Business Wire
September 29, 2004

Golden Rule Customers Exceed $110 Million Saved in Health Savings Accounts; HSA Sales Reflect Growing Popularity of Lower-Cost Health Insurance

Golden Rule Insurance Company today announced that its customers have exceeded more than $110 million saved in tax-advantaged Health Savings Accounts (HSAs).

“On average, we find Golden Rule’s customers saving 45-55 percent on annual insurance premiums alone,” Andy Grim, Golden Rule vice president of marketing, said. “Our customers are getting the coverage they need without paying for coverage they don’t.”

http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20040929005426&newsLang=en

Comment:
Step back and look at the broad picture. Imagine everyone having a health savings account (HSA) and a low cost, high deductible insurance plan. Now let’s fund our entire health care system, currently at $1.8 trillion, with the HSAs and high deductible plans. Keep in mind that 80% of health care costs are used by the 20% of individuals with serious acute and chronic disorders.

Current contributions for HSAs are capped at $2600 for individuals and $5150 for families. For illustrative purposes only, let’s assume that each individual has $2000 in an HSA. That means that the 294 million U.S. citizens would have $588 billion in HSAs. For the 20% with significant needs, their $117 billion would be rapidly depleted, having been spent of health care. The healthy 80% might use an average of $300 per person in incidental health care costs, depleting their accounts of $70 billion. The “beauty” of HSAs is that the $401 billion remaining in the HSAs of the 80% who are healthy will be converted into retirement pensions. That’s a great deal for the majority of individuals who remain healthy. But that removes about $400 billion from the $1.8 trillion that we are already spending.

HSAs will have funded $187 billion of the $1.8 trillion, leaving costs of $1.61 trillion for the catastrophic care of the 20% of individuals with greater needs. But after the HSA funds are removed from the equation, there is only $1.21 trillion left to pay for care that currently costs $1.61 trillion.

Where will the $400 billion shortfall come from? Not from most of those with greater needs since current health plans already fail to provide adequate financial security, and this would add an average additional burden of $6800 per person. The only practical solution would be to increase the premiums for the high deductible coverage to a level that would fund the full balance of the $1.8 trillion that we are spending.

There are two significant consequences of this. First, the low cost, high deductible plans would no longer be low cost. Second, there is a perversity of the fundamental principle of health insurance, in which funds of the healthy normally help to pay for care for the sick, in that, with HSAs, the funds of the sick help to pay for the retirement accounts of the healthy.

And that’s sick health policy!

Families USA
September 2004

In 2004, there were 14.3 million Americans whose health care costs totaled more than one-quarter of their earnings-up from 11.6 million in 2000, an increase of approximately 22.9 percent.

Among insured people, the number with health care costs in excess of one-quarter of their earnings rose from 8.4 million to 10.7 million between 2000 and 2004.

The result of (the) combination of higher premium costs and thinner coverage is that insured workers with serious illnesses, those with chronic conditions or disabilities, or those who experience a one-time medical crisis often find themselves in real financial trouble. In 2004, having health insurance does not necessarily guarantee protection against high medical bills. A growing number of insured workers are facing catastrophic health care costs.

http://www.familiesusa.org/site/DocServer?docID=4601&JServSessionIdr005=sf27qmna31.app26a

And…

Rising Health Costs, Medical Debt and Chronic Conditions
By Ha T. Tu
Center for Studying Health System Change
September 2004

Between 2001 and 2003, the proportion of people with high out-of-pocket costs relative to income increased overall. The increase occurred almost completely within the privately insured group, and the increase was most pronounced for low-income people. The proportion of low-income, privately insured, chronically ill people with out-of-pocket costs exceeding 5 percent of family income increased from 28 percent in 2001 to 42 percent in 2003-an increase of 50 percent. This change likely reflects the impact of increased patient cost sharing for insured people, as well as the fact that health care costs increased at a much faster pace than incomes. By 2003, low-income, chronically ill people covered by private insurance had become as likely as their low-income, uninsured counterparts to spend at least 5 percent of income on health care.

http://www.hschange.org/CONTENT/706/

Comment:
Currently the rhetoric on health care reform centers around two
approaches. Some recommend that patients be “empowered” to pay more for
their own care. Only the “let them eat cake” ideologues can be serious about
this approach since all objective studies confirm that the negative impact
on the health of nation would be catastrophic.

