Aligning the Incentives of Patients and Insurers

A cause of increasing health care costs is the three-player game between patients, providers, and insurers. Patients interact with providers at the time of service, deciding which service to provide. Insurers interact with providers after the service has been performed to supply payment. Patients interact with insurers regularly to pay premiums. Thus, patients do not accurately feel the costs of the services they receive, so high costs of services are no deterrent to patients. Providers can then increase costs with no impact on quantity demanded, resulting in consistent increasing health care costs. Health Savings Accounts are a solution that alter incentives to lower costs.

Health Savings Accounts are based on the idea that individuals prefer not to spend their money. This natural aversion to high costs is a tool that can be harnessed to significantly drop healthcare spending costs; at least that’s the assumption behind the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which created health savings accounts.

Health Savings Accounts (HSAs) are, like traditional IRAs, individual accounts that are owned and controlled by the patient (HSAs are similar to FSAs and HRAs, see the table here). Each year, individuals are allowed to contribute a certain amount to their HSA, and the funds “roll-over” so they can add to the account over time. Here is a good comic strip tutorial of the HSA basics. The money in the HSA is used for a wide range of health services, and HSAs are beneficial because they require that the patient decide how to use the funds should a medical need arise. HSAs incentivize individuals to both save their money and select cost efficient medical services.

When many patients select cost efficient care, providers are led to compete over prices, significantly reducing the cost of care without impacting the quality. HSAs also face reduced tax rates, allowing people to get more for their money when they pay for health care with HSAs.

A problem with HSAs is the inability of individuals to save their money while they are healthy for when they get sick. Here is an outside-the-box solution which has worked in other saving situations: tap into individuals’ desire to win large amounts of money for very little work to create a health savings account that balloons faster and larger than current rates. A different way to look at the solution is to think of health savings accounts as a vehicle for a lottery system, where people add funds to their HSA, and for every bit they enter, a small percentage is entered into a community pot to be given to a random grand prize winner. This idea capitalizes on the huge amount of money Americans spend on the lottery each year. This is a win-win situation: people get the chance to win a lot of money and they keep their contributions to their HSAs.

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