HSA's work

Posted: Jun 13, 2005 12:00 AM

How many times have you heard that health care costs are rising at record rates? Well, they aren't any more.

 The Bureau of Labor Statistics reports that health care costs rose 7.5 percent in 2004, well under the 11.4 percent rise in 2002. The BLS also reports that costs for employers for health insurance per employee per hour worked has slowed down even more. From March 2001 to March 2002, it rose 11 perecnt; from March 2002 to March 2004, it rose 9 percent each year. But from March 2004 to December 2004, it rose only 3 percent.

 Something is going on out there. Politicians and political commentators always assume that government must do something new and different if health care costs are to be held down to bearable increases. But the evidence is that health care costs are being held down, by the workings of the marketplace, partly in response to health care legislation passed in the last four years.

 One thing that is going on is that employers are offering and employees are choosing health savings accounts and high-deductible health insurance in greater numbers. HSAs were given a big boost in the Medicare prescription drug bill passed in November 2003; indeed that was the reason that most Republicans voted for a bill that also included the biggest new entitlement program since Medicare was passed in 1965.

 HSAs seem to be gaining in popularity. A survey by Watson Wyatt and the National Business Group on Health found that 8 percent of employers are offering health savings accounts in 2005, and 18 percent plan to offer them in 2006. Large majorities of employers believe that HSAs will help lower overall health care costs and that they will expand options for employees.

 The number of people covered by HSAs and high-deductible insurance policies increased from 438,000 in September 2004 to 1,031,000 in March 2005. Nearly half of these are people over 40 -- though some predicted that such policies would not be attractive to them.

 One thing that HSAs and high-deductible health insurance help do is to make employees more cost-conscious when it comes to health care decisions. HSAs allow employees to keep money they don't spend on health care this year and to roll it over to next year, and on and on -- therefore, there is an incentive not to fritter it away. High-deductible health insurance operates the same way high-deductible auto insurance does: It does not pay for the equivalent of your oil change but does pay you when your car is totaled.

 For many years, the World War II decision to make health insurance coverage tax-deductible for employers and non-taxable to employees has driven health insurance to a different model, one that pays for virtually every procedure but in a surprising number of cases does not cover catastrophic costs. But increasingly that makes no sense.

 As Wall Street Journal columnist Holman Jenkins points out, the tax subsidy to employees, while worth a lot to high-income earners, is worth very little to those whose income tax liability is low or, as in the case of Earned Income Tax Credit recipients, nonexistent. To them, it is hardly worthwhile to pay an insurance company to process their claims for predictable items like annual checkups and routine pediatric care, yet to be left with a policy that, to hold down employers' costs, doesn't provide catastrophic coverage.

 The other interesting development is the emergence of health insurance policies that encourage healthy behavior. Health care experts note that the increasing incidence of diabetes and other obesity-related diseases threatens to hugely increase health care costs in future years.

 Old-style health insurance policies provide no incentive to behaviors that tend to reduce the incidence of such disease. In a previous column, I looked at one company that provides such policies, including health club membership for employees. These policies may provide a long-term answer to problems that health care analysts of all political stripes are concerned about.

 The overriding assumption in much commentary on health care finance is that individuals and companies are helpless automata waiting for government action before anything can be done anything about health care costs. But recent developments suggest that, in fact, employers and employees are active players, and that provisions of recent legislation that were not much noticed by the commentariat have enabled them to take action that reduces costs and provides increased benefits and incentives for healthier behavior.

 We have problems, yes, but we are not helpless.