Those who are serious about trying to address the unmet health care needs of
the nation are supporting expansion of our current fragmented system of
funding care, especially providing incentives to expand private health care
coverage. But these two reports add to the plethora of studies confirming
that private plans no longer protect individuals against catastrophic
financial losses, nor do they ensure adequate access to essential care.

We will attain our goals of comprehensive coverage for everyone only when we
address the real problems facing us. We must eliminate the $300 billion
waste in administrative excesses. We must provide incentives for a strong
primary care base which has been shown to improve quality while decreasing
costs. We must budget capital improvements to prevent the excess high-tech
capacity which results in much higher costs but with unimproved or even
detrimental outcomes. We’ll never be able to make these essential changes
until we establish a universal risk pool from which funds can be allocated
on a rational basis.

We don’t need more of the flawed coverage provided by private plans. We need
single-payer national health insurance. Nothing less will work.

(Please share this message with others. Thanks.)
Don McCanne

By Milt Freudenheim
The New York Times
September 25, 2004

The Bush administration has broken new ground in its “faith-based” initiative, this time by offering federal employees a Catholic health plan that specifically excludes payment for contraceptives, abortion, sterilization and artificial insemination.

The new plan, announced last week, combines two White House priorities. It is part of a $1 billion project seeking to involve religious organizations in all types of federal social programs. At the same time, the plan is a new form of coverage – a health savings account combined with high-deductible coverage – that is being promoted as a centerpiece of President Bush’s health care policy.

…the new OSF health savings account plan will not cover contraceptives. But because the money in the savings account itself is controlled by the enrolled member, the member could use the account to pay for an abortion or for contraceptives, according to federal officials.

Kay Coles James, the director of the Office of Personnel Management (which manages the Federal Employee Health Benefits Plan, the nation’s largest purchaser of health insurance), said last week that the new additions to federal employees’ health benefits would “empower” workers to control their medical spending.

But some critics expressed concern that this trend in health care might grow into a wider phenomenon. Is this “explicit denial” the first step in “denying federal employees a normal benefit that has been traditional for 30 years?” asked Philip R. Lee, a professor of social medicine at the University of California, San Francisco and a former assistant secretary for health in the Clinton administration. “Is this simply the opening wedge?”

http://www.nytimes.com/2004/09/25/business/25care.html

Comment:
Today’s comments will not address the controversial issue of health plan coverage of reproductive services, other than to dismiss that issue with a restatement of our belief that we need a universal system that covers all beneficial services. Setting aside the issue of faith-based coverage, there is another extremely crucial health policy issue in this new FEHBP plan.

Much has already been said about the inadequacies of health savings accounts(HSAs) for those with major acute or chronic disorders. For these individuals, the HSAs would be rapidly depleted, and then the individual would be dependent on the high deductible plan that complements the HSA. We’ve already seen that these plans are not indemnity plans that cover all additional expenses, but they are managed care PPO plans with significant out-of-pocket expenses, restricted provider choices, and severe financial penalties for using non-contracted providers. But what is alarming is that the supporters of this version of consumer-directed health care (CDHC) call for increasing options in coverage. Why pay for services that you will not use? Parenthetically, this was Gov. Schwarzenegger’s message this week when he vetoed the bill requiring California health plans to include maternity benefits.

The FEHBP program has required plans to provide a minimum level of benefits. This new plan breaks ground by shifting the coverage for reproductive services from the high deductible plan to the individual’s own HSA. Very soon we can anticipate that patient-consumers will be further empowered by being offered a greater variety of high deductible plans with even lower premiums made possible by excluding benefits which they know or at least they hope that they will never need.

