Monday, August 27, 2007

HSAs - Your FAQs

I received quite a bit of feedback from last week’s post about HSAs. I also had my first person post on my blog – In this post I have included a list of concerns by Craig Williams of Bartlesville, OK.

1) Who puts the money in the HSA? The employer more than likely if he is not providing traditional insurance and can now get a tax reduction for funding the HSA.

This is correct. Under my proposal HSA deposits would still be tax deductible so the employer would still have an incentive to fund them. Premiums would make up a much smaller amount of the costs so the employer does not need to control premiums costs as much by interfering. I still support an employer sponsored high deductible health care plans.

However, when you left that job you would be able to take all of your HSA funds with you. Let’s say you were able to save up $4,000 in your HSA during 8 years you worked for one firm, then they let you go. You could then buy a private $4,000 deductible plan, which should be fairly inexpensive, and you’ll be completely covered.

2) Who is affected the most by the one time funding? The catastrophic illness recipient. Their HSA money is quickly consumed and they are left with a huge deductible and co-pay.

I don't see the HSA as being a one time funding. I would support legislation that encourages monthly deposits (in place of monthly premiums).

This week, I e-mailed a gentleman who works as a Health Plan consultant for a national firm asking him to confirm some points of a presentation he gave while I worked at the same firm. If he ever e-mails me back then I will let you know if he confirmed what I recall from his presentation.

He said that he was working with a company that was considering dropping their HMO style insurance and asked for alternatives. What he was able to tell them was that the incentives under an HSA were so much better that the company could offer a health plan with a $1,000 deductible and deposit $1,000 in a corresponding HSA for no additional costs over their current HMO expenses. What that means is that the employee would not have any out of pocket medical expenses.

3) What happens to all the left over money? If they never use much of their HSA savings, who eventually gets that money? The government is the likely recipient as with the FSA left over funds today.

Let me first clarify first that left over FSA funds actually go to the employer, not to the government. Any money left over at the end of the year would roll over to the next. Younger people who don't spend much on health care would often be able to build up a significant account balance so that insurance becomes less and less necessary. I would also support allowing transfers into a retirement account once the balance reached a certain level (say $25,000). I would also support allowing people to make a full withdrawal at age 65.

4) A number of employers fully fund High Deductible insurance premiums already today. Many employees pay a premium to have the more traditional insurance above the portion their employer pays.

The existence of PPOs is not only a result of the tax incentives given to corporations. There is a market for PPOs outside of employer plans. If a person chooses to take on additional insurance, that is their choice. Let me be clear, I do not support banning HMOs and PPOs, only the tax incentives that encourage them.

5) High deductible insurance only helps the non-employer paid insurance workers by having cheaper premiums. They must still fund their own HSA out of pocket. They still run the risk of having a large debt if they have a catastrophic illness.

It is true that HSAs aren't the best plan for every person in every circumstance. I’ve read a good amount about the subject and brainstorm from time to time, but I haven’t figured out a perfect plan for every person. As soon as I figure out the perfect plan for health care please write your checks to “Friends of Brian Shelley for President”

6) Our Aetna PPO severely limits the price that a doctor, hospital, or lab can charge for services. Many times I have seen reductions of as much as 90%. Which means my employer as well as me saves money, because my company is self-insured and only uses Aetna to administer the policy.

I am not 100% familiar with how organizations administer group discounts, but I imagine that many doctors agree to them so that they get more patients. I don't see a logical reason why group discounts couldn't be coordinated through an employer after the switch to HSAs.

I probably haven’t answered every question or concern, so don’t shy away from putting in your two cents. Our health care system is very complex and coming up with a short and sweet answer is not very likely. I can see now why this why Bush had a hard time getting people excited about HSAs. The principles that I am trying to stick to are slowing the growth of health care costs and expanding individual control and freedom over personal health care protections.

Thursday, August 23, 2007

More Health Care Solutions

Today, the vast majority of Americans with health insurance receive it through their employer. The employer typically pays a large portion and the employee pays the rest in premium. The reason why the employer offers health insurance is that premium payments are not taxed, meaning the company can offer a slightly more generous compensation package than with just salary alone. Most companies offer either HMO or PPO coverage.

