The Problem with Health Care: Control vs. Cost—and How to Resolve It

Source: Wikipedia/FEMA photo library (public domain); photo by Robert Kaufmann
Like all insurance markets, health care markets are tricky. For non-mandatory insurance especially, insurance companies spend a lot of time and money assessing how expensive a patient is likely to be before offering that patient coverage and determining the price of that coverage. Before this was banned as part of the Affordable Care Act (ACA) in America, this meant insurance companies often refused to cover expensive, pre-existing conditions. If a patient already had, or was likely to develop, cancer, most insurance companies would simply refuse to insure that patient because they were sure to lose a lot of money doing it. If any one insurer started to offer such coverage, all the most expensive patients would move to that provider and they would go bust. This sort of market "natural selection" ensured that patients with poor health were either stuck with their previous insurer, paid eye-wateringly high premiums, or were uninsurable altogether.

Banning insurance companies from taking this into account changed this, but it created a new problem. If pre-existing conditions would be covered, healthy people could simply wait until they got sick to get insurance and save themselves loads of money in the interim. This meant insurers would be stuck with only sick customers. Imagine if people waited until their house caught fire before getting fire insurance. They pay $100 and get a payout of $100,000. The insurance companies obviously wouldn't last long. This is the aptly named "death spiral". The answer? The "individual mandate", which requires everyone to purchase health insurance. Except in countries where everyone automatically has cover through a scheme funded out of general taxation (like that in the UK), mandatory insurance is how most countries handle this problem. It was an obvious step for the ACA. More importantly, it is impossible to ban health insurers from barring coverage for pre-existing conditions without also making health insurance mandatory!

So the ACA is great? Everyone knows it isn't. Even President Obama didn't love it. It was the best deal he could get, full of sub-optimal compromises. Do the Republicans have any ideas that could improve upon it? They do, if they would actually decide to improve the ACA rather than just scrapping it, which seems to be what's coming. Many of them are pretending that the individual mandate, which they hate (liberty and all that), can be scrapped even as health insurers can continue to be barred from blocking coverage for pre-existing conditions. As I've shown, this is impossible.

Republicans have long talked about two things to improve health care: allowing competition across state lines and health savings accounts (HSAs). They both have their good points, though HSAs, in particular, have a bad reputation and are widely misunderstood (perhaps because the Republican version of them would probably be terrible). On competition: elementary economics shows that, in general, the more providers there are competing for a group of customers, the lower the prices and the better the products and services those providers will offer. There is currently no US health insurance market, but rather 50 state markets. This slashes competition and increases costs, as insurers have to set up separate entities for each state. The result is reduced competition and therefore higher health care costs. Allowing insurers to offer their plans across state lines would increase competition and improve coverage and prices.

The problem is that this would cause a "race to the bottom," with insurers locating in the state with the fewest regulations. States with stricter rules would see those rules legally ignored. In addition, who would monitor the insurance companies? The host states, who would now have to monitor insurance activity in all 50 states at great expense? Or the recipient states? Those states would have little control over what was offered by an insurer regulated by another state. To do it properly, regulation would have to be national (the Affordable Care Act went some way to making this happen) to ensure certain standards across the 50 states and that insurers can be held accountable. Opening up competition could therefore be a good thing—but it would require a larger role for the federal government (something Republicans would loathe) or lead, in essence, to a massive deregulation of health care (something many states would loathe).

Against these issues, HSAs are less complicated and they would help resolve one of the biggest contradictions in health care: the conflict between control and cost. The ideal health insurance would give patients full control over where they went for care, what care they sought, what medications they took, etc. Such coverage would be prohibitively expensive, however, because once anyone had it, they'd have no incentive to keep an eye on spending to save their insurer money if they paid the same regardless. The high expense would mean its benefit over just being rich and paying out of pocket for everything would disappear. At the opposite end of the spectrum is a single-payer system like the UK's National Health Service (NHS). It keeps costs down, among other things, by tightly controlling what services patients have access to, where, and when (and by making them wait weeks for treatment and through the massive bargaining power its shear size provides against pharmaceutical companies, for example). The system is cheap and covers everyone, but patients have little control over what happens to them. I have experienced this first and second hand and found it incredibly frustrating. I could go on a tirade here, but I won't. Suffice it to say that I would never vote for a politician recommending an American NHS—despite the fact that I strongly believe all Americans can and should have access to health care.