This is part of the agenda to break up all risk pools, whether public or private, and shift the responsibility of funding health care delivery in the United States. Instead of funding care in an equitable manner from a common pool based on solidarity shared with our fellow man, health care will become ever more the responsibility of the individual. The 20% of individuals who use 80% of all health care will find that the exclusions that made their premiums affordable will make their access to health care unaffordable.

Are we really a society that believes that we should cut the anchor ropes for those unfortunate enough to have significant medical needs and simply allow them to drift off into the seas of ill health, poverty, despair, and even death?

By John A. Nyman
Health Affairs
September/October 2004

Excerpts:

Insurers call the change in behavior that occurs when a person becomes insured “moral hazard.” Moral hazard occurs, for example, when an insured person spends an extra day in the hospital or purchases some procedure that he or she would not otherwise have purchased. Insurers originally viewed moral hazard unfavorably because it often meant that they paid out more in benefits than expected when setting premiums – hence the negative term.

Economists also viewed moral hazard negatively because, under the conventional theory, the additional health care spending generated by insurance represents a welfare loss to society. When people become insured, insurance pays for their care. In economists’ view, insurance is reducing the price of care to zero. When the price is reduced in this way, consumers purchase more health care than they would have purchased at the normal market prices-this is the moral hazard. But because consumers purchase care when the price drops to zero that they would not have purchased at the market price, economists interpret this behavior as revealing that the value of this care to consumers is less than the market price. The additional care, however, is still costly to produce. The difference between the high cost of the resources devoted to producing this care (reflected in the high market price) and its low apparent value to insured consumers (reflected in the low insurance price) represents an inefficiency. Thus, health care spending increases with insurance, but the value of this care is less than its cost, generating an inefficiency that economists call the “moral-hazard welfare loss.”

Conventional insurance theory also provided the policy solution: Impose coinsurance payments and deductibles to increase the price of medical care to insured consumers and reduce these inefficient expenditures. In the 1970s many insurers adopted copayments to reduce health care spending. In the 1980s and 1990s economists also promoted utilization review and capitated payments to providers as further ways to reduce moral hazard. The managed health care system we have now is largely a product of this theory.

A fundamental ambiguity exists, however, in the welfare implications of moral hazard, which economists have, perhaps, always suspected but could never voice because they did not have the appropriate theory to explain it. That is, conventional theory makes sense for health care such as cosmetic surgery or drugs to improve sexual functioning or designer-style prescription sunglasses, but not for serious treatments such as coronary bypass operations or organ transplants. Clearly, insured people would purchase more of all these procedures than would uninsured people, so they would all be considered moral hazard to insurers.

Mark Pauly, one of the architects of the conventional insurance theory, recognized this ambiguity as early as 1983. He pointed out that his original theory of moral-hazard welfare loss was intended to apply only to “routine physician’s visits, prescriptions, dental care, and the like” and that “the relevant theory, empirical evidence and policy analysis for moral hazard in the case of serious illness has not been developed. This is one of the most serious omissions in the current literature.” This distinction, however, has been lost on most health economists. For example, health economics textbook writers continue to present moral hazard as being unambiguously welfare decreasing, and health policy analysts continue to use the conventional theory in developing their recommendations for optimal cost-sharing rates, managed care programs, and other policies designed to curb U.S. health care costs.

If insurers actually transferred income to an ill person in one lump-sum payment, the welfare implications of moral hazard would be unambiguous.

Health insurance policies, however, generally pay off by paying for the ill person’s care. The welfare ambiguity arises because of this payoff mechanism. …we cannot tell whether this additional moral-hazard spending represents a welfare loss or a welfare gain.

…there is some unknown portion of patients who would respond to insurance paying for their care in exactly the same way that they would respond to insurance paying them a cashier’s check for the same amount. For these patients, moral hazard is efficient and represents a welfare gain.