An HMO requires you to be part of a network of medical providers, and typically requires a referral before seeing a specialist. Doctor visits cost the employee a co-pay (normally $5 to $20). Hospital visits also charge a co-pay ($100 is common). Beyond the co-pay, there is a very high dollar maximum for charges in a year. However, the company controls costs by limiting services available and often limits doctors on the care they can give you.

A PPO encourages you to be part of a network by offering discounts. A PPO does not typically require a referral before seeing a specialist. An employee must incur enough medical cost to meet the deductible (usually a few hundred dollars) before the insurance company begins to cover costs. After meeting the deductible, the insurance company will typically pay between 70 and 90% of the medical expenses, up to an annual maximum, after which they pay 100%.

Imagine if you will, that your local grocery store offered families a flat $100/week fee for groceries and then $5 per visit, and the family could pick whatever they wanted. What do you think would happen? People would take home more groceries than normal and they would choose the highest quality food in the store. I personally would die of a coronary after 50 straight days of eating my body weight in meat and Blue Bell ice cream. Few would exercise self-control about the kind of foods and the amount. Why get one Hershey’s bar when you could get three Godiva ones? Why not buy the free-range-slept-on-a-satin-pillow-with-daily-massage-and-yoga-classes eggs that cost $25 a dozen? The extra cost to the family to pick up a few more items would be zero, but it would still cost the grocer. The store would quickly go out of business.

This scenario is called “Income Smoothing” and it creates terrible incentives. Income smoothing is exchanging a random stream of expenses for a smooth and level one, which is exactly what an HMO does. An HMO does not actually meet the technical definition of insurance. Insurance is a financial arrangement to mitigate the risk of an unforeseen event, whereas an HMO covers all medical events expected and unexpected. There are a few special arrangements such as futures and swaptions in the financial world where income smoothing works, but it would not work well for our grocery store and it does not work well for health care.

Under an HMO, you pay a flat monthly fee and then just a few dollars for every doctor visit. There is an incentive to go to the doctor too much because your costs do not equal the actual costs. There are times when I could see myself spending $5 on a doctor visit and $5 on a prescription, because I can barely buy a bottle of Tylenol for that amount. There aren’t as many times when I would spend the real costs of $100 on a doctor visit and $150 on a prescription. A PPO is not as bad, but once the deductible is met and the policyholder only pays 10 or 20% of the actual costs, the incentives can be as bad as under an HMO. The added demand these health plans create increases the price of health care services nationwide.

Some may wonder just how big a problem these bad incentives really are. If the design of HMOs and PPOs caused every American to go to the doctor and get a prescription just one more time than needed each year (assuming an average doctor’s visit is $50 and a prescription is $50) this adds up to $30 Billion in wasted resources.

The general problem with the system of HMOs and PPOs is that they separate the costs from the consumer. The solution, as I have mentioned before, is Health Savings Accounts (HSAs). If you do not spend all the money in your account, you get to keep it. Every dollar of health care you use you have to pay for. Charges are not pooled with everyone else in the plan like an HMO or PPO. This incentive helps people control their use of medical services.

When the government started giving tax deductions for employer sponsored health plans, we lost control of our own medical care. We fear quitting a job we dislike because we are afraid of losing health care coverage. Some spend health care dollars irresponsibly because someone else is picking up the tab. To keep costs down, employers and insurance companies make many decisions for us and try all kinds of techniques to manipulate not just our decisions but also those of your doctor as well.

An HSA allows you to take your health care savings with you no matter what your employment situation. It corrects the bad incentives that have led to skyrocketing health care costs. It gives control of health care choices to doctors and patients, not employers and insurance companies.
Because of this, I support ending the tax deduction for companies offering health care plans like HMO and PPO plans and instead create a tax deduction for money placed in an HSA with a high deductible insurance plan. This would help fix the problems with the bad incentives caused by income smoothing. It frees us, and our doctors, from manipulation and interference by a cost-cutting bean counter sitting in a cubicle. It would also allow portability of insurance, and it gives you ownership of your health care funds.

