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Understanding My HSA: One User’s Story
Nate was helping me limp off the soccer field, bearing the weight that would otherwise fall on my
rapidly swelling knee. "At least we know you didn't tear your ACL," he said, referring to my anterior
cruciate ligament. "How do we know that?" I asked. "Because I tore my ACL once," he said. "Believe
me, if you had torn yours, you would have done a lot more screaming and crying."
The ACL runs from the shin bone to the thigh bone. It keeps your knee from dislocating when you turn
or pivot—unless you turn or pivot too hard. ACL tears are among the more common sports injuries,
and, despite Nate’s assurances, it turned out I had in fact torn mine.
There was nothing pleasant about tearing my ACL or having it surgically reconstructed. But there was
a silver lining: I finally got to use my health savings account (HSA). For years I have argued that the
HSA would make health insurance more affordable by giving patients an incentive to eliminate
unnecessary medical expenditures, and I was one of the first to get one. But I've always been pretty
healthy, so I never got a chance to use it. Until now.
HSAs are a far cry from HMOs. If I had an HMO, I might have gone straight from the soccer field to
the emergency room, where they would have taken an X-ray and MRI, referred me to an orthopedic
surgeon and maybe given me something for the pain. Importantly, I probably would not have asked
whether the ER trip, X-ray or MRI were worth the cost, because I would have been responsible for
only a small portion of those costs. HMOs typically feature low or non-existent deductibles and
copayments, so patients do not realize or care how much their health care is actually costing.
That kind of price insensitivity leads patients to consume a lot more medical care—much of it
unnecessary. Thirty years ago, a well-respected study (the RAND Health Insurance Experiment)
randomly assigned thousands of people with all sorts of health problems to different health plans with
varying coinsurance levels. Unsurprisingly, researchers found that the less patients had to pay out-ofpocket, the more medical care they consumed. Patients who paid nothing out-of-pocket consumed 43
percent more than those with a deductible of a few thousand dollars.
More surprising was that, overall, the additional care produced no better health outcomes. A lot of the
added expenditures were simply wasted on low- and zero-value care. America's health care system
seems to be following a similar trend. In 1965, patients paid, on average, 44 percent of their medical
care out-of-pocket; today that number has fallen to 14 percent. No wonder patients demand more
health care each year, whether it’s necessary or not (which results in more health insurance claims
and leads to skyrocketing health insurance premiums).
That's where HSAs come in. HSAs resemble the "high deductible" insurance from the RAND
experiment—where patients purchased less medical care but ended up just as healthy. High deductible
insurance has always been available, but few Americans choose it because out-of-pocket dollars spent
on health care have always been taxed (unlike employer-provided insurance). The HSA’s big
innovation was to give the money you save for your out-of-pocket expenses the same tax-free status
as employer-provided insurance, thereby eliminating the bias against high-deductible insurance.
So if you have HSA coverage, you can put money tax-free into a health savings account to cover your
routine medical expenses. But you also have a health insurance policy with a deductible of $1,200 or
more, which pays for any catastrophic medical bills. The important part is that the money in your HSA
belongs to you, even if you change jobs, change health insurance or retire. That gives you a big
incentive to spend the money wisely, because whatever you don't spend rolls over each year and
grows, tax-free. Plus, you can spend it on future medical expenses without ever paying taxes on it.
Of course, HSAs are controversial. Despite the evidence from the RAND experiment, some fear that if
patients are more cost-conscious, they will skimp on needed medical care. With my HSA, a $2,500
deductible and a swollen knee, I was about to become part of this experiment. Would I make better
decisions than if I were spending an HMO's money? Or would I end up hurting myself by forgoing
necessary care?
As my teammates kept playing, I sat on the sideline trying to figure out what to do next. Since I
would be paying for my first $2,500 of medical expenses out of my HSA, I decided that an emergency
room trip wasn’t really necessary. Instead, I iced my knee until I was able to see an orthopedist.
The orthopedist recommended both an MRI and an X-ray. Since I would be paying for these items
myself, I asked him whether both were necessary. According to one estimate, as many as 30 percent
of such imaging tests are either unnecessary or the wrong type of test. He agreed that the X-ray
probably wasn't necessary, so I skipped it. As for the MRI, I was aware that they can be quite
expensive, so I was determined to make sure I got the lowest possible price.
Most patients don't even pay attention to the ”negotiations” that go on between the doctor's bill and
the insurance company. They just look for the part that says "You owe this much." But since I knew I
was paying for 100 percent of this MRI, I paid close attention to how much the radiologist charged
me. And overcharge me, he did. The radiologist initially billed me $1,500, though my insurance
company's "negotiated discount" brought the price down to $1,380. But through some research, I
discovered that an imaging center near my house charged cash-paying patients just $600 per knee.
Here's a dirty little secret: the amount that health care providers initially charge isn't the actual price
or even a reasonable markup. According to a recent study, hospitals charge cash-paying patients twoand-a-half times what insurance companies ultimately pay, because insurance companies demand
discounts. Savvy patients demand discounts too, and frequently get them. Unfortunately, many cashpaying patients aren't insistent, and end up getting gouged.
Knowing all that, I decided to start negotiating on my own behalf. When I explained that I would be
paying cash, the radiologist's billing agency lowered the price to about $1,000. Finally, seven months
after my MRI, we settled on a price of $700. That's a 53 percent discount from the sticker price. The
woman I negotiated with has handled this radiologist's billing for the last 20 years. She told me that if
I ever need another MRI, I should just walk up to the front desk and demand a 50 percent discount.
Skipping the ER and an X-ray... Haggling with the radiologist... Spending my own money made me
behave differently than if I were spending an HMO's money. Since ACL damage is such a common
injury, it makes me wonder how many people unnecessarily use those services, or pay too much for
them. That kind of cost-consciousness is one way HSAs can make health coverage more affordable.
My cost-consciousness kept my expenses down, which kept me from filing claims with my insurance,
which helps keep my health insurance premiums (and those of my coworkers) from rising. That may
be one reason why premiums for HSA-qualified insurance plans have grown at less than half the rate
of traditional insurance premiums – and some brokers report that premiums have actually decreased!
But what if skipping the X-ray had been a bad decision, only to set myself up for greater costs down
the road? As it turns out, my decision was a smart one (one that I only made with the
recommendation of my doctor). What the RAND experiment showed to be true in the aggregate was
also true in my case: making me cost-conscious didn't hurt my health. People tend to make pretty
good decisions when spending their own money on health care, such as conducting research, speaking
with doctors and negotiating prices. Without that financial incentive, I would have simply submitted to
the X-ray, thus pushing my insurance premiums upward—all for absolutely zero health benefit.
HSAs will not cure everything that's wrong with America's health care sector. But my HSA plan did get
me more engaged in my health care decisions, in a way that benefited me directly, and helped make
health insurance a little more affordable for others.
Authored by Michael F. Cannon, the director of health policy studies at the Cato Institute, a non-profit public policy
research foundation. Repurposed with permission. Design © 2007-2009, 2011 Zywave, Inc. All rights reserved.