Reviving Managed Care With Health Savings Accounts

Disruptive innovation: the demand side

The notion of disruptive innovation provides a welcome framework for considering the prospects for low-cost alternatives in American medicine. Such innovations as have been seen, however, are largely the result of demand by patients paying their own bills because they have high-deductible coverage or are uninsured. Many other cost-saving innovations are discouraged by financing systems that are themselves largely immune to competition from disruptive innovators.

Health Spending Projections Through 2015: Changes On The Horizon

Growth in national health spending is projected to slow in 2005 to 7.4 percent, from a peak of 9.1 percent in 2002. Private health insurance premiums are projected to slow to 6.6 percent in 2005, with a rebound expected in 2007. The introduction of Medicare Part D drug coverage in 2006 produces a dramatic shift in spending across payers but has little net effect on aggregate spending growth. Health spending is expected to consistently outpace gross domestic product (GDP) over the coming decade, accounting for 20 percent of GDP by 2015.

Which way for competition? None of the above

Despite growing documentation that the conditions needed to support competition in health care do not exist, consumer-directed health care has been offered as the new market-based solution to cost inflation. Yet typical consumer-based insurance products undermine the very logic of expecting consumers to make good health care decisions by making preventive services--the category of services about which consumers are best able to make informed decisions using their own money--exempt from cost sharing. Consumer-directed care threatens important societal values--in particular, the goal of establishing relationships between patients and clinical professionals based on trust.

The role of state regulation in consumer-driven health care

In December of 2003 the Medicare Modernization Act (MMA) added section 223 to the Internal Revenue Code, creating a federal tax subsidy for money contributed to (and earnings accumulated on) health savings accounts, or HSAs. Though public attention was largely focused at that time on the provisions of the MMA creating the new Medicare prescription drug benefit, the MMA was also a major victory for advocates of “consumer-driven health care” who believe that HSAs have the potential to control the cost and improve the quality of health care in the United States, and perhaps even to increase health care access.

Consumer-driven health care advocates believe that the key reason health care costs are out of control in the United States is that most Americans are too generously insured. They believe the solution is to increase consumer sensitivity to cost and effectiveness by making people spend their own money for health care.