Thursday, August 9, 2007

We Don't Need No Education

Every year Hollywood rolls out another “Tough Love Teacher” cliché where all it takes is someone with guts to fix a school. Too bad it’s not that simple. According to a 2006 PDK/Gallup Poll, 68% of Americans gave our nation’s schools a grade of C or worse. The problems are systemic and we need a new direction. Student behavior is bad, leaders do not embrace change, and the best teachers are burning out.

The answer is School Choice with charter schools and vouchers. A charter school receives school district funds based on the number of students enrolled. They have more freedom in their approach, but cannot charge tuition, teach religion, nor choose students based on ability (often using a lottery). A voucher allows private schools to receive public funds to educate a child, but does not bind them by the rules above.

School choice improves behavior because these schools can require parents to sign covenants outlining discipline methods. Our public schools have little real consequences for bad behavior because they are plagued by feel good intentions and fear of lawsuits. An independent school can expel unruly kids and the covenant makes it harder to sue. Parents are unlikely to endure many expulsions before working on bad behavior at home. Vouchers can take discipline a step further because they can teach morals and values.

In public schools, there are too many decision makers. Parents, school boards, teachers, state officials, national officials and teachers’ unions (in most states) all have a say in the curriculum and format. Pleasing more groups means compromises water down change. A charter school has fewer decision makers and a private school has even less. Both rely on market forces for feedback. They have to provide the results that parents want or face losing their jobs. Public schools do not face this pressure because they have a geographic monopoly.

According to a study done by Met Life, the Top 3 reasons cited for teachers burning out and leaving the profession were low pay, lack of respect from society, and disorderly student behavior. In most public schools, Harvard 4.0s make the same salary as a local city college 2.0. The school choice system is more competitive so the best teachers could command much higher salaries as their skills go to the highest bidder. Some would be able to start their own schools and reap the benefits. Increased pay, improved discipline, and being in demand should help these teachers feel more respected.

The standard-bearer for charter schools is KIPP academy, a nationwide system that caters to low-income students. KIPP academy requires every student and parent to sign a covenant that states the rules of behavior, extra workload and expected parental involvement. KIPP Academy generally pays its teachers about 20% more than the local school district according to the Houston Chronicle. Recently, a small group of donors, including Bill Gates and Oprah Winfrey, gave $100 million to their cause. While KIPP gets state money for operations, they need donations to build schools.

According to a recent study comparing students at charter schools and public schools in New York City performed by Dr. Caroline M. Hoxby, economics professor at Harvard:

A charter student in grades 3-8 is gaining about an extra 12 percent of a [grade] level in math each year over the comparison group, the study says. In reading, the growth is approximately an extra 3.5 percent each year. “This means that a charter school student whom we would have expected to be failing if he had stayed in the traditional public schools would be, at the end of 13 years of charter school education (K-12), above proficient in math.”

I know a school board member angry about a second charter school opening in his abysmal school district because the waiting list for the first was so long. He toed the line that “It takes money away from public schools”. Of course it does, that’s the whole point! Schools will have to put in effort to attract students and resources. If fewer students attend a school why spend as much money? The only way it cuts classroom budgets is when leaders fund too many non-classroom activities. If there is a long waiting list to leave his schools, is there even a debate about which schools are better? Better schools deserve the money.

Why are a number of people in the educational establishment against charter schools and vouchers? There are a few reasons, but primarily its fear of change. This is understandable, but not justifiable. If one has a stable job guaranteed for life, why choose a new system? The other big reason is loss of control. Many do not like the idea that the government would lose its ability to “enlighten” students whose dim parents have ideas that go against “the truth”. Some editorializing is unavoidable for teaching subjects like history, but it becomes propaganda when parents have no choice as to whether their children listen.

The evidence is clear that students perform better, behave better, and teachers are rewarded better with school choice. The preferences of a few should not stand in the way of improvement, especially amongst low-income students. Thankfully, victory for charter schools in major urban areas looks to be inevitable. Already 15% of Houston students and a majority of post-Katrina students in New Orleans attend publicly financed non-traditional schools. Vouchers are making progress, but they face more fierce opposition. However, Utah recently passed statewide vouchers. When Americans get used to charter schools running the show, the public will be more open to this next step in freeing our students, teachers, and parents.

