The Blog

I'm Not Going to Pay
a Lot for This MRI

Navigating the Brave New World of consumer-directed health care.

12:00 AM, Jun 15, 2007 • By MICHAEL F. CANNON
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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.