Expert Q&A: Health Plan Strategy Tips from an HSA Pioneer

​Health savings accounts (HSAs) rapidly became a dominate part of employer-sponsored health care after being authorized in 2003, when President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act.

A key champion behind this reform was health policy analyst John Goodman, who in the early 1990s famously drew a diagram of a tax-advantaged medical-expense savings plan for then-House Ways and Means Committee Chairman Bill Archer. Goodman also explained the concept in his book Patient Power: Solving America's Health Care Crisis (Cato Institute, 1992), which envisioned allowing people to voluntarily contribute pretax dollars to savings or investment funds, then withdraw that money tax-free to pay current or future medical expenses.

Today, Goodman is the president and CEO of the Dallas-based Goodman Institute for Public Policy Research.

The Summer 2023 issue of HR Magazine, celebrating the 75th anniversary of the Society for Human Resource Management, will include Goodman's reflections on the creation and subsequent growth of HSAs. In the Q&A below, SHRM Online asked Goodman about containing health care costs and other challenges facing employer-sponsored plans.

SHRM Online: What factors are driving innovations in health care delivery and reducing costs for employees and employers?

John Goodman: The problem behind spiraling health care costs is that most people never see the real price for health care. One of the key ideas behind HSAs, and one that has only been partly achieved, was to create incentives for individuals to ask about the cost of nonemergency care and to then select high-quality, cost-competitive doctors and facilities.

Almost all the innovations in health care delivery have happened outside the third-party payer [insurance] system. Walk-in clinics now exist because people are spending their own money on needed care in a timely way, and what they don't spend they can keep in their own accounts, so they benefit directly from taking costs into consideration when they're able to do so.

Online pharmacies came into existence to compete with local pharmacies on pricing. Telehealth initially was not covered by any third-party insurers, but innovative firms realized people had a need to talk to a doctor and get quick service, and they began meeting that need.

In time, the third-party payers adapted and began covering these new care-delivery options, but the innovations occurred because of patient [spending] power.

SHRM Online: So it comes down to fostering market competition?

Goodman: Right now, health care providers do not compete on price or on quality. Our hospitals are capable of competing for patients on both, and that's what they do when patients come from Canada and other countries for treatment and get a price quoted in advance. We need to get our hospitals to do that for the patients who are living next door.

In Dallas, where I live, there are probably 40 or 50 hospitals in the metroplex, and when I asked a large insurer, they told me they covered them all. Well, if you have a health plan that covers every single hospital in your geographical area, you're not making any distinction about which hospitals are efficient, or cost more or less, or provide higher versus lower quality. No wonder the health care system is so inefficient.

If you look at employer plans, they have free [to the employee] checkups and primary care, but if you go into the hospital, you pay thousands of dollars. That's the opposite of how a health plan ought to work. The incentives [for selecting high-quality, cost-competitive care] have been distorted.

SHRM Online: Should high-deductible health plans (HDHPs) be able to cover more types of care outside the plan deductible?

Goodman: Treating chronic illnesses, such as diabetes, is where most of the spending occurs in our health care system. Originally, the HSA was not designed for the chronically ill, which is why it had a high-deductible requirement. In 2019, the IRS allowed HDHPs to cover maintenance drugs for chronic conditions at no cost to patients without violating the high-deductible requirements. That was a major step in allowing these accounts to serve the needs of the chronically ill, but we need to go further to encourage employees to stay compliant with the medication regimens prescribed by their doctors to avoid costly trips to the emergency room.

SHRM Online: That raises the issue of how insurance pays for prescription drugs. How can employers address drug cost issues?

Goodman: One of the most important things to do [regarding] drugs is to make sure chronic [disease] patients are taking them because it's the most cost-effective form of therapy there is. You do that by making generic medications free or making them available for a nominal charge, which is a very smart thing to do.

In many employer plans, it's more expensive to buy prescription drugs through the plan than if employees ask the pharmacy to charge them outside the plan and then use a coupon service such as GoodRx, or if they buy their medications directly from a discount outlet such as Mark Cuban Cost Plus Drug Company. Well, that's crazy, and employers are being foolish when they allow themselves to be caught in that kind of trap. Their plans should enable members to take advantage of discounted prices.

SHRM Online: What else are employers doing wrong with their plan designs?

Goodman: They are not being aggressive with their pricing strategy, especially when their health coverage is self-funded and can more easily adopt reference-based pricing.

There was a wonderful experiment in California with Anthem Blue Cross, the preferred provider organization for state employees under CalPERS [the agency that manages pension and health benefits for more than 1.5 million California public employees]. CalPERS put a limit of $30,000 on what it would pay for hip or knee replacements, telling members they could get joint replacements anywhere they wanted, but the health plan was only going to pay $30,000 for each surgery.

Within two years, it was hard to find any hospital in the state of California that was charging more than $30,000 for a joint replacement. It had a radical effect on the market very quickly. Employers ought to be doing that everywhere.

SHRM Online: How do employee financial incentives fit into this scenario?

Goodman: If an employer says it's only going to pay $30,000 for a hip replacement, but members select a center of excellence for joint surgeries that only charges $28,000, then the members should get to keep the $2,000; it shouldn't go back to the employer. If employers want employee buy-in, employees have to gain.

The same holds true for medical tourism as an employee benefit. For example, some employers offer the option of flying down to the Cayman Islands [for standardized procedures such as joint replacements], where there's a very good health center, the price of a surgery is well below what it is in the U.S., and the quality is very good. The mistake employers make is not allowing the employee to keep the savings—maybe they'll just waive the deductible. The employee should get most of the savings from traveling.

SHRM Online: Any final thoughts on improving health accounts?

Goodman: There are three health care spending accounts today: HSAs, health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs). Together, there are about 80 million accounts, almost all of them in the employer workspace, and about half the employees in our economy have some kind of account.

But confusingly, the rules are completely different among these accounts. We need to have one easy-to-use account that can roll over from year to year and let people keep the money they don't spend on health care, like with HSAs. There should be no high-deductible requirement, so the account can be paired with any third-party insurance, as with HRAs and FSAs, and funding should be permitted by either employees or employers, as with HSAs and FSAs. In other words, take the good points of each of the three and get rid of their drawbacks.

Stephen Miller, CEBS, is a former editor of compensation and benefits for SHRM Online.