Implications For Policy

Cost sharing often not appropriate: Because some of the moral hazard that was considered a welfare loss under the conventional theory must now be reclassified as a welfare gain, health insurance under the new theory is generally much more valuable to consumers than economists have thought it was. Many of the more serious procedures – organ transplants; trauma care; many cancer treatments;and, indeed, a large portion of the costly, life-saving medical care that people could only afford to purchase with insurance – would now be tallied in a welfare gain column instead of a welfare loss column when determining the value of insurance. Because such a large portion of moral hazard spending represents a welfare gain, the recategorization of losses as gains dramatically changes the welfare calculations.

The new theory suggests that cost-sharing policies have been directed at problems that largely do not exist. Furthermore, it suggests instead that coinsurance is too blunt a policy instrument and that it should be refined to focus only on the inefficient moral hazard. Moral hazard that generates welfare gains should be left alone or even encouraged. That is, for those with serious illnesses, whose care might also be associated with a great deal of pain and suffering anyway, it makes little sense to apply copayments.

Subsidizing insurance premiums is beneficial: The new theory suggests that health insurance generally makes the consumer better off. Therefore, the subsidies that encourage consumers to purchase insurance voluntarily, or a national health insurance program for the entire U.S. population, would improve society’s welfare.

High prices are harmful: …under conventional theory, high health care prices are not bad. Indeed, a few economists have even argued that high prices should be encouraged because they reduce moral hazard. …according to conventional theory, any reduction of moral hazard is a welfare gain. Under the new theory, the high prices that providers charge because they have market power would again be considered harmful. With the new theory… economists would be able to revert to the standard analysis that monopoly pricing causes an undesirable reduction in use, even for the insured.

More than anything else, the new theory suggests that health insurance provides an economywide redistribution of income from those who remain healthy to those who become ill. Those who become ill use this income either to cover the costs of health care that they would otherwise purchase, or to purchase more care, often care that they would not be able to afford without insurance. Those who remain healthy simply pay into the system, but they do so voluntarily because everyone has a chance of becoming ill. Because people value the additional income they receive from insurance when they become ill more than they value the income they lose when they pay a premium and remain healthy, and because everyone has in theory an equal chance of becoming ill, this national redistribution of income from the healthy to the ill is efficient and increases the welfare of society. Thus, the new theory identifies efficiency as a new justification for adopting some form of national health insurance.

http://content.healthaffairs.org/cgi/content/abstract/23/5/194

Comment: Although steeped in the rhetoric of health policy economists, the concepts presented are fundamental to the health care reform movement. It is imperative that we have a solid grasp of the issues.

The decades old Rand studies are still frequently cited to show that cost sharing through deductibles, copayments and coinsurance is effective in reducing health care costs. Cost sharing has been widely adopted in response to concerns about rising health care costs. Some features of managed care were designed to further reduce utilization of health care services. Largely ignored has been the well documented fact that this reduction included a reduction in the utilization of truly beneficial services. Avoiding the “moral hazard” has proven to be too blunt of a cost containment tool, even though it is still widely supported.

Today, the consumer-directed health care (CDHC) movement expands on that concept. The supporters of CDHC and health savings accounts (HSAs) contend that the moral hazard is eliminated because individuals will not spend funds on care that they perceive to have a value less than its cost. A major flaw in this concept is that individuals with major acute or chronic problems would rapidly deplete their funds. CDHC supporters state that catastrophic coverage would then provide an umbrella to cover the losses. But these plans are high deductible, managed care PPO plans which provide protection that is about as effective as a sieve. Coverage under these plans has already proven to be inadequate to protect against significant financial loss or even bankruptcy. Again, this tool is too blunt because it prevents the delivery of welfare-increasing health care.

There are other mechanisms to reduce ineffective, welfare-reducing care that are much more precisely targeted. Pricing can be improved through negotiation with providers which takes into consideration legitimate costs and fair profits. Excess capacity which results in higher spending without a commensurate improvement in outcomes can be controlled through planning and budgeting of capital improvements. Physicians who inappropriately upcode or who provide an excessive frequency or intensity of services can be identified as outliers and provided with education opportunities or subjected to punitive measures if refractory to the educational process.

Global budgeting can slow the expansion of health care services down to levels closer to inflation and growth of the GDP. The $1.8 trillion that we are spending should be sufficient to ensure that there is adequate capacity in our system to meet our needs for beneficial services.

