Obama Should Stop Taking Credit: Health Savings Accounts Are Driving Down Costs
This column by ACRU General Counsel Peter Ferrara was published on January 21, 2014 on the Forbes website.
In his economic address at the Washington Navy Yard on September 16, President Obama bragged that “Health care costs are growing at the slowest rate in 50 years,” and attributed that to his Affordable Care Act, “which has helped to keep down the rise in health care costs to their lowest level in 50 years,” he claimed. He reiterated that in his press conference on November 14. His chief economist Jason Furman echoed that line in arguing that Obamacare is slowing health inflation in the Wall Street Journal on January 7.
But Obamacare has just gone into effect this year, almost a decade after that slowdown in health costs first appeared, as shown in the chart below.
By contrast, Health Savings Accounts (HSAs) were enacted into law in 2003, which is when the slowdown in health costs began. Mr. Obama was still in the Illinois state legislature at that time. Participation in HSAs has been growing at double digits every year since then.
HSA accounts grew by 22% in 2012, with total HSA assets soaring by 27% to nearly $15.5 billion. Over 15 million Americans were estimated to be covered by HSAs at the start of 2013, with close to 30 million overall covered by Consumer Directed Health Plans, which include the similar Health Reimbursement Accounts (HRAs) more commonly offered by large employers. HSA assets were projected to grow another 22% in 2013, totaling close to $27 billion.
Along with the rise of these Consumer Directed Health Plans, national health spending growth declined, slowing to 3.9% each year from 2009 to 2011, and 3.6% for 2012, almost two-thirds slower than a decade ago. That is the slowest rate of increase since the 1960s (which was the last time the government role in health care exploded).
But all that Obamacare, passed in 2010, did during that time, with one exception, was contribute to increased health costs — providing risk pool insurance to the uninsurable (a desirable solution to the plight of the uninsurable), forcing private plans to cover more benefits, and adding such extras to Medicare as free “wellness exams” and closing the drug prescription “donut hole.” More serious people expect Obamacare to increase health costs in future years. Medicare’s actuaries project that ObamaCare will add $625 billion to total health care spending over the next decade. The RAND Corporation predicts that ObamaCare will increase health insurance costs by almost $2,000 per family by 2016.
The one exception is the beginning of the $716 billion in Medicare cuts adopted by Obamacare. Furman emphasizes the reduction in health spending in Medicare, saying that it involves reduced “overpayments” to providers (doctors and hospitals). But the Medicare actuaries say that as a result of the Obamacare Medicare cuts, ultimately Medicare payment rates to doctors and hospitals will be one-third of what is paid by private insurance and only half of what is paid by Medicaid. The actuaries further explain, “the large reductions in Medicare payment rates to physicians would likely have serious implications for beneficiary access to care; utilization, intensity and quality of services; and other factors.”
The Medicare actuaries further add that the Obamacare Medicare cuts would result in “negative total facility margins” for about 40% of hospitals, skilled nursing facilities, and home health agencies by 2050. The actuaries explain, “In practice, providers could not sustain continuing negative margins [total losses] and, absent legislative changes, would have to withdraw from providing services to Medicare beneficiaries.” Timothy Jost, Law Professor at Washington and Lee University, writes in the New England Journal of Medicine, “If the gap between private and Medicare rates continues to grow, health care providers may well abandon Medicare.”
Is this what President Obama and the Democrats mean when they say that Obamacare is reducing health inflation? In 2012, the Obama campaign denied that there were any such cuts to Medicare in Obamacare.
In fact, the Medicare actuaries believe that these Medicare cuts will have such severely negative impacts on health care for seniors that Congress will be forced to reverse them, sharply increasing deficits. They write, “It is reasonable to expect that Congress will legislatively override or otherwise modify the reductions in the future to ensure that Medicare beneficiaries continue to have access to health care services.”
HSAs are designed to reduce the growth in health costs by giving patients more power and control over their own health care, and market incentives to reduce those costs. HSAs include catastrophic health insurance with a high deductible, in the range of $2,000 to $6,000 a year or more. The premium savings due to that high deductible, as compared to more traditional, first dollar coverage insurance, would be saved in the HSA, and used to pay for health expenses below the deductible. The catastrophic health insurance pays for health costs above the deductible. The patient keeps any remaining funds in the HSA each year for future health care expenses, or to spend on anything in retirement.
This framework creates full market incentives to control costs for all non-catastrophic health care expenses, because the patient is effectively using his or her own money to pay for them. Since the patient is now concerned about costs, doctors and hospitals will compete to control costs.
After one healthy year, the insured typically has more than enough in the HSA to pay for all expenses below the deductible. Moreover, patients with HSAs enjoy complete control over how to spend their HSA funds. They don’t need to ask for approval from an insurance company to spend their HSA funds on whatever health care they want.
HSAs can be advantageous for vulnerable populations, particularly the sick and the poor. Because they have complete control over their HSA funds, the sick become empowered consumers in the medical marketplace. Because they can pay for care themselves out of their HSA account, the poor have ready access to a wide range of providers (unlike in Medicaid today).
HSAs and their incentives have proven very effective in controlling costs in the real world. Total HSA costs have run about 25 percent less than costs for traditional health insurance with much lower deductibles. Annual cost increases for HSA/high-deductible plans have run more than 50 percent less than conventional health care coverage, sometimes with zero premium increases. A 2012 Rand Corporation study found that those covered by HSAs spend 21% less on average on health care in the first year after switching from more traditional coverage. Rand estimated that national health costs would fall by nearly $60 billion if half of all workers were covered by HSAs.
Consumer-driven health plans probably now exceed enrollment in managed care Health Maintenance Organizations. The 2013 annual Kaiser Family Foundation survey reported that one fifth of all workers are now enrolled in HSA-type plans, up from 8% in 2008.
So many people are paying with their own money now it is changing the supply side of the market. Nationally, 1300 walk in clinics post their prices and provide timely care. Free standing emergency care clinics have now arisen to complement them. The first mail order prescription drug organization, RX.com, is also driven by cash patients saving time and money. Walmart now offers $4 generic drugs financed by cash not costly insurance. Doc In The Box consultations by phone and email also serve primarily cash patients.
I began work in 1981 developing and promoting the concept of HSAs with John Goodman, President of the Dallas-based National Center for Policy Analysis (NCPA), who is recognized as the intellectual godfather of HSAs. Such HSAs can and should be extended throughout the whole health care marketplace. Those on Medicare can and should be given the freedom to choose HSAs for their Medicare coverage. Those on Medicaid can and should be given the freedom to choose HSAs for their Medicaid coverage. Workers with employer provided coverage can and should be given the freedom to choose HSAs instead.
Add in new freedom for health insurers to sell their health insurance nationally, in competition across state lines, and tort reform to control runaway medical liability costs, and you would have a complete solution to rapidly growing health costs.
Furman, who seems to specialize in “political” economy, compounds his misconception, claiming that the reduced health costs that Obamacare is supposedly causing will create hundreds of thousands of jobs. But Obamacare has already proven to be a job killer in the real world, as 77% of jobs created in the first seven months of 2013 were part time, since part time jobs avoid the Obamacare employer mandate.
Moreover, Obamacare is not even achieving its original goal of expanding insurance coverage, let alone reducing health costs. The Wall Street Journal reported on Friday that, “Only 11% of consumers who bought new coverage under the law were previously uninsured, according to a McKinsey & Co. survey….” That is not going to offset the millions who are losing health insurance coverage due to Obamacare.
Mr. President, stop trying to take credit for the success of our HSA innovation.