Cash-and-Carry Medicine

Health Savings Accounts to Drive Transition to Consumer-Directed Care

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Cover Story -- April 2005  

By  Ken Ortolon
Senior Editor  

Austin family physician William E. Jones, MD, has seen the business of medicine come "full circle" in the 30-plus years he has been in practice.

"In the old days, the patient-physician relationship was real simple," Dr. Jones said. "The patients employed me. My job was to give them the best care I knew how. Their job was to pay the bill."

While most other physicians today process claims, bill insurance companies, and wait weeks, if not months, to get paid, Dr. Jones has gone back to the way things used to be. In January 2003, he dropped the last of his managed care contracts and set up a cash-only practice. His patients pay his full fee at the time of service. If they have insurance, he gives them the forms to file claims for reimbursement, but that's their responsibility.

As a result, Dr. Jones sees about half as many patients as he used to, but his gross receipts are about the same, even though he has reduced his fees. He has cut his office staff from four to two full-time employees. "And we don't have to do any billing," he said.

Dr. Jones says he thinks this type of "cash and carry" practice probably will always be just a niche in the medical marketplace. But experts say recent trends toward a new type of health plan called consumer-directed care, including health savings accounts, likely will mean many physicians will have to retool their practices to bill patients directly for health care services.

And, where physicians once relied on managed care networks to steer patients into their practices, many soon will have to compete for patients on the basis of price, quality, convenience, and other factors as patients take ownership of their own health plans.

"There will be growing interest among patients in bypassing insurance mechanisms for routine and low-cost services," said Greg Scandlen, director of the Center for Consumer Driven Health Care at the Alexandria, Va.-based Galen Institute, which describes itself as a nonpartisan, nonprofit research and policy center. "I think it will help spawn the growth of cash-based practices." 

The Ownership Society  

Consumer-directed care plans have been around for some time. Congress authorized the first medical savings accounts (MSAs) as part of the Health Insurance Portability and Accountability Act of 1996. MSAs allowed some untaxed benefit dollars to flow from employers to employees without going through a health insurer. The money earned interest, and any money not spent each year rolled over to the next.

But MSAs were available only as a pilot project, and only a limited number of self-employed Americans were allowed to start one. Several legislative attempts to expand MSAs failed.

In 2003, however, Congress finally removed the limits as part of the Medicare reform bill advocated by President Bush. The renamed health savings accounts (HSAs) fit neatly into President Bush's vision of an "ownership society" and are now available to 250 million nonelderly Americans. The accounts are owned by the employee or individual. They can include contributions from both the employer and employee. They are portable and can be carried over from year to year. And, they earn interest or investment income tax-free.

HSAs also must be tied to a high-deductible health plan that will cover medical expenses when and if the employee or individual exhausts his or her HSA contribution for the year. Such plans have deductibles ranging from $1,000 to $5,000 for individuals and from $2,000 to $10,000 for families.

In addition to HSAs, there are two other types of consumer-directed care plans. Flexible savings accounts (FSAs), which have been available for several years, can include both employer and employee contributions but the employee does not own the account, they are not portable, and the employee must use the money each year or lose it. Health reimbursement accounts (HRAs), which became available in 2002, are owned by the employer and include employer contributions only. They may or may not be carried over from year to year, and they are not portable.

Neither FSAs nor HRAs earn interest, and high-deductibles are not required.

While more than 2 million Americans currently have FSAs or HRAs, experts believe HSAs will drive the revolution toward consumer-directed care. The HSA program took effect Jan. 1, 2004, but rules were not adopted until July 2004. In the six months that followed, some 500,000 Americans purchased HSAs, and now 3.2 million people have some type of consumer-directed plan, says William J. West Jr., MD, a Reading, Pa., obstetrician-gynecologist and president of First HSA Inc., a health savings account administrator.

"For the first six months of 2004, we didn't have a product," Dr. West said. "As of Jan. 1, 2004, only 23 of the 49 Blues [Blue Cross and Blue Shield plans] in the country had an HSA-high-deductible product available. By the end of 2005, all Blues are going to have an HSA-HDP available." 

The 2006 Boom  

Dr. West says 2004 was a year of product development and education, while 2005 will see HSAs purchased primarily by individuals and small groups. But he predicts HSA sales will begin to "rock 'n' roll" by 2006.

