Nate was helping me limp off the soccer field, bearing the weight that would otherwise fall on my rapidly swelling knee.
“At least we know you didn’t tear your ACL,” he said, referring to my anterior cruciate ligament.
“How do we know that?” I asked.
“Because I tore my ACL once,” he said. “Believe me, if you had torn yours, you would have done a lot more screaming and crying.”
The ACL runs from the shin bone to the thigh bone. It keeps your knee from dislocating when you turn or pivot - unless you turn or pivot too hard. As many aging athletes can attest, ACL damage is among the more common sports injuries. Put too much sideways pressure on your knee joint, and your ACL will tear. Which is exactly what happened to mine.
So much for Nate’s diagnostic skills.
There was nothing pleasant about tearing my ACL or having it surgically reconstructed. But there were a few silver linings. The first has to do with Nate, who foolishly admitted to me that when he tore his ACL, he screamed and cried more than I did. When I got the diagnosis, he was the first person I called. It’s not every day you get to tell a 6’ 5”, 225-pound former Marine that he’s a big sissy.
Another silver lining was that I finally got to use my health savings account. As a health economist, I have spent years arguing that this new type of health plan, also known as an “HSA,” would make health insurance more affordable by giving patients an incentive to eliminate unnecessary medical expenditures. When Congress finally made HSAs available in 2004, I was one of the first to get one. But I’ve always been pretty healthy, so I never got a chance to use it. Until now.
HSAs are a far cry from HMOs. If I had an HMO, I might have gone straight from the soccer field to the emergency room, where they would have taken an X-ray and an MRI, referred me to an orthopedic surgeon, and maybe given me something for the pain.
Importantly, I probably would not have asked whether the ER trip, the X-ray, or the MRI were worth the cost, because I would have been responsible for only a small portion of those costs. According to the Kaiser Family Foundation, the average HMO deductible for family coverage is about $750. (Simply setting foot in an ER can cost more than that.) Co-pays for generic drugs average $11, and most people with HMO coverage pay less than $20 for a physician visit. Oftentimes, patients face no deductibles or co-payments at all.
That kind of insensitivity to price leads patients to consume a lot more medical care - including a lot of medical care that doesn’t do them any good. Thirty years ago, an enormous and well-respected study (the RAND Health Insurance Experiment) randomly assigned thousands of people with all sorts of health problems to different health plans with varying coinsurance levels. Unsurprisingly, researchers found that the less patients had to pay out-of-pocket, the more medical care they consumed. Patients who paid nothing out-of-pocket - for whom healthcare was effectively “free” - consumed 43 percent more than those with a deductible of a few thousand dollars.
More surprising was that, overall, the additional care produced no better health outcomes. A lot of the added expenditures were simply wasted on low- and zero-value care.
America’s dysfunctional healthcare system seems to be conducting a similar experiment over time. Back in 1965, patients paid, on average, 44 percent of their medical care out-of-pocket. Since then, that share has fallen to 14 percent. In other words, for every dollar of healthcare a patient receives, on average the patient pays only 14 cents from their own wallet.
The results have been predictable. Patients demand more low-value medical care, they file more health insurance claims, and year after year, health insurance premiums rise faster than family incomes.
That’s where HSAs come in. HSAs resemble the “high-deductible” insurance from the RAND experiment - where patients purchased less medical care but ended up just as healthy. High-deductible insurance has always been available, but few Americans choose it because of an odd tax quirk.
Under the federal tax code, employer-provided health insurance isn’t taxed - but any money you save for your out-of-pocket medical expenses is taxed. That provides a huge incentive to increase the share of medical expenses purchased through insurance, and reduce the share that patients purchase directly. That incentive is a big reason why out-of-pocket spending has fallen as a share of total private health spending.
The HSAs’ big innovation was to give the money you save for your out-of-pocket expenses the same tax-free status as employer-provided insurance, thereby eliminating the bias against high-deductible insurance. Actually, it’s kind of a no-brainer. No wonder it took Congress 60 years to do it.
So if you have HSA coverage, you can put money tax-free into a “health savings account” to cover your routine medical expenses. But you also have a health insurance policy with a deductible of $1,100 or more, which pays for any catastrophic medical bills.
The important part is that the money in your HSA belongs to you. It remains yours even if you change jobs or change health insurance. That gives you a big incentive to spend the money wisely, because whatever you don’t spend rolls over from year to year and grows, tax-free. You can spend the money on future medical expenses without ever paying taxes on it. Or you can use it for other things. The tax rules are the same as for an IRA: withdrawals are taxed as income, with an additional penalty that goes away at age 65.
Of course, HSAs are controversial. Despite the evidence from the RAND experiment, some fear that if patients are more cost-conscious, they will skimp on needed medical care.
