Making Health Care Dollars Go Further

We spend more than 16 percent of our gross domestic product on health care, and that number is expected to rise to 20 percent in 10 years. Federal spending on Medicare, Medicaid and Social Security is projected to double as a share of GDP in the next 40 years.

Health insurance premiums have risen more than 75 percent since 2000, more than 50 percent faster than inflation and more than twice as fast as wages.

Given the enormous strain that increases in health care spending put on both public and private budgets, it is vital that we get the most value for our health care dollars, and evidence suggests that right now we are not.

We spend roughly twice as much per capita on health care as other developed countries, without commensurately better health outcomes. We see the same story across different regions of the United States, and the parts of the country where Medicare spends the most are the least likely to receive effective, high-quality care.

With such a high fraction of our national resources going to health care, it is imperative that we get better value for our investment. This will in the long run make health care more affordable for everyone, opening health care and health insurance to more people.

The reason our spending has risen so rapidly is not because we go to the doctor more often or stay in the hospital longer but because we are treated more intensively once we are there.

While our current system promotes life-saving advances in medical technology that must not be discouraged, it does not encourage the development of cost-saving technology, and it does not encourage the highest-value use of our current technology.

One of the key problems with our private health insurance system is a tax code that penalizes people who choose basic insurance coverage over gold-plated plans.

Premiums for employer-provided insurance are paid with tax-free dollars, while most people who don't get insurance from their employers or who choose basic plans and cover routine care on their own do have to pay taxes on their health care. This pushes people into insurance policies that leave patients with little incentive to seek out high-value care and leave health care providers with little incentive to compete for their business.

Even consumers who would like to shop for the highest-quality, highest-value care often cannot find the price and quality information they need. This inefficiency means that wages have risen more slowly than they otherwise would have, and consumers have less money to spend on other things they value like food and housing.

A key step toward more effective use of health resources is leveling the playing field between out-of-pocket expenditures and health care purchased through an employer's health plan -- freeing people to choose policies that combine the financial protections of catastrophic coverage with potentially higher out-of-pocket costs but correspondingly lower premiums.

Health Savings Accounts, enacted in 2003 as part of the Medicare Modernization Act, are a promising and increasingly popular move in that direction.

HSAs allow consumers to pay for many of their out-of-pocket health care expenditures tax-free as long as they have a high-deductible health plan with limited financial risk for enrollees. These plans sometimes cover preventive care with no deductible.

President Bush has proposed -- and legislators are now considering -- several options for increasing the attractiveness of HSAs, including raising contribution limits and allowing the funds to be put toward health insurance premiums.

Low-income consumers should be given credits to help pay for the policy. Employers should be allowed to contribute more to the HSAs of chronically sick employees.

An executive order signed by the president on Aug. 22 will help give patients and physicians the price and quality information they need to take advantage of these policies.

HSA-based policies can help achieve more affordable and higher-value health care.

First, they can help bring down overall health costs.

Roughly half of all national spending by those under age 65 is accounted for by people with medical bills below the typical out-of-pocket maximums of a high deductible health policies. Only about 20 percent of spending goes toward medical emergencies, and evidence suggests strongly that, when patients and their families are given the information they need, they choose care that is of higher quality and higher value than they would otherwise.

Second, high deductibles do not make these policies out of reach of the poor. Focusing exclusively on the deductible misses half of the picture. Lower premiums for these policies make them affordable for people who couldn't otherwise afford insurance.

A recent survey suggests that a third of the individual purchasers of HSAs were previously uninsured, and a third of the small firms newly offering HSAs did not offer insurance to their employees before.

Third, HSA-based policies are not just attractive to the healthy. Their caps on total out-of-pocket spending limit families' financial exposure in the case of catastrophic illness, and by encouraging high-value health spending, HSAs make health dollars go further.

That said, those who are chronically ill need additional ways to obtain insurance, such as through state high-risk pools or through such innovations as the provision of risk-adjusted health insurance vouchers.

We need to focus not only on how much we spend on health care but on making our health care dollars go further.

Combined with other policies to improve the effectiveness of public health insurance spending, leveling the playing field for different types of insurance policies and health care spending can give patients the power to use their health care resources in the way that's best for them, leading to greater provider competition, more cost-effective technology and higher value health care.