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Why Have Health-Care Costs Been Rising so Much More Slowly of Late?

On a par with President Obama’s oft-repeated masterpiece of mendacity that “If you like your insurance plan you can keep your insurance plan,” is his claim that the Affordable Care Act has already begun to slow down the rise in medical costs.

There’s only one problem with that. The ACA came into effect (well, at least those parts Obama did not decide to waive on his own, non-existent authority) on October 1, 2013, and medical cost increases have been slowing for more than a decade. So what did cause the slow down?

John C. Goodman, head of the National Center for Policy Analysis, makes the argument that the causative agent has been the Health Savings Account, which first became legally possible in 2003. The HSA and its close cousin Health Reimbursement Arrangements (HRA) provide company employees with a high-deductible insurance plan to cover catastrophic events and a savings account that can be used to cover routine medical expenses. If the money in the savings account is not needed, it usually is added to the employee’s retirement account.

HSAs have grown by leaps and bounds since 2003. In 2005 there were about 1 million people covered by them. At the end of 2012, about 15 million were.

This structure has great economic advantages. For one thing, health insurance becomes health insurance, covering unexpected costs that would be financially calamitous, just like car and house insurance does. It does not cover routine expenses, such as the infamous birth-control pills, that are much more expensive to cover in what amounts to a pre-payment plan, as I have explained before.

But most important, it gets health-care consumers to ask the magic question: How much is this going to cost? When consumers have to ask that question, costs are kept under control much more easily. As Milton Friedman explained, no one spends other people’s money as carefully as they spend their own. When it becomes in a person’s self-interest to find the cheapest way to get a job done, he will find the cheapest way. If it makes no difference to him, why bother? Life is short enough.

This has had supply-side effects as well. As Goodman explains, “The emergence of so many people paying for care with their own money is also changing the supply side of the market, leading to walk-in clinics that post their prices and provide timely care, and places like Walmart that offer $4 generic drugs financed by cash, not costly insurance.”

Altogether, HSAs cost about 25 percent less than traditional health insurance.

HSAs were not legally possible before 2003 because Senator Ted Kennedy, who favored a single-payer system, used all of his very considerable legislative skill to keep them off the market. He feared, correctly, that they would work effectively to keep down costs and thus pose a threat to the socialization of health care he so wanted, so he fought them tooth-and-nail.