Health reimbursement arrangements fall short on coverage
The New York Times
March 2, 2003
A New Health Plan Works, at Least for the Healthy
By Beth Kobliner
Last fall, Mrs. Welborn, 32, a senior training specialist in corporate development, signed up for a new kind of health coverage, called a health reimbursement arrangement, or H.R.A. As part of the plan, her employer, CompuCom Systems, an information technology service provider in Dallas, has given her a $2,000 health care savings account that she can use to pay for medical care.
But Mrs. Welborn's new plan also comes with a hefty deductible of $3,400. That means that if she spends more than her allotted $2,000 in the account this year, she will be liable for the next $1,400 of expenses. After she reaches the deductible, the insurance plan kicks in; it will cover 80 percent of costs, if network doctors are used, and 60 percent if not.
But if any of the $2,000 remains in her account at year-end, she can add it to the next $2,000 CompuCom will set aside for her in 2004. Mrs. Welborn... can have a maximum of $6,000 in her account.
Consumer-driven plans are variations on P.P.O.'S and H.M.O.'s, but with two important differences: they carry considerably higher deductibles, often around $1,500 for individuals and $3,000 for families; and employers cushion these higher deductibles at the front end, by financing individual cash accounts ranging from a few hundred to several thousand dollars.
http://www.nytimes.com/2003/03/02/business/yourmoney/02MEDS.html
Comment: Medical savings accounts (MSAs), tax free medical accounts backed up by high deductible (catastrophic) insurance, have long been supported by those who claim that we will bring health care costs under control only when we make patients sensitive to costs by spending their own funds. Once their medical savings are depleted, then the catastrophic plans will cover all costs. But this is really a fantasy, as we'll see below.
For several reasons, insurers and employers have been reluctant to offer these products. But an IRS ruling last year authorized the version called health reimbursement arrangement (HRA). One of the features that made HRAs more attractive is that the unused funds could be rolled over from year to year. It is important to note that employers retain ownership of the HRA. Unspent funds on job termination are not converted into a cash or retirement benefit for the employee, but remain with the employer. So it really is a pooled fund source with a low spending cap per individual or family. Since the accumulation of funds will stop when the maximum is reached ($6000 in the example in the article), the family would be motivated to be sure that the funds are spent or they will fail to receive additional contributions and will eventually lose what's left anyway. Since most healthy families spend less than the amount placed in the HSA, they will be motivated to increase their utilization of health care services, the exact opposite of the intended result.
The high deductible coverage offered with these HSAs also raises concerns. These catastrophic plans are not indemnity plans that "cover 100% of costs after the deductible is met." They are PPO and HMO managed care plans, using contracted providers. Some plans may allow patients to use their own non-contracted providers, but only with severe financial penalties.
Let's look at an example using the numbers in the article: a $2000 HSA, with a $3400 deductible, and then a PPO with 80% for network providers and 60% for providers outside of the network. What is not mentioned is that this is 80% or 60% of the allowed fee. The contracted provider is required to adjust off the disallowed balance, but, of course, the non-contracted provider can demand the full fee.
Now let's say that the patient needs an $85,000 coronary bypass. The university center in town has a cardiovascular surgery program noted for its excellent outcomes. The other hospital in town is being investigated for doing a very large number of bypass surgeries that appear to have been unnecessary. But because of the higher cost of care at academic centers, the charges will be $108,000 instead. Although this may be a somewhat extreme example, it is realistic. And most of us would certainly opt for what we perceive to be better care, especially for our loved ones.
How do the numbers work out? Let's make one more assumption. The PPO has contracted with the hospital under investigation for a fee of $56,000 for the package, a reasonable fee since the PPO can offer that facility a high volume of insured patients. But the PPO has repeatedly failed to negotiate a similar contract with the academic center, which then remains a non-contracted provider.
The numbers? The employer funded HSA pays the first $2000. The patient pays the next $1400, when the deductible is met. The allowed amount, $56,000, minus the deductible of $3400, leaves a covered amount of $52,600. Since the center is not contracted, the PPO pays 60% or $31,560 and the patient pays $21,040. But the patient is also responsible for the disallowed charges of $108,000 minus $56,000, or $52,000. So this HRA with a catastrophic plan that "covers expenses after the deductible is met," results in an out-of-pocket expenses for the patient of a total of $84,240. That is quite a tab for an $85,000 procedure, especially for a family with an income of $42,228 per year (median household income 2001, US Census Bureau).
Under the best circumstances, the patient would pay the $1400 share of the deductible and 20% of the contracted rate, with the balance being adjusted off. That would still amount to $11,920, an almost unaffordable amount for a median income household.
Who would elect these plans? Individuals that shop for plans based on premium alone might select them because the premiums for high deductible coverage are lower. Those that are better informed may still elect these plans, gambling that they would remain in good health. But those that develop a major acute medical problem will lose their bet. Individuals with significant chronic disorders would not select HSAs but would select more comprehensive plans. Concentrating higher cost patients into more comprehensive plans will drive up premiums, threatening affordability of comprehensive coverage for the rest of us.
Private indemnity insurance has been priced out of the market and is gone forever. The fragmented system that we are left with can only perpetuate and compound the inequities that characterize our system today. We already have enough money in the system to provide comprehensive services for everyone, but the only way we can ever obtain value for that already invested is to establish a single, equitable risk pool. Why do we keep delaying the inevitable?