"Two thousand six is when you're going to see the large and mid-size corporations, unions, and associations purchase HSAs," Dr. West said. "They make their decisions on what they're going to do in March and April for Jan. 1 of next year. So last year they'd already picked their health plan for 2005."

The federal government expects 40 million Americans will own HSAs within 10 years, but Dr. West says "some of us think that's a low number."

Mr. Scandlen agrees. "A lot of people are looking at 40 percent of the market in five years. The amazing thing, the really outstanding thing that we've seen so far, is the retention level of people who have opted for one of these account-based plans, and I include both HRAs and HSAs. Something like 95 or 98 percent of people who choose it in the first year stay with it the second year. Once you've got skin in the game you stay in the game. Once you have a health savings account with $700 or $800, that creates some real consumer loyalty." 

Getting in the Game  

HSAs and other consumer-directed plans force patients to take a different attitude about managing their health care costs as they then are responsible for first-dollar coverage. "Most patients have been conditioned to think that they should be able to get health care without any financial involvement of their own other than their $20 copay," said Dr. Jones. With consumer-directed plans, that will have to change and patients will have an incentive to shop for the best care at the best price.

But these accounts are poised to have a dramatic impact on physician practices, as well. While physicians have been largely unhappy with managed care plans, they have relied on them to steer patients into their practices.

With the growth of HSAs, however, the "steerage" value of managed care contracts could disappear, particularly for office-based primary care physicians and some specialists, such as dermatologists.

"A rapidly growing base of patients will be in a position to pay cash and will not be steered by their insurance company to this, that, or the other physician -- or hospital, by the way," said Mr. Scandlen. "Managed care will no longer bring physicians anything of value."

Instead, physicians will have to compete against each other for patients. And that competition will be over price, quality, and convenience as patients become more sophisticated health care shoppers.

"I think physicians are going to have to compete on all of those facets," Dr. West said. "HSAs allow us to own our own health care. When we own it, we demand products and services that meet our needs. So there's a huge demand out there right now for information. They want to understand why an MRI costs $1,000 in one place and $1,250 in another. Is it because it's a better MRI? Is it better service? Or is it just that one chooses to charge this and the other chooses to charge that?"

Dr. West says there will be significant market pressures on pricing, and physicians will need to know more about the real cost of the services they provide, the tests they order, and the prescriptions they write.

"Physicians have to get serious about what things actually cost," Mr. Scandlen said. "They've got to look at their own practice. Physicians don't even know the cost of the services they're providing."

Patients will not only value a good price in a physician's service, but also a doctor's advice on where to find low-cost alternatives in prescription drugs and other medical services, Dr. West says.

But physicians will have to be value conscious in addition to price conscious, he says. "The best pediatrician in town will be able to charge quite a bit, whereas the kid just out of medical school will not be able to charge as much. They'll be able to marry their prices to the quality of the services they're offering. And patients will be very receptive to that, I believe."

Consumer-directed care plans are not going to change medical practice overnight, but both Mr. Scandlen and Dr. West say physicians need to start tailoring their practices to work with these new plans. The first thing physicians should do is look at HSAs for their staff, Mr. Scandlen says. "I think they'll find their own employees will be pretty happy with the program."

For some physicians, HSAs will eliminate the need for claims processing. They simply will bill the patient for services rendered.

However, those physicians who remain in network contracts or provide high-dollar services will have to be able to instantly determine whether to send the bill to the patient or to his or her health plan, Dr. West says.

"What we need to do as physicians is develop systems in our offices that are similar or identical to what's going on in the pharmaceutical industry," he said. "That is to have some way to hook up with the insurance companies to have real-time adjudication of claims."

Health plans can solve these problems by investing in smart card technology. The physician's office would simply swipe the card through a card reader similar to those already used for credit cards. Data from the card would be electronically transmitted to the patient's insurance plan and the physician would get an almost instantaneous answer regarding whom to bill. If the patient had not yet met his or her deductible, the physician would bill the patient, who could write a check or use a debit card tied directly to their HSA. If the deductible has been met, the physician would bill the insurer.

"The cost to hook into these new smart cards is not going to be that expensive," Dr. West said. "The problem is getting the insurance companies to do it, the physicians to do it, to get the whole system to change. Currently, when HSAs are less than 1 percent of the market, I don't think there's an impetus to change. When we get to 10 percent of the market, which shouldn't take too long, there will be significant market force to get these changes to occur." 

