The future of health care in America is threatened by the trend of steadily increasing health spending. Costs in the health care market have increased at about double the rate of inflation for decades. If the trend continues, individuals and employers will struggle to afford coverage and Medicare and Medicaid will face fiscal unsustainability. There are many contributing causes to this trend, but one of the most commonly accepted culprits is the prominence of employer-sponsored insurance.
Employer-sponsored insurance has become the norm in the U.S. health market. Because of anti-profiteering wage controls during World War II, firms began offering generous health benefits to compete for the best employees. In 1954, Congress passed a formal tax exclusion for any health benefits or care provided by employers. Since individually purchased health plans do not enjoy the same tax-exempt status, the employer model was almost immediately cemented as the preferred mode of insurance coverage. Over the years, most firms have made a habit of giving more generous health benefits because they are cheaper than traditional “raises”.
Generous coverage plans create the phenomenon known as moral hazard which further drives up prices. Basically, if an individual pays into a premium pool, but is not liable for any out-of-pocket costs such as co-pays, they have the incentive to spend as much as possible at the doctor’s office without regard for the true costs. During the booming economies of the 50s, 60s, and 90s, companies were able to pay for those benefits and still continue to make profits. However in today’s sluggish economy, premium rates for employers have become huge business expenses that threaten even the most productive companies. Therefore, companies are looking for new ways to cut health spending by enrolling in innovative health plans.
One company looking to save on health benefits is Imagine Learning Inc. in Provo, Utah. Founded in 2002, it is a rapidly growing software developer with over 200 employees. Since the per capita spending on health care in Utah has climbed past $5,000, Imagine Learning executives began encouraging employees to switch to a new form of health coverage: High Deductible Health Plan with a Health Savings Account (HDHP/HSA). The high deductible plan means that up to a certain dollar amount of coverage, say $3000, the employee is liable for all health spending (including doctors appointments, vaccinations, minor treatments, etc.). Anything that costs more than $3000 (any catastrophic health needs) is covered by the traditional insurance pool. This fixes the problem of moral hazard, since individuals must now take the cost of care into consideration when seeking medical help, but it also drastically lowers premiums from the traditional plan.
The challenge with HDHPs is that individuals feel like they are getting a bad deal because they have to pay more out of pocket. Therefore, most of these high deductible plans are coupled with a health savings account. Let’s say Imagine Learning was paying $500 per month on a traditional premium, but the employee decides to switch to an HDHP, and the new premium is only $100. The company can incentivize them into that plan by offering to put the $400 difference into the HSA. The employees can then use the money in those accounts (which can roll over from year to year) to pay for the out-of-pocket expenses less than $3000. Essentially, all the employer has done is transfer the money from the risk pool into individual pools, where employees will use it more selectively. From a business perspective, the company has successfully slowed the constantly inflating costs of care, and the employees have gained an account that they can keep into the future for health needs when they are older. It’s an innovative solution from the private market that will help tackle the growing weight of health spending in America.