Being in charge: health savings accounts are making consumers responsible for what they spend on medical care.

Key Points

* Congress created health savings accounts to shift accountability for health-care costs back to households.

* The average household spends more than $9,000 on health-care premiums, yet 50% of Americans use $1,000 of health insurance benefits annually.

* The success of HSAs in reducing health-care costs depends on responsible consumer behavior.

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What follows is a scenario the American employer hopes for: a household making healthcare decisions not just to protect its health, but also to stem rising costs of care.

Call her Elaine. This evening, after going online, she learns her family's health plan introduced an annual $5,000 deductible. At her employer's health benefits Web site she opens a household planning toolbox and custom builds a health plan for the next year.

Each time she hits the enter key, she triggers an immediate response from a huge database of clinical studies, actuarial projections, and profiles of doctors and hospitals. She checks off the existing medical conditions of family members. Until recently, her family of two parents and two teenagers had no major health concerns. In the past year, her husband damaged his knee, resulting in surgery and rehabilitation. More worrisome, Elaine recently tested positive for Type 2 diabetes.

On her health insurer's Web site, Elaine finds the complete history of her husband's knee repair. She also finds next year's forecast for health-care use for each family member--office visits, trips to the emergency room and prescriptions. She studies a projection of insurance premiums, out-of-pocket costs, deductibles and copays. The sums move up or down depending on copay deals, drug plans, preventive regimes and provider selection. The cost of each expected service--drugs, office visits etc.--is shown by the provider.

Concerning her diabetes, she learns that her future health behaviors will profoundly influence her health and spending on care. Low-cost healthy lifestyle routines, matched with regular blood-sugar and lipid monitoring, will prevent or at least delay complications. She learns when, whom and how to e-mail or call for medical advice.

A New Way to Pay

Elaine is stepping over a digital threshold of sweeping transformation in health-care financing. With the Bush administration's backing, on the last day of 2003 Congress created health savings accounts that shift more discretion and more accountability in health-care finances to the household. Washington has pinned much of its hopes for health-care cost containment on someone like Elaine--mother, wife and health-care planner.

So have employer alliances. Over the years, American employers have sought protection from chronic health-benefit cost inflation. One way was to terminate health benefits entirely for their workers. Some employers negotiated more aggressively with health plans. A third strategy has been to lobby for health-care system reforms, such as reduction of medical errors and smarter use of technology.

A fourth strategy promotes responsible consumerism by getting households to absorb more financial risk. Harvard Business School's Michael Porter envisions household-focused health as key to restoring the American health-care system. Health savings accounts are means to this end. Elaine's family is custom-writing its own cost-conscious health-care plan. It is behaving like a captive health insurer: setting a spending pattern, absorbing less or more risk, using an expanding array of plan selection and health-care tools. Elaine's online session as described above reflects systems marketed by independent firms such as Choicelinx and Health Dialog, two of a number of companies rushing to bring these tools to market.

HSAs and health reimbursement arrangements enable employers and households to put money aside on a tax-sheltered basis to save for and spend on health-care costs. The accounts are owned by the individual, are immediately vested to the owner, and--like 401(k)s--are portable. Also like 401(k)s, investment income from HSA assets is tax-exempt. Unused balances remain in place for future years or withdrawal may be available, subject to certain conditions. At age 65, the owner can apply the balance for any purpose without penalty.

Brent Greenwood, a health-care consultant with the firm of Reden and Anders, thinks larger employers with in-house skills to manage health benefits may favor HRAs, as employers can keep tighter control over their use. For example, HRA balances are, for the most part, not portable. Greenwood said United Health and some employers are rewarding households for good health choices by small additions to HRA accounts. In past experiments, doctor office visits, expensive hospital emergency room use, and prescription drug use declined toward levels more in line with best medical practice.

While their mechanics differ in detail, both HSAs and HRAs have the same function: promote cost-conscious habits in health care. In its role as a small insurance company, a household will receive "premium" in the form of an HSA contribution. Household members can invest unused premium over time to accumulate more equity. They access their personal actuarial department on the Internet, 24/7. They pay medical expenses, some of which they can predict with varying degrees of confidence. After a spending threshold is pierced, another insurance company will step in as a "reinsurer." Thus, the household has a complex stacking of co-insurers and reinsurers including first-dollar coverage for prevention.

The big question is whether and how the health-care costs will moderate under high-deductible tax-advantaged programs. The current thinking is that households will pay more attention to prevention and learn the difference between self-indulgent and disciplined use of medical resources. In short: fitter, leaner, better.