Schools in the nation Phi Delta Kappa/Gallup Poll
Leaving the profession
Houston Chronicle Articles on KIPP Academy

Thursday, August 2, 2007

Incentives have Consequences


Last week’s post led to some good feedback from all of you. I’ve included a couple quotes I thought were worth mentioning.

Alex G. – I disagree with your plan. And you hit the nail in the head yourself. "I usually don't like the government telling me what to do with my money".

Yes, and I did make the comments two weeks ago about sticking to principles. Good point.

Mark S. – The majority of people are middle class working people who do have insurance, but rely on that check to make one yearly big purchase or down payment. I think that since you are making the majority of people fill out extra paperwork it would not go over well.

The great thing about getting feedback is that I can expand my understanding of where other people are coming from and adjusting my political strategies to meet those realities. No matter how good a plan is on paper, it has to capture the imagination of the public to make it through the legislature and become law. For me, filling out the extra form to get the money or directing my tax return into an HSA didn’t seem like a bother, but Mark obviously didn’t like it. I still like my idea in general, but I’ll have to think about some alternatives.

-On to this week’s post

In 1963, Dr. Stanley Milgram of Yale University devised a psychological experiment to test our level of obedience to authority in order to shed light on how thousands of people took part in the Holocaust. His test instructed a volunteer test person to ask a number of questions to a man hidden behind a screen. If the man gave the wrong answer, they were to flip a series of switches that started at 45 volts and increased to 450.

The man behind the screen was an actor. The actor made sure to let each person know that he had a heart condition before the questions started. As the volts increased, he would pound on the wall and make other noises. A recording played protests and screams to simulate that the man was in agony from the shocks. A “scientist” in a white lab coat would prod any person hesitant to continue by assuring them that this was very important research.

What kind of monster would keep flipping the switches? Out of the 40 people in the original study, every single person flipped the switches up to 300 volts. This level is lethal and was past the point where the actor went silent. All of them expressed some concern for the well-being of the man. In the end, however, 26 of 40 flipped all of the switches including the 450 volts three different times at the end. We have all wondered how we would behave in certain situations and like to believe that we would not succumb to peer-pressure and incentives that encourage us to go against our morals. This experiment revealed that doing so is not as easy as it seems.

When I talk to people face to face about the idea that our poverty programs have caused the awful mess our poor people live in today they don't like to believe that the incentives created by the programs can shape behavior that much. They believe that in any given population group a certain number of people are born reckless or unintelligent. Others believe that their upbringing has destined them for crime and immorality. I refuse to believe that the bell curve of human existence is unchangeable. Every human being is capable of greatness. A greatness defined by strong moral character, loving and peaceful relationships, and a lifetime of adventures and personal growth.

The Milgram Study shows that given the right conditions, bad incentives can make normal people to do horrible things. It is not a stretch to believe that bad incentives in our poverty system have led to the rampant problems today. Those at the bottom of the spectrum, plagued by criminal and immoral behavior, were not destined by fate to be there, our system has done it to them. Our poverty programs have been a horrible mistake.

Confusion also exists that correlates poverty programs with charity, when they do not normally have the same effects. Charitable organizations trying their best to lift people out of poverty, addiction, mental illness, or homelessness, can be very effective. The difference between charity and government programs is that when we help a friend in need, there is an expectation that they will do the right thing to prevent that situation from happening again. If they do not, we usually stop giving help in the same manner.

A government program doesn't work the same as charity. A dispassionate bureaucrat merely looks through documents to see if one qualifies and then hands out a check. Their job is to process paperwork efficiently, not to make moral judgments on the applicant. A charity can quickly react to changing events because they are typically small and have fewer rules. The government can’t change something without massive research projects and congressional hearings to figure out whether there is a problem and then a bill has to crawl its way through Congress. The government is simply too big to administer poverty programs effectively.

Unfortunately, too many in poverty today are ill prepared to take care of themselves and their children, so sweeping these programs away overnight would cause a lot of short-term chaos. This is why I proposed building a bridge to link those hurt by the horrible mistakes of the past to a better future. A future where they have the strength to rise up to the greatness God intended for them.

I think we’ve made a good start. Next week: Education.

As always, tell me what you think. Feedback has been slowly increasing and if it increases a little more I will probably switch to a blog format soon.

Milgram Study