High-Deductible Health Plans

An article in yesterday’s New York Times discusses the composition and relative merits of high-deductible health plans, which are most often paired with George Bush's favorite cost-containment vehicle, the Health Savings Account. Despite the bitter taste in my mouth when I think about our former president (blech!), I think that high-deductible health insurance plans do have some merit.

First, let's ask ourselves what the point of insurance is. Sounds obvious, but health insurance has metamorphosed into a creature nothing like life insurance or car insurance. In the latter, you pay a premium and if something happens, you first pay a deductible and then, for catastrophic accidents, you get full coverage. Interestingly, having this deductible actually promotes health, sorry car, maintenance activities. After all, you'd rather shell out 20 bucks for an oil change than the 500 dollars for a new transmission down the road - not to mention your car runs smoother in the meantime. Health insurance should really function the same way: you pay premiums and if something really horrible happens, you get totally covered after you surpass the deductible. The way most traditional plans work now, you continue to pay a percentage of costs when your bone marrow transplant costs $1 million, which is why healthcare debt is the leading cause of bankruptcy in the country. Because they cover such unlikely events, high-deductible plans can afford to have cheaper premiums since they make more money on the front end than they lose on the back end.

High deductible plans are meant to reduce the effects of “moral hazard,” which is the notion that people will use more of a good if they are shielded from the costs of consumption. As has been described on these pages, Americans are voracious consumers of healthcare, so perhaps exposing consumers to some of the costs, while not thoroughly penalizing them if something untoward happens, might reduce spending. Alas, health is not like car maintenance, and people have little insight into how health promoting activities may lead to lower financial (not to mention emotional and physical) costs down the road. Because health is so opaque for consumers, they might be willing to defer that colonoscopy if it means they have to shell out $1000 dollars. Furthermore, many of the benefits of health promoting activities wouldn’t accrue to the health plans, but probably to Medicare. Insurance companies, therefore, have no incentive to subsidize “good” behavior now if the beneficiary is the government 20 years from now.

So, this is where the Health Savings account fits in. High-deductible plans paired with HSA's benefit consumers because a) it's a pre-tax contribution and b) employers will often chip in the first $500 to $1000 dollars, and c) HSAs are portable and you never lose what you put in. The HSA is intended to offset the moral hazard problem with high-deductible plans - again, that irrational consumers will avoid costly health promoting activities like skin checks if they have to pay any proportion of that out-of-pocket. Contributing to the HSA is purely voluntary, though, and I suspect those who are trying to save money aren't likely to build a battle-chest of money in case they get sick.

From a pure economics standpoint, these plans make sense. For them to work for everyone, though, I think policy makers have to force insurers to provide basic stuff like checkups, Pap smears, mammograms, etc. for very low or even free prices.