Health Services Agents -- A Novel Way to Manage Health Care

(revised March 4, 2016)

The Cost of Health Care

Why do health care costs keep rising? Well, demand keeps rising; there are more of us and we're getting older. It's the cost of new high technology, expensive drugs.

But a big part of the reason is health insurance. Unlike most things people pay for, the cost of health care is sheltered from the free market by insurance. You don't pay the medical bill; your insurance company does. So the free market interaction, between buyer and seller, is between you and an insurance company.

The doctor, hospital or pharmacy doesn't see price resistance from you. These providers put in a claim and the insurance company usually pays it, without offering any effective price resistance.

An individual dealing with a doctor or pharmcy may fear the consequences of resisting the price asked, because the person's health, their well-being, is on the line. When an insurance company acts as an expense-buffer, health care is abundant, but the price of it tends to keep rising.

Insurance companies, like any business, want to make a profit. Their profit comes from the difference between what they collect in premiums and what they pay out to the health care providers for providing you with health care.

Your price resistance to premiums is muted by the fact that your employer pays much of the premium cost. In the case of Medicare, the government is acting as the buffer.

The point is that the free market interaction between supply and demand, the resistance to prices, is muffled by the middleman insurance companies.

What's Wrong with having Middleman Insurance Companies

A middleman is helpful in health care when it provides service. It locates, organizes and promotes abundant quality health care. But the middleman needs to have the right economic motivations, so that the free market will act as it should to restrain costs while promoting supply. The middleman needs to act more as an agent for patients and less as a guardian of profits for investors.

Health care providers have major complaints about the health insurance system: too much paper work and delayed payments. Also, insurance companies tend to use their money power to second-guess medical providers about what treatment a patient should receive.

A Health Savings Account is a tax-advantaged medical savings account available to people who are enrolled in a high deductible health insurance plan. Wages earned and contributed to this account are not subject to US federal income tax at the time of deposit.

This concept could be extended to the notion of a Health Services Agent (HSA).

An HSA could be an effective middleman for both patient and provider, while letting the free market work as it should, matching supply with demand, promoting healthy competition on price and service.

A Health Savings Account with an Agent

Each patient-client of an HSA opens a savings account with the HSA. When the patient is billed by the HSA for health care service, the bill is paid out of the patient's savings account balance.

An employee signs up with an HSA, usually one recommended by his employer. The employer takes a health care deduction from the employee's paycheck, adds an employer contribution and deposits the total into the employee's savings account with his HSA. The contributed funds are not subject to US federal income tax at the time of deposit.

When the employee-patient requires health care service, the HSA connects with an available provider and sends the patient over. When the provider tells the HSA that service is either complete or has reached a billable stage, the HSA promptly pays the provider the contracted price for the service rendered. The patient subsequently receives a bill for the service -- from the HSA, not the health care provider.

Where Insurance Steps In

If the balance is overdrawn, the HSA extends a loan and the account is charged interest, much like what happens when a credit card statement balance is not fully paid. The HSA will have a relationship with a bank or credit union to get a line of credit to cover these loans.

When an employee's account is overdrawn due to large billings, some employers will arrange with their designated HSA to contribute extra money, so the HSA doesn't have to extend a loan to the employee. The employer may buy insurance to cover such contributions. Self-employed people may make similar arrangements to pay HSA bills.

There is a credit limit on each account; when this limit is exceeded, catastrophic insurance steps in. This insurance may be purchased by the employer, the patient or both.

One should keep in mind that HSA service is not insurance. The primary function of an HSA is to connect patients with health care providers at a low negotiated price, and get good service from providers in return for ensuring that they are paid fully and promptly.

HSAs don't drive insurance companies out of business. Insurance is still needed to cover risk. Insurance is just not used to buffer expenses.

Motivation of a Person Acting as an HSA

The big difference between having a Health Services Agent and having an insurance policy is motivation. The HSA is motivated to serve the patient; the insurance company is motivated to minimize or delay payments to providers while maximizing the premiums received.

An insurance company may decline to cover a particular medical cost. An HSA will never do this; the HSA tries to get the best prices on all medical services. In some cases, the HSA may get stuck paying a high price, possibly overdrawing the savings account and annoying the client by having to extend a loan. This motivates the HSA to search for more service providers and to bargain harder.

An HSA is always canvassing the market, negotiating with health care providers, collecting bids and building a list of providers for a wide variety of health care services at contracted prices.

How an HSA Makes Money

The HSA makes its money from three sources:

Primary Care Physician

An HSA negotiates with clinics and doctor offices to generate a list of available Primary Care Physicians (PCP). Each employee either selects his own PCP from this list, or agrees to be directed to an HSA-selected PCP when he needs health care service.

A provider of PCP services will include as part of its bid to an HSA, a list of what will be included with Primary Care service, as part of the contracted package price. For example, PCP service may include regular exams, some number of other office visits, some common procedures, and an advice nurse available on the phone.

An HSA accepts only packaged deals; an HSA only accepts notification that a service was completed, never a list of billed fees for service.

The HCA usually agrees to guarantee the PCP's office a minimum number of patients as part of the contract. In some cases, the contract may call for maximum numbers of patients in a specific age group or with specific health issues.

A medical office dealing with an HSA never has to submit a bill to the HSA or request reimbursement from an insurance company. The medical office has already agreed with the HSA on services and prices, and can depend on receiving prompt payments for services, usually by direct bank deposit. The only paperwork is a notification of completion of a service; this notice will usually be transmitted electronically.

