A Better Alternative to High-Deductible Health Insurance

Nearly 60% of voters say out-of-pocket medical costs are among their most pressing financial worries. Yet Congress seems unwilling to heed that concern.

In the early days of the Affordable Care Act, some Democrats were worried about the effects of high deductibles in plans sold on the marketplace exchanges created by Obamacare. But MIT economist Jon Gruber (sometimes called the “father of Obamacare”) and other Obama White House advisers argued that high deductibles were needed to keep premiums low.

“Many people would rather have a lower premium and higher deductible than a high premium plan that covers everything,” Gruber said.

Since then, out-of-pocket costs under Obamacare have soared to levels even Gruber probably didn’t foresee. Last year, the average deductible in the most commonly selected Silver plan ($4,572) was twice as high as the average in employer plans ($1,787). And total exposure (deductibles, coinsurance, and copayments) has gone through the roof.

This year, an individual with Obamacare insurance faces a possible out-of-pocket cost of $10,600 and the exposure for families is twice that high. Next year, things will get worse. The possible out-of-pocket hit will rise to $12,000 for individuals and $24,000 for families! If the family has ongoing medical problems, they can face those costs each year.

What’s a better solution?

Health economics tells us there are two ways to insure for anything: self-insurance (with individuals taking the risks and saving to pay for them) and third-party insurance (in which an insurance company, an employer or the government bears the risk).

Self-insurance makes sense for risks over which we have more personal control. For example, just about every time you have needed a Band-Aid, it was probably for an event you could have easily avoided.

The problem is that most people are not accustomed to self-insuring for medical expenses. The median household has only $8,000 in a bank account, and millions of families are living paycheck to paycheck. The solution to that problem is a Health Savings Account.

A version of these accounts already exists, but here is how they could work much better.

First, insurers should be able to dole out any amount of money into an HSA, so long as the insured individual agrees to take full responsibility for an area of care. That might include all preventive care or all primary care, for example.

A model for this proposal is the Medicaid Cash and Counseling program, under which the homebound disabled can manage their own budgets, with the ability to hire and fire service providers. Properly managed, this 30-year-old program saves taxpayer money, improves the quality of care, and has patient satisfaction rates as high as 98%.

Second, in making the deposit, the insurer transfers to the individual full financial responsibility for that area of care. Whereas Obamacare requires insurers to cover certain essential benefits, we would let individuals assume responsibility for those benefits in return for a cash deposit.

These transfers should be completely voluntary. Under the current system, when people choose between self-insurance and third-party insurance, they do so amid artificially high prices created by regulation and perverse incentives.

Under this proposal, in short order, we would learn the free market price for getting people to self-insure for preventive care, primary care, routine pediatric care, chronic care management, etc. People could make their own decisions based on those market prices.

Third, under current law, people cannot have an HSA unless they have a high, across-the-board deductible. For insurer deposits, there would be no such requirement. There will always be a border between self-insurance and purchased insurance. The market should determine that boundary line.

Finally, the HSA accounts should be Roth-type accounts. At the end of the insurance period, withdrawals for non-healthcare purposes should be without taxes or penalties. This would give people the opportunity to choose between healthcare and non-healthcare on a level playing field.

The ideas described here can get us to a better system—especially for people who need medical care.