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How High Deductible Plans Lead To Low Healthcare Spending

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The Centers for Medicare and Medicaid Services (CMS) just released their latest estimates of national healthcare spending over the past few years -- and they seem to provide some rare good news. Researchers determined that total U.S. health costs increased 3.8 percent in 2009 and 3.9 percent in 2010 -- the slowest annual growth rates in 50 years.

President Obama and his allies have been quick to take credit for the slowdown. As a recent, not-so-objective piece in the New York Times put it, the moderation in health cost growth was "happening just as the new health care law was coming into force." Healthcare economist and former Obama adviser David Cutler told the paper of record, "The recession just doesn't account for the numbers we're seeing. I think there's much more going on."

There's much more going on, alright. But Obamacare has nothing to do with it. Healthcare costs started to plateau well before Obamacare began taking effect. And the trend closely tracked the spread of consumer-directed health plans -- high-deductible, patient-centric coverage options that give people control over their healthcare dollars and provide a direct financial incentive to conserve care and spend responsibly.

Unfortunately, Obamacare targets these cost-deflating health plans for extermination.

According to CMS's own data, the growth rate of health costs didn't start moderating in recent years -- it's been cooling off since 2002.

It's no coincidence that 2002 was also the year that employers started embracing high-deductible health insurance plans for their workforces. The plans really took off in the mid-2000s. Between 2006 and 2011, the share of American workers enrolled in one more than quadrupled, from 3 percent to 13 percent.

As of January 2011, the most recent month for which data exist, 11.4 million Americans were enrolled in consumer-directed health coverage -- a 14 percent increase over the 2010 total.

High-deductible plans give patients financial responsibility for routine medical services. The plans are coupled with Health Savings Accounts (HSA), which allow people to save pre-tax income to be spent exclusively on health care. The insurance policies kick in once the annual deductible is reached, to protect patients against health catastrophes.

Together, high-deductible plans and HSAs give patients the incentive to use some common sense when shopping for health care. Any money they don't spend they keep and can be rolled over to the next year tax free. That encourages patients to be aware of the prices they're charged -- and to avoid consuming excessive or duplicative services.

Work from the RAND Corporation finds that the average American worker who switches from a traditional health plan to a consumer-directed one uses 14 percent fewer medical services -- without any associated adverse effects on health outcomes.

Expanding the use of consumer-directed plans would dramatically reduce national health spending. RAND researchers have estimated that expanding the share of employers with such plans to 50 percent would reduce national health costs by a stunning $57 billion per year.

The philosophy embodied in consumer-driven plans is at odds with Obamacare. The president and his allies don't believe individual Americans should be trusted with their own healthcare dollars. They want bureaucrats making the decisions. That antipathy is reflected in their health law.

Indeed, Obamacare tries to regulate consumer-directed plans out of existence.

The law mandates a minimum "medical loss ratio" (MLR) for all insurers. The MLR requires that insurers devote no more than 20 percent of premium income in the individual and small-group markets toward administration. In the large-group market, the threshold is 15 percent.

Obamacare also requires insurers to meet minimum "actuarial value" standards, whereby they must cover a certain percentage of a beneficiary's health expenses -- at least 60 percent, in most cases.

By design, insurers take in much lower premium dollars for high-deductible plans. If an insurer's pool of beneficiaries was fortunate enough to avoid major health issues in a year, then it's unlikely that the insurer would meet the MLR thresholds. So the MLRs could effectively encourage insurers to spend more on health care -- even if it's unnecessary.

That's no way to solve the nation's health cost crisis.

Further, individual contributions made by HSA owners -- even though they're earmarked for future healthcare expenses -- do not count toward the minimum actuarial value of a plan. If a patient with a high-deductible plan stays healthy for the year, then it will be very difficult -- if not impossible -- for his insurer to meet the minimum actuarial value requirement.

As a result, these plans will probably be discontinued en masse.

The new CMS figures on health spending are encouraging. But it's disingenuous for the president and his allies to claim that Obamacare is the reason why. Consumer-directed health plans -- not federal government dictates -- have helped bring down costs. Obamacare should be expanding them -- not regulating them out of existence.

Sally C. Pipes is President, CEO, and Taube Fellow in Health Care Studies at the Pacific Research Institute. Her latest book is The Pipes Plan: The Top Ten Ways to Dismantle and Replace Obamacare (Regnery 2012).