For a long time, I have believed the greatest potential for Health Savings Accounts (HSAs) is in the treatment of chronic illness. I even wrote some fictional vignettes in a “vision” chapter in the National Center for Policy Analysis’ Handbook On State Health Care Reform, describing how HSAs might work for diabetics and other patients. This was an application of a more general piece on “Designing Ideal Health Insurance” that many of you might be familiar with.

Turns out, truth is stranger than fiction. UnitedHealthcare is now using HSAs and health reimbursement arrangements (HRAs) to do something that almost never happens: aligning health incentives with economic incentives.

For diabetics, the program works like this. Deductibles and copayments are reduced to zero for four classes of medications, certain supplies and some office visits. Patients are further prodded by an online tracking and reminder system. And this is just the beginning. Patients who comply with their treatment regimes are rewarded with an additional contribution to their health account of up to $1,000 a year.

Here is my take:

1. Patients get an economic reward for doing things that have an economic payoff for the insurance pool as a whole. Let’s say the insurer/employer expects to save $500 in medical costs if a diabetic patient is fully compliant. Then it makes sense to pay up to $500 to induce such compliance.

2. The mirror image of a reward is a penalty. Since failure to be compliant means the patient forgoes the $500 reward, $500 is the opportunity cost of noncompliance.

3. One way to think about this arrangement is to see that there is a social cost of noncompliance over and above the personal costs. The social cost is the cost that is imposed on others. In making choices, therefore, patients are encouraged to consider the total cost of their actions, not just the personal costs.

4. There are other decisions patients make that do not have large spillover effects for the insurance pool as a whole. For these decisions, it makes sense to have the patient manage his/her own health care dollars. In doing so, patients will tend to weigh personal cost against personal benefits. That is appropriate.

5. No employee is forced to participate in the program. However, there are two kinds of rewards for doing so (and implied penalties for not doing so): (a) a flat fee of as much as $500 for answering a health questionnaire and for undergoing screening tests, and (b) the prospect of zero out-of-pocket expense for some drugs, supplies and office visits. Presumably, these rewards reflect the value to the insurance pool as a whole to induce screening and enrollment.

Two general comments on the program:

1. The incentives here are not as finely aligned as I imagine they could be. Among other things, every diabetic gets the same financial deal, even though expected costs must surely vary a lot from patient to patient. Still, you have to give UnitedHealth credit for a major advance in getting the economics of health care right.

2. Because of the rigidities of the HSA law, employees can have a zero deductible for some drugs but not others. Statins and beta blockers are okay (because they are considered “preventive” drugs), but insulin and antiglycemics are not okay (because they are considered “maintenance” drugs). This is one more reason to change the law and give the private sector a completely flexible account.

A news story description of how this program works for Affinia and other companies is here.

Postscript: Is this the first time you have ever seen ideal chronic care described in terms of getting the economic incentives right for all the actors at all the margins? If you know of someone else who has done this, please send me the source. Thanks.

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