Win-Win-Win Situation  

Not everyone is a champion of HSAs and consumer-directed care. Some critics say the plans could lead to sicker patients and higher health care costs.

Howard Berliner, a health policy professor at the New School University in New York City, recently told the Wall Street Journal that forcing individuals to make payment choices about their health coverage could mean many poorer individuals will postpone a trip to the doctor or put off important surgeries to avoid depleting their accounts.

But advocates of consumer-directed care say HSAs will be good news for patients, employers, and physicians. A study by Assurant Health of Milwaukee found that HSAs were popular among families, older Americans, and workers of all income levels. That study also found that 43 percent of HSA purchasers previously were uninsured.

Another study by Aetna found that consumer-directed care plans help employers cut their health care costs and give employees incentives to seek preventive care. That study also found that health care costs for companies that replaced traditional health insurance with a consumer-directed plan decreased 11 percent.

Dr. West says physicians will like HSAs because they take the insurers out of the exam room.

"HSAs reconnect the physician-patient relationship," he said. "It diminishes third-party intervention in our daily practice. People who have an HSA are making informed decisions about their care. They're making the decision on whether or not to get a test based on whether it's worthwhile or cost effective. That lowers our risk liability-wise from a defensive medicine standpoint. I don't get sued for that test I order too many of. I get sued for that one test I didn't order."

Mr. Scandlen predicts physicians with a large number of patients covered by HSAs and consumer-directed plans will get more satisfaction out of their practices. He cites Dr. Jones as an example of what physicians will experience with consumer-directed plans.

"The doctors who have already gone to a cash basis so far have found that they can slash their overhead costs dramatically," he said. "They've gone from a national average of five full-time equivalent employees to one or one and a half. With that reduced overhead and reduced administrative burden, they find that they are able to charge fees that in many cases are not that far off from the copays that patients are currently paying.

"The ones who have done this have also found they're a lot happier in their practice," he continued. "They can spend more time with patients, they can go home and be with their families at a reasonable hour, they don't have to do the kind of assembly line services that managed care requires." 

Ken Ortolon can be reached by telephone at (800) 880-1300, ext. 1392, or (512) 370-1392; by fax at (512) 370-1629; or by email at  Ken Ortolon.   


Health Savings Account Market Growing in Texas

Texans interested in purchasing a health savings account (HSA) may find their options growing.

The Texas Department of Insurance (TDI) reports that 16 companies are authorized to offer HSA-compatible health plans, but only four currently say they now do so. Companies offering HSAs in Texas at press time included Central Reserve Life Insurance Co. of Strongville, Ohio; Fortis Benefits Insurance Co. of Kansas City; Trustmark Insurance Co. of Lake Forest, Ill.; and Unicare Life & Health Insurance Co. of Thousand Oaks, Calif.

A complete list of companies authorized to offer HSA-compatible plans in Texas, including telephone numbers, is on the TDI Web site at

TDI defines a health savings account as a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. Such accounts must be used in conjunction with a high-deductible health plan. A high-deductible health plan has a higher annual deductible than typical health plans and a maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses.

Consumers do not necessarily have to purchase their HSA and high-deductible health plan from the same company. Many banks and brokerage houses will offer HSA account services.

The HSA Coalition, a Washington, D.C.-based coalition of nonprofit organizations, maintains a Web site that provides extensive information about consumer-directed care plans, including lists of companies by state that offer HSAs and high-deductible health plans. The Web site address is

The Texas Medical Association currently offers its staff a consumer-driven health plan through an affordable preferred provider organization plan. Under TMA's plan, a health care account (HCA) is established for each participant. The first dollars spent on covered health care services are paid from this account -- not by the participant. And, while deductibles need to be met each benefit year, the money spent from the HCA counts toward meeting that deductible.

Plus, preventive care and wellness visits when provided in network are fully covered even before the deductible is met. Dollars not used from the HCA during the calendar year can be rolled over to the next year.

TMA also offers employees a flexible spending account (FSA), which allows eligible employees to set aside a certain amount of their paycheck into either a dependent care and/or medical expense reimbursement account before paying income taxes. The FSA can be used to reimburse employees for medical expenses not covered by insurance, including deductibles, copays, prescription drugs, dental services, and other expenses, as outlined by the Internal Revenue Service. 

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