Another alternative is the HSA combined with a high-deductible health insurance plan. HSAs put patients firmly in control of their health care and, because they're spending their own money, give them an incentive to monitor costs closely themselves—without the need for a government or insurance company to second-guess their decisions. Crucially, they can also be designed in such a way that everyone has coverage and no one goes bankrupt due to health care costs. Some people have pushed HSAs without having them coupled to health insurance plans. This is no solution, as the unlucky, the already old, or those with chronic conditions from a young age would quickly exhaust their accounts and end up with no coverage. So what would a well-designed plan look like?

I'm currently on such a well-designed plan. It's funded by my partner's company. The company pays $650 per quarter into our HSA, for a total of $2,600 per year. The payments into the HSA are tax-deductible and come on top of gross salary. Then there's a high-deductible health insurance plan this is coupled with. That plan is far cheaper for us than the lower-deductible plan, meaning it must be cheaper for the company even though the company is paying $2,600 per year into the HSA! This means it could be a cheaper option even for people who have to pay into an HSA out of pocket.

On top of the lower up-front cost, treatment is also cheaper for us in the end. This is because the annual deductible is also $2,600 ($1,300 per individual). After that, we pay 10% up to an annual individual/family out-of-pocket maximum of $2,500/$5,000. We can use the HSA to pay deductibles, co-insurance, and co-pay, but, crucially, we can also use it to pay for uncovered expenses like contact lenses, dental care, and more. We often exceed the deductible by very little, meaning it all comes from the HSA and the insurance company has low costs. If we did go over, however, we'd still be protected and pay just 10% up to a maximum, together, of $2,400 in a year ($2,600 from the HSA + $2,400 ourselves  $5,000 annual out-of-pocket maximum). That's the worst-case scenario, though, because you can always build up more in the HSA over years so that you never pay anything directly. And you can always top it up with your own money and write that off your taxes, saving you more. We have so far never had to pay directly for anything.

For a short video summarizing how all this works from BlueCross BlueShield of NC (note: this is not an endorsement, they just have a decent video explaining the concept in their case), see the comments section.

An HSA/high-deductible plan puts the patient in the driver's seat, gives them an incentive to keep costs down, and still protects them from catastrophic expenses. It also saves insurers money. The final step is to ensure equity, but this is fairly easy and less complicated for the government than single-payer options like the NHS or Medicare. I know I'm very lucky to have such a good plan. But such plans could be made standard and the government could pay into the HSAs of those unable to afford to do so. This would be cheaper than paying for their insurance outright and would likely save on the current ACA subsidies (especially when coupled with higher competition and tort reform to bring down the cost of liability insurance for doctors and hospitals). Part or all of the cost of the high-deductible health insurance plan the HSA is coupled with could also be provided by the government.

This solves the control/cost conundrum: patients can have full control and low costs, and so can the government. HSAs are the only way of doing this. They have far fewer drawbacks than standard, private-provided insurance (too expensive, limited control, patchy coverage) or single-payer government-provided care (cheap, with broad coverage, but infuriatingly restrictive, slow, and complex). They also seem a good compromise between the wishes of Democrats (equitable coverage) and Republicans (freedom, choice, and competition). Call your representatives.


  1. Here's a decent description of a plan offer by BCBS of North Carolina (though I'd also note: You can use the HSA for coinsurance payments, too. Everything!):

    1. Please note that I've posted this video only because it provides a helpful example. I am not associated with BCBS in any way, cannot vouch for the quality of their products or services in comparison with any other provider, and am not endorsing their products or services in any way, nor making any sort of recommendation about what sort of plan any individual should seek.

  2. Note: A previous version of this post stated support for selling insurance plans across state lines, but did not properly analyze the consequences of doing this as Republicans would want to: without a great regulatory role for the federal government. I have made changes to this and also revised my own position. I now believe such a plan could work only with federal regulations that prevented a regulatory "race to the bottom."


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