It is no secret that health costs have spiraled out of control for years to the point that it has become a significant drain on the country’s economy, not to mention individual pocket books. Every constituency has their own theory. Doctors blame insurance companies, insurance companies blame lawyers, liberals blame the profit motive, and so forth. Amongst the din of special interests one group is worth listening to: economists. Economists for years have attacked the very structure of medical care which provides very little financial reward for leading healthy lives and too little incentive for individuals being judicious with medical spending. The threat of a $10 co-pay hanging over someone just isn’t going to deter a morbidly obese smoker from ondering one more 1,400 calorie “Monster” from Hardees.

One would hope that people would be deterred from destructive personal behaviors by non-financial factors alone, but with the majority of the country eating and smoking themselves to death that doesn’t seem to be the case. A great analogy can be drawn from the relationship between driving behaviors and auto insurance. Drive dangerously (e.g., accidents and tickets) and auto insurance rates skyrocket. How many people are primarily motivated to slow down in a school zone to avoid an insurance-increasing tickets as opposed to slowing down simply to avoid imperilling children? The result of the relationship of personal behavior and personal cost is that we have generally safer driving and less accidents thereby reducing the overall social cost. (For the record, we do not want to hold up auto insurance as a model of efficiency, but compared to our health system it certainly is.)

This personal behavior versus costs relationship is well-documented by economists who have long advocated modifying the medical system. It’s also common sense, which in our special interest world is its downfall. The fact that a system of holding people personal accountable for their behaviors (good or bad) might help the vast majority and lead to significant overall social benefits doesn’t matter if those opposing change can find someone, anyone, who will be worse off under the new system.

So how to you incorporate individual decision making into the health care behemoth? One small step is with HSA’s (Health Savings Accounts) under which individuals (who choose to opt into the system) pay for the majority of their own doctor/hospital bills. Why is this good? Because in exchange for being responsible for the first (say $5000 of family medical expenses) , they get two significant benefits. First, the monthly rate drops significantly (by more than 50% in most cases) and second by the fact that most medical costs can be paid with pretax dollars (essentially making day-to-day medical costs tax deductible). This makes available for a typical family anywhere from $2,000-5,000 per year for medical expenses. If they spend more than this, the medical insurance kicks in as it would any normal policy. If they spend less, they’re ahead (unlike with a typical policy whereby spending less would have much less if any benefit for them).

For the self-employed, it should be a no-brainer. For the employed, it depends on how their employer sets it up. Are HSA’s a panacea for our health care woes? Of course not. Do they help? Absolutely.

This entry was posted on Sunday, January 23rd, 2005 at 9:06 pm by Insider and is filed under Brilliant, but uncategorizable. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.