The Power of Incentives

           My wife and I have a “high-deductible” health plan.  And we credit this type of plan for saving us money on healthcare expenses.  “Why”, you ask?  Because incentives matter.

Here’s how it works.  In January of each year, United Healthcare deposits $2,400 into our health savings account.  We may use the funds for any medical-related expenditure, including some qualifying dental expenses.  As an additional benefit, we aren’t required to establish a primary care physician and then waste time and money searching for referrals.  Instead we may visit the specialist of our choice without the hassle of first asking for permission. 

Costs for office visits and procedures are paid directly out of our HSA account.  And filing is similar to other kinds of insurance.  We just hand the doctor our insurance card and the funds are deducted from our account.  We can save money by using in-network doctors, but we can also venture out if we want.  Sure, we’ll pay a little more, but the choice is ours, and we believe more choice is good.

Now, here’s the best feature: any unused funds from the prior year are automatically carried forward into the next year – up to a maximum of $10,000 per family.  This allows us to “save” up for an emergency.  The ability to roll over unused funds also creates a neat incentive – it makes us smarter consumers of our healthcare dollars.  We routinely shop around and are quick to question doctors about procedures. And our efforts pay off.  Our dermatologist sent tissue samples to two different labs.  One lab charged $495 and the other $125 – for the same tests! With a regular health plan, there is exactly zero incentive (once the small co-pay has been paid) to forego any additional test, procedure, or lab work because the cost to do so is hidden.

Americans overspend on healthcare because we don’t know how much we're spending.  While this may sound crazy, it follows the economic axiom that people tend to over-consume when not faced with the full cost of consumption.  With traditional insurance coverage, most costs over and above the co-pay are paid directly by the insurance company, not the consumer.  This “third party” payer system has had the unintended consequence of masking the true cost of healthcare.  When friends ask about how much a particular procedure costs, we simply respond that it was covered by insurance.  And since we don’t know how much something costs, we can’t really know if we should forego its purchase.  We’ve abandoned one of the most essential elements of free market economics: the price system. 

The price system works because we respond to incentives.  Absent this remarkable feature of the market system, our ability to weigh tradeoffs is severely diminished.   Our so-called solution has been to shift this responsibility to third parties like insurance companies.  But this is problematic.  We routinely complain and lament insurance companies for denying claims.  On the other hand, insurance firm owners probably complain that their customers are routinely trying to abuse their services by constantly ordering wasteful tests and unneeded procedures.  And this awful arrangement will continue as long as we as health consumers are denied access to prices.

Consumer-driven high-deductible health plans save money because they capitalize on the economic theory that people are more cautious when spending their own money.  Insurance plans that allow consumers to accumulate unused healthcare dollars for future healthcare expenditures create additional incentives for healthcare consumers to comparison shop.  This would help create true healthcare competition – something that is badly needed. 

Obamacare does little to advance this money-saving potential.  In fact, Obamacare discourages high-deductible plans in favor of more traditional insurance arrangements.  This is unfortunate and almost guarantees that we’ll continue to spend ever more on healthcare while denying folks the opportunity to be in control of their healthcare choices and dollars.