John Nyman has provided us with an invaluable contribution to the health policy literature. As he says, “There is a new argument for national health insurance: efficiency.”

By John A. Nyman
Health Affairs
September/October 2004

Excerpts:

Insurers call the change in behavior that occurs when a person becomes insured “moral hazard.” Moral hazard occurs, for example, when an insured person spends an extra day in the hospital or purchases some procedure that he or she would not otherwise have purchased. Insurers originally viewed moral hazard unfavorably because it often meant that they paid out more in benefits than expected when setting premiums – hence the negative term.

Economists also viewed moral hazard negatively because, under the conventional theory, the additional health care spending generated by insurance represents a welfare loss to society. When people become insured, insurance pays for their care. In economists’ view, insurance is reducing the price of care to zero. When the price is reduced in this way, consumers purchase more health care than they would have purchased at the normal market prices-this is the moral hazard. But because consumers purchase care when the price drops to zero that they would not have purchased at the market price, economists interpret this behavior as revealing that the value of this care to consumers is less than the market price. The additional care, however, is still costly to produce. The difference between the high cost of the resources devoted to producing this care (reflected in the high market price) and its low apparent value to insured consumers (reflected in the low insurance price) represents an inefficiency. Thus, health care spending increases with insurance, but the value of this care is less than its cost, generating an inefficiency that economists call the “moral-hazard welfare loss.”

Conventional insurance theory also provided the policy solution: Impose coinsurance payments and deductibles to increase the price of medical care to insured consumers and reduce these inefficient expenditures. In the 1970s many insurers adopted copayments to reduce health care spending. In the 1980s and 1990s economists also promoted utilization review and capitated payments to providers as further ways to reduce moral hazard. The managed health care system we have now is largely a product of this theory.

A fundamental ambiguity exists, however, in the welfare implications of moral hazard, which economists have, perhaps, always suspected but could never voice because they did not have the appropriate theory to explain it. That is, conventional theory makes sense for health care such as cosmetic surgery or drugs to improve sexual functioning or designer-style prescription sunglasses, but not for serious treatments such as coronary bypass operations or organ transplants. Clearly, insured people would purchase more of all these procedures than would uninsured people, so they would all be considered moral hazard to insurers.

Mark Pauly, one of the architects of the conventional insurance theory, recognized this ambiguity as early as 1983. He pointed out that his original theory of moral-hazard welfare loss was intended to apply only to “routine physician’s visits, prescriptions, dental care, and the like” and that “the relevant theory, empirical evidence and policy analysis for moral hazard in the case of serious illness has not been developed. This is one of the most serious omissions in the current literature.” This distinction, however, has been lost on most health economists. For example, health economics textbook writers continue to present moral hazard as being unambiguously welfare decreasing, and health policy analysts continue to use the conventional theory in developing their recommendations for optimal cost-sharing rates, managed care programs, and other policies designed to curb U.S. health care costs.

If insurers actually transferred income to an ill person in one lump-sum payment, the welfare implications of moral hazard would be unambiguous.

Health insurance policies, however, generally pay off by paying for the ill person’s care. The welfare ambiguity arises because of this payoff mechanism. …we cannot tell whether this additional moral-hazard spending represents a welfare loss or a welfare gain.

…there is some unknown portion of patients who would respond to insurance paying for their care in exactly the same way that they would respond to insurance paying them a cashier’s check for the same amount. For these patients, moral hazard is efficient and represents a welfare gain.

Implications For Policy

Cost sharing often not appropriate: Because some of the moral hazard that was considered a welfare loss under the conventional theory must now be reclassified as a welfare gain, health insurance under the new theory is generally much more valuable to consumers than economists have thought it was. Many of the more serious procedures – organ transplants; trauma care; many cancer treatments;and, indeed, a large portion of the costly, life-saving medical care that people could only afford to purchase with insurance – would now be tallied in a welfare gain column instead of a welfare loss column when determining the value of insurance. Because such a large portion of moral hazard spending represents a welfare gain, the recategorization of losses as gains dramatically changes the welfare calculations.

