Friday, June 8, 2007

Business Week article on Health Savings Accounts

Business Week has an interesting article on Health Savings Accounts (HSA's), featuring the experience of an academic health economist who decided to change his traditional coverage into a combination of HSA's and catastrophic insurance:
Health Care You Control

One family finds that health savings accounts may be the smart choice

In the name of academic research, finance professor Stephen T. Parente got his physician wife to agree, reluctantly, to make a radical change in their family's medical coverage. The health-economics specialist who teaches at the University of Minnesota's Carlson School of Management had realized he knew a lot about health savings accounts (HSAs) as a scholar. But he had no experience with them as a consumer. So two years ago he enrolled himself and his family in a high-deductible insurance plan linked to a tax-sheltered HSA for medical expenses.

... The HSA contributions are made with pretax dollars. Withdrawals are tax-free as long as the money goes toward qualified medical expenses, which include everything from acupuncture to organ transplants to quit-smoking programs. The money is usually parked in a bank-like account, and beneficiaries of the plan receive a checkbook or debit card for paying bills. It's like a flexible spending account—except that with an FSA, you forfeit what's not spent in a calendar year while unused HSA money rolls over.

The idea behind the high-deductible/HSA plans is this: Catastrophic coverage prevents serious medical illness from financially crippling an individual or family. Patients, who will now have more financial skin in the game, spend their health-care dollars more carefully, putting downward pressure on health-cost inflation. "Besides doing research in the area, I liked the idea of having more control over our medical spending..."
And he found that the theory actually worked:
So what has he learned as a consumer? Just as with his previous insurance, he doesn't worry that medical bills will cause financial ruin. Once he exhausts his $5,000 deductible, his insurance kicks in and his family is protected against disaster. In addition, he is now fully covered for preventive care to encourage sound medical habits, a relief with three children, ages 2, 5, and 10. Such services includes immunizations and well-child care, as well as annual physicals and mammograms. Some 82% of high-deductible/HSA plans follow this practice, according to the Kaiser survey.

...The tax-sheltered savings account does have an impact on his health-care spending, he says, just as his scholarly work predicted. "When the account is your money, and when you get to keep it, you do act differently," he says.

He draws an analogy between this sort of health plan and auto insurance. If there's major damage to your car, you file a claim with your insurer to defray the cost of repair. But if you just have a cracked windshield or dent in a door, chances are you'll shop around for the best deal and pay out of pocket, rather than file a claim and risk getting a premium hike next year.

The same applies to your family's health care. If someone develops a major illness, the catastrophic insurance will cover the expenses. But if your child has strep throat, you can pay for the strep test and doctor's visit from your HSA. If Parente sticks with in-network doctors and laboratories, he pays the same rates insurers pay in other university health plans.
This market-based system provides quality care at an affordable price, without the drawbacks of the current employer-based system.