John Locke Update / Research Brief

Why Paying Out Of Pocket For Health Care Is A Good Thing

posted on in Health Care, Health Care & Human Services
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Why Paying Out of Pocket For Healthcare is a Good Thing

Americans aren’t thrilled with the fact that health care costs continue to eat away at their overall take-home pay. For those who have insurance through their jobs, deductibles have risen by an average 12 percent in 2016, or six times faster than wages. For those who don’t have employer-sponsored health insurance, maximum out of pocket spending amounts to $6,000 for individual policyholders and upwards of $13,000 for families before their insurance company picks up the tab.

Why is health care so expensive? One reason is that Americans have little sense of what their care actually costs.

Patients aren’t the true customers of health care, insurance companies are. Insurance carriers are the ones that are buying services from hospitals, physicians, medical equipment providers, and other professionals in the field.

Sure, patients who have insurance are subject to co-pays and co-insurance. However, the lack of consumer control and the pervasiveness of government price controls over health care services and health insurance is what keep high health care costs alive and well.

Some members of Congress are trying to make health care more like other sectors of the economy; that is, having patients (consumers) control how they spend their health care dollars – even for big ticket items. Consumer power drives market competition. It spurs innovation, and it pushes businesses to appeal to those shopping for their goods and services.

So, how can there be more of this in health care?

It can start by expanding health savings accounts (HSAs). HSAs under current law let consumers under the age of 65 build up savings for certain medical expenses, all tax-free. The Health Savings Account Expansion Act, sponsored by US Senator Jeff Flake (R-Ariz) and Congressman Dave Brat (R-VA), would do the following:

  • Triple current HSA contribution limits to $9,000 for individuals and $18,000 for families.
  • Link HSAs with any type of health plan. Today, HSAs can only be linked with high-deductible health plans – defined as plans with a minimum deductible amount of $1,300 for an individual and $2,600 for a family.
  • Pay health insurance premiums with HSA funds.
  • Pay Direct Primary Care (DPC) membership fees with HSA funds.*

The Flake-Brat bill capitalizes on a health reform proposal developed in 2008 by Michael Cannon, director of health policy studies at the Cato Institute. You can watch the video archive of the Capitol Hill briefing on the legislation here.

Cannon’s alternative takes large HSAs even further by recommending that employers cash out the amount of tax-advantaged health benefits they offer their workers and deposit this lump sum into a worker’s HSA; this would free over 150 million American workers from being tied to their employer’s plans. (According to Kaiser Family Foundation, 83 percent of firms offer one health plan option, 13 percent offer two, and 3 percent offer three or more). These workers will have a choice to use those funds to pay for their job’s health plan, or shop for other options in the non-group market. They can allocate how much to save (self-insure) and spend on either a health insurance product or health services directly out of pocket.

People who don’t receive health insurance through their jobs would receive the same tax advantages. Cannon explains:

Large HSA contributions would be excludable from income and payroll taxes just like employer-paid premiums are. Individuals can get the same income-tax break with a deduction. But there’s currently no way for individuals to get the payroll-tax exclusion (or equivalent thereof) on their own. They need an employer who can do the payroll-tax exclusion for them. So I have proposed creating a non-refundable tax credit that the worker would receive when she files her federal individual income taxes, and that would provide the exact tax break that the payroll-tax exclusion would provide. That way, those with and without ESI would get both an individual-income tax exclusion (or equivalent thereof) and a payroll-tax exclusion (or equivalent thereof). Totally level playing field.

Because patients will have more control on how to spend or save their health care dollars, health care suppliers will be motivated to chase them as possible “new” customers. In time, the health care sector could transform into one that is ripe with transparent pricing accompanied by falling prices. Price transparency is a rare find in health care nowadays, but where it does exist, basic needs and even elective surgery aren’t always expensive when paid for directly by patients.

*Direct Primary Care (DPC) is one example. In exchange for a monthly fee of around $50, patients have access to a basic package of health care services. Some practices also offer labs and meds to their patients at wholesale cost. You can get a cholesterol lab for as low as $5, a complete blood count for $3, a urine culture for $7. That monthly fee also includes the value-added benefit of having unlimited access to your primary care physician.

Because direct primary care is treated outside of insurance, these docs are no longer working for their old customers – insurance companies. They are instead motivated to work for their “new” customers’ patient satisfaction. The Flake-Brat bill would also allow DPC patients to pay their membership fees with their large HSA funds. There are 20 practices and counting in North Carolina.

The Surgery Center of Oklahoma is another operation that prides itself on price transparency. No matter a patient’s health status or age, elective surgeries are all priced the same. An ACL reconstruction costs under $7,000. A tonsillectomy costs $3,050. All of these costs include the facility fee, surgeon’s fee, and anesthesia when paid for out of pocket.

Should large health savings accounts ever pass into law, patients will begin to realize that a majority of primary care needs, procedures, and even some same-day surgeries can be paid for out of pocket. In his plan, Cannon further implies that people will then think differently about the way in which health plans are structured. Since their dollars are directly funding a good chunk of their health care needs, they’ll be attracted to insurance policies that resemble what an insurance policy ought to look like; one with low premiums that doesn’t include benefits that can typically be paid for out of pocket. They’ll opt for one that protects someone from being exposed to financial ruin in the event of an unforeseen medical catastrophe.

While the government would still maintain its role of determining what a qualified health plan is, large HSAs and the elimination of legal mandate to purchase health coverage provide patients with an opportunity to unravel today’s bloated and expensive system.

Cannon explains that, as power shifts to patients with large HSAs, there would be mounting political pressure to allow those patients to choose the exact coverage that meets their particular needs, rather than impose burdensome mandates on all.

If we turn our attention to North Carolina for a moment, the legislature has passed over 50 benefit mandates beginning in the 1970s. These may not necessarily be beneficial for all policyholders, but they are advantageous for special interests and medical providers who have successfully lobbied to get paid by insurance companies for certain services they provide.

People may balk at the idea of paying for preventative care out of pocket, especially since the Affordable Care Act requires all health plans to cover at least 15 preventative benefits that include screenings for blood pressure, cholesterol, depression, cancer, and diet counseling at no cost at the point of service. But why insure items that aren’t necessary to insure? This only makes health insurance more expensive. The subsidized, indirect cost of small ticket items takes away resources from covering large and unpredictable expenses insurance plans are meant to cover.

Large HSAs won’t solve all of the interwoven complexities rooted in our nation’s health care system, but they are a catalyst for people to realize that paying for more health care items out of pocket is a good thing.

Katherine Restrepo is the Director of Health Care Policy at the John Locke Foundation. Before joining the John Locke Foundation, she interned at the Cato Institute under the direction of Michael Cannon, Director of Health Policy Studies. Katherine’s… ...

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