The new theory suggests that cost-sharing policies have been directed at problems that largely do not exist. Furthermore, it suggests instead that coinsurance is too blunt a policy instrument and that it should be refined to focus only on the inefficient moral hazard. Moral hazard that generates welfare gains should be left alone or even encouraged. That is, for those with serious illnesses, whose care might also be associated with a great deal of pain and suffering anyway, it makes little sense to apply copayments.

Subsidizing insurance premiums is beneficial: The new theory suggests that health insurance generally makes the consumer better off. Therefore, the subsidies that encourage consumers to purchase insurance voluntarily, or a national health insurance program for the entire U.S. population, would improve society’s welfare.

High prices are harmful: …under conventional theory, high health care prices are not bad. Indeed, a few economists have even argued that high prices should be encouraged because they reduce moral hazard. …according to conventional theory, any reduction of moral hazard is a welfare gain. Under the new theory, the high prices that providers charge because they have market power would again be considered harmful. With the new theory… economists would be able to revert to the standard analysis that monopoly pricing causes an undesirable reduction in use, even for the insured.

More than anything else, the new theory suggests that health insurance provides an economywide redistribution of income from those who remain healthy to those who become ill. Those who become ill use this income either to cover the costs of health care that they would otherwise purchase, or to purchase more care, often care that they would not be able to afford without insurance. Those who remain healthy simply pay into the system, but they do so voluntarily because everyone has a chance of becoming ill. Because people value the additional income they receive from insurance when they become ill more than they value the income they lose when they pay a premium and remain healthy, and because everyone has in theory an equal chance of becoming ill, this national redistribution of income from the healthy to the ill is efficient and increases the welfare of society. Thus, the new theory identifies efficiency as a new justification for adopting some form of national health insurance.

http://content.healthaffairs.org/cgi/content/abstract/23/5/194

Comment: Although steeped in the rhetoric of health policy economists, the concepts presented are fundamental to the health care reform movement. It is imperative that we have a solid grasp of the issues.

The decades old Rand studies are still frequently cited to show that cost sharing through deductibles, copayments and coinsurance is effective in reducing health care costs. Cost sharing has been widely adopted in response to concerns about rising health care costs. Some features of managed care were designed to further reduce utilization of health care services. Largely ignored has been the well documented fact that this reduction included a reduction in the utilization of truly beneficial services. Avoiding the “moral hazard” has proven to be too blunt of a cost containment tool, even though it is still widely supported.

Today, the consumer-directed health care (CDHC) movement expands on that concept. The supporters of CDHC and health savings accounts (HSAs) contend that the moral hazard is eliminated because individuals will not spend funds on care that they perceive to have a value less than its cost. A major flaw in this concept is that individuals with major acute or chronic problems would rapidly deplete their funds. CDHC supporters state that catastrophic coverage would then provide an umbrella to cover the losses. But these plans are high deductible, managed care PPO plans which provide protection that is about as effective as a sieve. Coverage under these plans has already proven to be inadequate to protect against significant financial loss or even bankruptcy. Again, this tool is too blunt because it prevents the delivery of welfare-increasing health care.

There are other mechanisms to reduce ineffective, welfare-reducing care that are much more precisely targeted. Pricing can be improved through negotiation with providers which takes into consideration legitimate costs and fair profits. Excess capacity which results in higher spending without a commensurate improvement in outcomes can be controlled through planning and budgeting of capital improvements. Physicians who inappropriately upcode or who provide an excessive frequency or intensity of services can be identified as outliers and provided with education opportunities or subjected to punitive measures if refractory to the educational process.

Global budgeting can slow the expansion of health care services down to levels closer to inflation and growth of the GDP. The $1.8 trillion that we are spending should be sufficient to ensure that there is adequate capacity in our system to meet our needs for beneficial services.

John Nyman has provided us with an invaluable contribution to the health policy literature. As he says, “There is a new argument for national health insurance: efficiency.”