A company providing HSAs may also operate a small clinic themselves, with doctors and nurses on staff. This allows the HSA to quickly arrange for many routine services and have in-house expertise to monitor the performance of the HSA's other providers of health care services. A few very large HSAs may even operate a hospital. It would not be too difficult, for example, to transform Kaiser Permanente into an HSA.

When a patient requires medical services not provided by his PCP, the HSA gives the PCP a list of providers of the required services. The HSA has already contracted with these providers. The PCP can see what each provider offers, and choose one which is suitable. It may be necessary to select more than one provider to deal with the specific medical issue.

If no suitable provider is found, the HSA will use its network contacts to find a suitable provider, and negotiate a contract. After an HSA has been operating for a while, this situation will arise less and less frequently.

A Simple HSA Example

  1. Patient makes an appointment with his PCP for an annual checkup. This involves a blood test and analysis of a urine sample.
  2. The PCP notifies the patient's HSA about the checkup appointment and the lab tests.
  3. Patient visits a lab, which is under contract with the HSA; he gets his tests done; the lab sends the results to the PCP; the lab notifies the HSA that the job was completed (at the contracted price).
  4. The HSA immediately makes a direct deposit to the lab's bank account of the contracted price for these tests.
  5. Patient shows up at PCP doctor's office for the checkup; doctor reports completion of this service to the HSA. The doctor's office immediately receives a direct deposit of the contracted price for doing a checkup.
  6. HSA bills the patient for both the lab tests and the checkup visit; bill is paid in full (to the HSA) out of patient's HSA account. The only paperwork the patient sees is some lines on his monthly account statement, showing that the bills were paid.

A More Complicated Example

  1. Patient is diagnosed with cancer and needs extended care, including chemo and radiation therapy.
  2. HSA connects patient with a cancer specialist physician and with clinics or hospitals to do the chemo and radiation.
  3. HSA makes an estimate of immediate costs for all this. If the patient's account balance will cover it, no problem. Otherwise, HSA secures a guarantee of support payment of at least this amount from the patient, his employer or an insurance company. In some cases, the HSA will require a minimal deposit in the patient's account.
  4. HSA pays the providers at contracted prices immediately after they provide the services. If the patient's account is overdrawn, it is covered either by an insurance policy or the HSA extending a loan to the patient.

Emergency Services

Ambulance and Emergency Room services are more difficult to cost-control.

HSAs serving a region should get together and negotiate with all emergency rooms in the region, to get package prices, plus possibly set up an insurance pool for regional emergency services.

Emergency rooms could get a regular retainer for standing ready, and contract to receive a fixed fee for dealing with each arrival at the emergency room. There might be different fixed fees for various types of emergency.

Q&A for a New Employee

Here is what might be a list of answers to Frequently Asked Questions provided to a new employee of a company which offers a designated HSA as an alternative to an insurance company.

Q: What if I want to stay with my own doctor?
A: Then you don't sign up with our HSA; you buy health insurance and we'll contribute to your premium payments. You will deal directly with the physician's office yourself. If you join an HSA, you pick a PCP from the list supplied by the HSA.

Q: How does an HSA handle a referral to a specialist?
A: Your HSA maintains a list of specialists who have contracted with your HSA. You should ask your HSA to talk with your PCP and find out which contracted specialist offers the best price for the recommended treatment, including consultation and procedures.

Q: What about Hospitalization?
A: Your HSA maintains a list of hospitals, surgery centers and other providers of specialty medical services, all of which have contracted with your HSA. You should ask your HSA to talk with your PCP and find out which contracted hospital offers the best price for the recommended treatment, including room charges, procedures and other medical services.

Q: Is Maternity covered?
A: Yes. It's part of hospitalization and specialty services.

Q: What about using the Emergency Room?
A: If at all possible, you should go to your HSA-contracted hospital if you require Emergency Room services, but you may go to any hospital. If you go to an emergency room not contracted with your HSA, the emergency provider will still be paid by the HSA, but your HSA account will be billed for all of whatever the charge was.

Q: How is cosmetic or elective surgery covered? What about sex-change surgery?
A: If you are contemplating any of this, contact your HSA and have them shop around for the best price.

Q: Drug prices? How does the HSA provide pharmacy services?
A: Your HSA has negotiated contracts with many pharmacies, contracting for the best individual drug prices.

Some HSA groups may operate large pharmacies, with multiple outlets and major buying power with the drug suppliers.

Savings Interest and the IRS

Interest is paid on HSA savings accounts with a balance greater than loans extended.

If the HSA patient withdraws money from his account, some of the withdrawn amount may be subject to income tax. Certainly the part contributed by his employer is taxable. The IRS will need to work out detailed regulations for this.

Patients agree never to use an HSA savings account as collateral for a loan.

Summary and Some Other Details

An HSA needs to spread its patients over many medical providers, so that a group of local doctors, for example, can't get together and force acceptance of higher service prices. Price fixing over a large region might be effective, but this might be against the law.

An HSA contract may need to include provision for negotiated price increases under some circumstances.

Competition always works best when there are a large number of suppliers in the market, so HSAs are always looking for new medical providers with which to sign agreements.

An HSA can get the best prices if it spreads its business over a large number of suppliers. Whenever an individual clinic increases its prices, an HSA may move its patients to other clinics. The HSA will absorb the cost of switching a patient being treated for a chronic condition, to another provider. This switch might involve paying for a new exam and diagnosis.

HSAs compete against each other for patients based on who can line up the best medical services for the best price.

HSAs compete for providers based on their transaction fee, promptness of payment, and number of patients connected.

This kind of competition involves motivations more beneficial than what motivates an insurance company.

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