Health Savings Accounts (HSAs) quickly became a dominant part of employer-sponsored health care after they were authorized in 2003 when President George W. Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act.
A key advocate behind this reform was health policy analyst John Goodman, who famously drew a diagram of a tax-advantaged medical savings plan for the then Speaker of the House in the early 1990s. Ways and Means Committee Bill Archer. Goodman also explained the concept in his book Empowering the Patient: Solving America’s Healthcare Crisis (Cato Institute, 1992), which planned to allow people to voluntarily contribute pre-tax dollars to savings or investment funds, then withdraw that money tax-free to pay for current or future medical bills.
Today, Goodman is president and chief executive officer of the Dallas-based Goodman Institute for Public Policy Research.
The summer 2023 issue of HR magazineand, celebrating the 75th anniversary of the Society for Human Resource Management, will include Goodman’s reflections on the creation and subsequent growth of HSAs. In the questions and answers below, SHRM online asked Goodman to curb health care costs and other challenges facing employer-sponsored plans.
SHRM online: What factors are driving innovations in health care delivery and reducing costs for employees and employers?
John Goodman: The problem behind the spiraling health care costs is that most people never see the real price for health care. One of the key ideas behind HSAs, and one that has only been partially implemented, has been to create incentives for people to ask about the cost of non-emergency care and thus select high-quality, competitively priced doctors and facilities.
Almost all innovations in healthcare delivery have occurred outside the third-party payer [insurance] system. Walk-in clinics exist now because people spend their money on needed care in a timely manner and what they don’t spend they can keep in their accounts, so they directly benefit from cost considerations when they can.
Online pharmacies were born to compete with local pharmacies on prices. Telehealth wasn’t initially covered by third-party insurers, but innovative companies realized that people needed to talk to a doctor and get fast service, and they started filling that need.
Over time, third-party payers have adapted and started covering these new care delivery options, but the innovations have come about because of the patient [spending] power.
SHRM online: So is it about fostering market competition?
Good man: Right now, healthcare providers aren’t competing on price or quality. Our hospitals are able to compete for patients on both, and that’s what they do when patients come from Canada and other countries for treatment and they get a budgeted price. We need to make our hospitals do it for the patients who live next door.
In Dallas, where I live, there are probably 40 or 50 hospitals in the metroplex, and when I asked a large insurer, they said they covered them all. Well, if you have a health plan that covers every single hospital in your geographic area, you’re not making any distinction as to which hospitals are efficient, or cost more or less, or provide higher or lower quality. No wonder the healthcare system is so inefficient.
If you look at the employer plans, they have free [to the employee] checkups and primary care, but if you go to the hospital, you pay thousands of dollars. This is the opposite of how a health plan should work. The incentives [for selecting high-quality, cost-competitive care] they have been distorted.
SHRM online: Should high-deductible health plans (HDHP) be able to cover more types of care outside the plan deductible?
Good man: Treatment of chronic diseases, such as diabetes, is where the majority of spending occurs in our healthcare system. Originally, the HSA was not designed for the chronically ill, which is why it had a high deductible requirement. In 2019, the IRS allowed HDHPs to cover maintenance medications for chronic conditions at no cost to patients without violating high-deductible requirements. It was an important step in enabling these accounts to meet the needs of the chronically ill, but we need to go further to encourage employees to stick to their doctors’ prescribed medication regimens to avoid costly trips to the emergency room.
SHRM online: This raises the question of how insurance pays for prescription drugs. How can employers address drug cost issues?
Good man: One of the most important things to do [regarding] drugs is to make sure chronic [disease] patients are taking them because it’s the most convenient form of therapy there is. You do this by making generic drugs free or by making them available at a nominal cost, which is a very smart thing to do.
In many employer plans, it is more expensive to buy prescription drugs through the plan than if employees ask the pharmacy to charge them outside the plan and then use a coupon service like GoodRx or if they buy their drugs directly from a discount outlet like Mark Cuban Cost Plus Drug Company. Well, that’s crazy, and employers are fools when they get caught in that kind of trap. Their plans are supposed to allow members to enjoy discounted prices.
SHRM online: What else are employers doing wrong with their plans?
Good man: They are not aggressive with their pricing strategy, especially when their health coverage is self-funded, and they can more easily adopt referral-based pricing.
There was a wonderful experiment in California with Anthem Blue Cross, the preferred supplier organization for state employees under CalPERS [the agency that manages pension and health benefits for more than 1.5 million California public employees]. CalPERS placed a $30,000 cap on how much it would pay for hip or knee replacements, telling members they could get joint replacements anywhere they wanted, but the health plan would only pay $30,000 for each surgery.
Within two years, it was hard to find a hospital in the state of California that would charge more than $30,000 for a joint replacement. It had a dramatic effect on the market very quickly. Employers should do this everywhere.
SHRM online: How do financial incentives for employees fit into this scenario?
Good man: If an employer says it will pay only $30,000 for a hip replacement, but members select a joint surgery center of excellence that charges only $28,000, then members should keep the $2,000; should not go back to the employer. If employers want employee buy-in, employees must earn.
The same goes for medical tourism as an employee benefit. For example, some employers offer to fly to the Cayman Islands [for standardized procedures such as joint replacements], where there is an excellent health center, the price of surgery is well below what it costs in the United States and the quality is very good. The mistake employers make is not allowing the employee to keep the savings, perhaps they will just waive the deductible. The employee should get most of the savings from the trip.
SHRM online: Any final thoughts on improving health care accounts?
Good man: Today, there are three healthcare spending accounts: HSAs, Healthcare Reimbursement Arrangements (HRAs), and Flexible Spending Accounts (FSAs). Together, there are about 80 million accounts, almost all of them in the employer’s workspace, and about half of the employees in our economy have some type of account.
But confusingly, the rules are completely different between these accounts. We need an easy-to-use account that can renew from year to year and allow people to keep money they don’t spend on health care, like with HSAs. There should be no high deductible requirement, so the account can be associated with any third-party insurance, such as with HRA and FSA, and financing should be permitted by employees or employers, such as with HSA and FSA. In other words, take the pros of each of the three and get rid of their cons.
Stephen Miller, CEBS, is a former compensation and benefits editor for SHRM online.