For the wealthy, the ill and the young and healthy, it is no sure thing that HSAs will actually alter healthcare use. Wealthy households can use HSAs to shelter income from personal taxes, allowing balances to grow undisturbed while paying medical bills from disposable income. It is hard to imagine that a family caught up in recurring years of expensive medical treatment will change its behavior because of a tax-sheltered plan that covers a small portion of its total health-care spending. Likewise, HSAs likely will not motivate a 25-year-old in perfect health to modify healthcare behaviors.

Yet many millions of households now covered by employer-sponsored health-benefit plans may begin to modify their behavior. These are households whose health-care spending wavers around the median, neither consistently very low nor very high. The Bianca family fits this profile. It may have spent $7,000 (that is, what the doctors received from the plan plus copays) in the prior year, due mainly to knee repair. But next year's spending may be more in line with the median of about $1,000 per family member. The average household premium today is more than $9,000, yet haft of Americans consume less than $1,000 annually per person.

The first dollars spent by all households are often the most important, for prevention and to control major chronic conditions. Prevention dollars might go to cigarette-use counseling, family planning, immunizations, screening for cancer, problem drinking, asthma and diabetes. When symptoms emerge, patient and doctor diagnose, prognosticate, select a clinical team, and forge expectations for managing and curing the condition. HSAs are expected to prevent disease and when it does occur, contain it.

The army of healthy households with HSAs covered by an employer could by sheer force of numbers drive the employer's total health-benefit costs far more than is commonly appreciated. The Bianca family's projected health-care costs could well exceed the employer's annual HSA contribution, which we can set at $2,000. Then maybe they won't, if the husband's course of knee treatment is complete. Perhaps the family could plan to retain in its HSA $500 as savings to carry into the next year, and draw upon their regular income to pay medical bills that would otherwise wipe out the entire HSA contribution. An employer will want to encourage this kind of household planning.

Using Information

The biggest uncertainty is Elaine's diabetes. Suppose her health plan teamed up with Health Dialog's online health-care consumer coaching and other consumer tools. This firm partners with health plans to address risks, such as diabetes and asthma, for which consumer choice has a decisive impact on health and costs.

At her plan's Web site, Elaine can find tailored advice for newly diagnosed Type 2 diabetes patients. If the health plan covers the cost of recommended exercise, she will learn about that online or from a health coach, available by phone on a 24-hour basis. She will be encouraged to complete periodic questionnaires, and her responses may alert the health plan to a gap in prevention. Her doctor will receive a summary from Health Dialog of tests, medications or treatments that she received.

Mark Litow, an HSA expert and consultant with Milliman, has studied HAS-type programs in the United States and South Africa. Litow expects a large segment of reasonably healthy households can and will work down their health-care spending. This would result in a massive migration of, say, one-fifth of American households, toward lower spending without compromising health status. The game is won or lost, nonetheless, by the behavior of today's moderate spenders. In round numbers, a 20/20 vision: total savings prompted by HSAs of 20%; and 20% of households driving most of the savings.

But prudent consumer spending on health care may be a mirage. Households may end up using excessive treatments or fall prey to medical provider seams. Households might prefer personal on-site language translators, customized exercise and home and office visits by doctors and nurses. Why not a hip replacement performed in Montego Bay? Treatment, providers, and health conditions can become elastic terms once the consumer controls the dollars.

Some concerned employer groups have sought a stronger grip on how HSA and HRA monies can be used. The National Business Group on Health, an employer coalition, petitioned the Internal Revenue Service to leave it to employers to define allowable preventive services covered by tax exemption.

Employers are directly engaged in a massive experiment. The nation may learn more through experience with HSAs about the ways households pay for health care as discretionary consumption. Employers will learn if doctors compete and modify their charges when they see they are billing not an insurer or an employer but Mary and Joe Neighbor. Until employers digest this experience, we probably cannot agree on how far employers can go to stabilize their health-benefit costs.

HSAs and HRAs

Health Savings Accounts

* Established by employee or employer

* Used in conjunction with a high-deductible health plan

* Funded by employee or employer, who can contribute as much as a combined $2,600 for individuals and $5,150 for families annually

* Contributions are pre-tax dollars

* Households control accounts; funds can be used during retirement and are portable

Health Reimbursement Accounts 

* Established by employer

* Funded by employer to reimburse employee for qualified medical expenses

* Companies of all sizes qualify to offer an HRA

* Portability is at the discretion of employer

Source: U.S. Department of Labor Bureau of Labor Statistics, National Association of Health Underwriters

Contributor Peter Rousmaniere is a risk and insurance consultant located in Woodstock, Vt.