With my HSA, a $2,500 deductible, and a swollen knee, I was about to become part of this experiment. Would I make better decisions than if I were spending an HMO’s money? Or would I end up hurting myself by forgoing necessary care?
As my teammates kept playing, I sat on the sideline trying to figure out what to do next. Since I would be paying for my first $2,500 of medical expenses out of my HSA, I had to ask myself whether a trip to the emergency room was really necessary. I decided that the pain was bearable, so I skipped the ER and iced my knee until I was able to see my wife’s orthopedist.
The orthopedist recommended both an MRI and an X-ray. Since I would be paying for these items myself, I asked him whether both were necessary. According to one estimate, as many as 30 percent of such imaging tests are either unnecessary or the wrong type of test. He agreed that the X-ray probably wasn’t necessary, so I skipped it.
As for the MRI, I was aware that they can be quite expensive. So I appreciated it when my orthopedist offered to intervene on my behalf if I thought his radiologist over-charged me.
Most patients don’t even pay attention to the bizarre kabuki dance that goes on between the doctor’s bill and the insurance company’s “Explanation of Benefits.” They just look for the part that says, “You owe this much.” But since I knew I was paying for 100 percent of this MRI, I paid close attention to how much the radiologist charged me.
And over-charge me, he did. The radiologist initially billed me $1,500, though my insurance company’s “negotiated discount” brought the price down to $1,380. But even that seemed steep compared to an imaging center near my house, where, I discovered, they charge cash-paying patients just $600 per knee.
Here’s a dirty little secret: the amount that healthcare providers initially charge isn’t the actual price so much as the sticker price. According to a recent study, hospitals charge cash-paying patients two-and-a-half times what insurance companies ultimately pay, because insurance companies demand discounts. Savvy patients demand discounts too, and frequently get them. Unfortunately, many cash-paying patients aren’t insistent, and end up getting gouged.
Knowing all that, I wasn’t intimidated by the radiologist’s sticker price. Nor was I particularly impressed with my insurance company’s negotiating skills. So I started negotiating on my own behalf.
When I explained that I would be paying cash, the radiologist’s billing agency lowered the price again, to about $1,000. Finally, seven months after my MRI, we settled on a price of $700. That’s a 53 percent discount from the sticker price - and more than six times the discount negotiated by my insurance company.
The woman I negotiated with has handled this radiologist’s billing for the last 20 years. She told me that if - God forbid - I ever need another MRI, I should just walk up to the front desk and demand a 50 percent discount. I think of it as the George Foreman approach to price negotiations: I’m not going to pay a lot for this MRI.
Skipping the ER and an X-ray; haggling with the radiologist - spending my own money made me behave differently than if I were spending an HMO’s money. Since ACL damage is such a common injury, it makes me wonder how many people unnecessarily use those services - or pay too much for them - each year.
That kind of cost-consciousness is one way HSAs can make health coverage more affordable. My cost-consciousness kept my expenses down, which kept me from filing claims with my insurance, which helps keep my health insurance premiums (and those of my coworkers) from rising. That may be one reason why, according to Deloitte Consulting, premiums for HSA-qualified high-deductible insurance have grown at less than half the rate of premiums for traditional insurance. The online insurance broker eHealthInsurance.com reports that in some cases, those premiums actually fall from one year to the next.
But what if my cost-consciousness led me astray? What if I had broken a bone, which only an X-ray would detect? By forgoing an X-ray, wouldn’t I just be setting myself up for even greater costs down the road?
As it turns out, I hadn’t broken any bones. What the RAND experiment showed to be true in the aggregate was also true in my case: making me cost-conscious didn’t hurt my health. People aren’t perfect, but they appear to make pretty good decisions when spending their own money on healthcare.
One reason for that may be that cost-consciousness encourages patients to use information that they would otherwise ignore. When my knee dislocated, I heard a tear, not a crack - which suggested soft tissue damage, but no broken bones. The only reason I used that information to rule out an X-ray was because I had a financial incentive to avoid unnecessary spending. Without that financial incentive, I would have ignored that information, submitted to the X-ray, and pushed my insurance premiums upward - all for absolutely zero health benefit.
HSAs will not cure everything that’s wrong with America’s healthcare sector. But my HSA plan did get me more engaged in my healthcare decisions, in a way that benefited me directly, and that helped make health insurance a little more affordable for others. With enough savvy, cost-conscious patients behaving that way, HSAs might actually force down the prices of individual healthcare services, as well.
As if that sense of optimism wasn’t silver lining enough, I did manage to find one more: all the informal healthcare I received from the other person covered under my HSA plan. It was my wife who picked me up from that soccer game, who drove me home from surgery, and who patiently endured the screaming and crying that Nate would never see.
HSAs are worth a look. But a good wife is the best insurance policy.