the skyrocketing cost of malpractice insurance, California passed the Medical Injury Compensation Reform Act (MICRA) in 1975, which has helped reduce our state’s health care costs while protecting patients’ access to health care. Before MICRA’s passage, annual premiums for malpractice insurance had risen to several hundreds of thousands of dollars for high-risk medical professions, impeding Californians’ access to care. Furthermore, MICRA has resulted in massive savings; according to a 2008 report by California’s former nonpartisan legislative analyst, even increasing the amount of non-economic damages allowed under MICRA from $250,000 to $500,000 would raise healthcare costs in California by at least $7.9 billion annually, or $1,032 annually for a family of four. Maintaining MICRA’s provisions thus remains essential in the effort to lower health expenditures.
Summary of Health Care Reform Goals
Broadly, the policies described above are designed to reduce health insurance costs while increasing access to affordable coverage. In particular, they would:
- shift financial risk for unpredictable variation in year-to-year health care expenses to the private sector,
- encourage prevention to reduce future rates of chronic disease,
- incentivize patients to choose treatments based on cost-effectiveness, and
- allow some physicians to serve as impartial advisors free from secondary incentives (medical coach) to help reduce medical liability by increasing patient participation in cost-effective decision making.
Furthermore, policymakers must counter some cost-cutting measures already adopted by private insurers that are socially damaging, including restrictions on new insurance enrollees with pre-existing medical conditions, denials of care to insured customers, and cancellation of insurance upon discovery of new ailments. This can be accomplished by:
- shifting power over decisions weighing financial cost versus health benefit to the only actor capable of making such choices: the patient; and
- guaranteeing the availability of insurance policies that cover pre-existing conditions.
By adopting competitive non-governmental bidding for insurance coverage within the parameters described we can save money and control costs. By adopting funded HSA accounts, complemented by these low cost HDHP safety nets for major expenses and catastrophic events, we offer the individual the freedom to choose and the opportunity to participate in appropriate utilization by conservationism rather than rationing resources and in return allow the patient to directly profit and prosper from suchchoices. By aligning health care dollars directly with the individual we offer choice and portability. By allowing the individual to make medical purchases directly we usher in a new era of transparency where physician compete for health care dollars rather than accept established and artificial fee schedules from insurers or the government. By providing the individual the assistance, resources and means to make wise medical decisions we create a new generation of savvy medical consumers to help keep the runaway medical costs from crippling our States ability to compete in the national and global marketplace.
We acknowledge the contributions of Adam Creasman, a student at Stanford University, under the direction of Tom Campbell
Bernie Saks MD
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 Public Policy Institute of California, “Just the Facts: Illegal Immigrants.” June 2008. <http://www.ppic.org/main/publication.asp?i=818>. This 8% reduction is conservative; illegal aliens almost surely have a higher rate of uninsurance than legal residents.
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 Ibid., p. 10-13.
 Ibid., p. XII.
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