We are going thru our yearly open enrollment where we get a chance to change our health insurance plans (among other things). In that context, I am reading a little bit about health care sector.

While the sector has clear deficiencies and is probably ripe for a complete change – there has been some innovations worth mentioning. For example, consumer driven health plans offer a way for providing higher quality care at cheaper prices.

DefinityHealth (a startup that got acquired by UHC for $300M when it had 300K members) offered such products as early as 1998. Essentially, they offered cheaper plans with higher deducitibles.

A typical plan is funded as follows:

• Employers funded most of the cheaper plan (just like other plans) but their costs were less .
• Employees got an attached account (HSA) that they can fund with pre-tax dollars (upto $5950/year/family).
• Many employers choose to pass on some of their savings (say, $500/year/family) to employees to kickstart their HSA fund. This added as an extra incentive for employees to opt for this fund.
• Employees owned their HSA free and clear and are free to invest them as they wish or take it with them when they leave the job but can only use it for medical purposes.

A typical plan paid as follows:

• Preventive checkups were covered at 100%
• Any other expenses (upto about $5000/family) were covered by the HSA – funded by employer (first $500) and then by pre-tax money from employees
• Catastrophes (beyond $5000) were covered 80% by insurance and 20% by employees.
• Any unused HSA will rollover to next year.

The plan has following benefits:

• Extra incentives for preventive checkups (no copay).
• Since consumer pays from “her” money – she has more incentive to search for the right cost.
• Cheaper premiums for employers and employees.
• Incentives for staying healthy as consumer pays some portion of the cost.

The plans has following disadvantages:

• People with chronic diseases (diabetes etc) where annual expense is roughly between $600-$5000 will have to pay most of it from their pocket

One can argue that benefits outweight disadvantages by a huge degree for such plans and people with chronic diseases should carry higher costs than other people in a capitalist society.

Now, if we can combine such plans with pricing transparency (another article) – we will be half way to medical nirvana in USA.