Sunday, July 29, 2012

HSA + HDHC Flunks the Test

When analyzing different health care policies, one must look at the way that the policy plays out with people with moderate to severe health conditions.

Insurance salesmen love to concentrate on single catastrophic events. For that matter, people have a deep fear of catastrophe; however, when I worked in insurance I quickly realized that the chronic conditions were both the most costly and hardest to handle.

It turns out that many catastrophic conditions lead to a chronic condition. In many cases the chronic condition resulting from a catastrophe costs more than the original catastrophe.

If you broke your back, the long term cost of dealing with a bad back is higher than the first surgery.

If you have an HSA+HDHC policy with a $3000 deductible and your chronic condition requires $5,000 each year; you are stuck having to pay out the full deductible each year plus the cost of the insurance.

When you have a chronic condition, you really aren't in a position to negotiate down the deductible. Once you have a chronic condition of a known cost, you are in a high risk pool. Trying to negotiate down your deductible is intellectually dishonest because the insurance company will have to pay a dollar for every dollar of reduced deductible.

So, the HSA+HDHC increases the cost that people with a moderate chronic condition must pay for health care because a person with a disease like diabetes simply must spend money on care every year.

An HSA+HDHC policy is regressive.

It is true that, if a low income worker has an HSA+HDHC policy and never has a moment of sickness in his life, the worker would make out better than with low deductible insurance. If a person has normal or higher than average medical expenses it does not work out so well.

Let's compare the experience of a person who makes $12,000 a year to a person making $120,000 a year. So, let's say the deductible was $3,000. The deductible is 2.5% of the income of the person making $120,000/year. The key feature of the HSA is the tax deduction. Our high income worker is smart to put the $3,100 in a "Health Savings Account" to get the maximum deduction.

As for the low income worker, $3k is 25% of his total yearly $12k paycheck. The tax deduction ain't worth bug squat because the marginal worker pays no taxes. The worker would be stupid to put money in a tax free health savings account.

Try living on $12K a year, the poor guy probably isn't going to be able to put any money aside to pay for the deductible and will be in a terrible crunch if health care problems occur. The working poor with high deductible insurance feel locked out of the system.

In our next thought experiment, imagine the bossman comes into the shop and says that, "to lower our health care expenses, we are going to raise your deductible from $300 to $3000, but to make it up to you we will give you all $500 that you can put in a Health Savings Account."

With this plan, the people in the shop who have health conditions will lose $2,700 in the deductible increase. A person with a chronic condition just lost $2,700 a year for life. Everyone else gets just a token pay increase that fails to cover the deductible.

The switch from a low deductible to high deductible leaves people feeling insecure and put upon with the people who have chronic health conditions complaining to the heavens.

The workers in the company will simply see the HSA+HDHC policy as a cheap attempt to cut costs in a manner that hurts the most vulnerable in the group.

I read the reviews of Health Savings Accounts coupled with high deductible insurance. People in the upper middle class praise the idea because they get a tax deduction. The working poor stress the deductible and see it having a negative effect on people with health conditions, and complain about the idea.

I suspect that if you analyzed HSA+HDHC policies over a large population base, you will find that the policy is regressive. This structure transfers wealth from the poor to the rich.

Please note, I am not a big fan of redistributing income. But the whole point of a Health Care policy is to transfer resources from the healthy to those in need. If a plan is not doing that, then it is best to get rid of the plan.

Simply tacking a Health Savings Account to high deductible insurance does not play out that well among the working poor.

I am a big fan of self-funded health care. If we want to use savings accounts, we need to form a health care system, from the ground up, around the savings accounts, which is what I did in the Medical Savings and Loan. This program removes insurance from the equation. Each person gets a pile of money in a savings account and access to a loan reserve. People with an unusually high ratio of health expenses to income will have access to grants.

The most important issue when judging a health policy is if the policy actually reduces costs.

Yes, it is true that low income workers with high deductible insurance will skip preventative and routine care. Skipping preventative care does not save all that much money. It just means people suffering from things they could have prevented.

The really big cost overruns in health care happen with the big expenses. High deductible insurance might encourage people to skimp on small items, but the abuse will continue on big items and might even grow.

Hospitals are notorious for creative billing. Imagine a patient with a $3,000 deductible who had an incident costing $3,333. Both the patient and doctor know that the patient was put upon to pay the $3k deductible. With that deductible paid, the inclination is to just load the bill with everything.

Care Providers are keenly aware of whose paying the bill, and most clinics are not above playing games where they shift costs to deep pockets.

A system with an HSA and high deductible insurance fails the three most important tasks: The program does not cut costs. The program does not handle chronic conditions well and the program is unnecessarily regressive.

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