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A national industry survey of business leaders and benefits managers found that more than twice as many employers now offer or plan to offer HSA-eligible plans in the next two years.15 In Colorado, about 10 percent of the state’s 46,368 small employers who contribute to their employees’ health insurance offer an HSA-eligible plan.16 Other types of health plans introduced in the last 20 years (Preferred Provider Organization, or PPO, and Point of Service, or POS, plans) have quickly gained a foothold, just as we are seeing now with HSA-eligible plans, then slowed their growth, eventually stagnating or losing market share to new plan types. PPO plans had an even faster initial rate of adoption than HSA-eligible plans.17 The limits of HSA-eligible plan enrollment are already becoming evident. Data from three large, multi-state insurance carriers suggest that when employees were offered a plan with a Health Reimbursement Arrangement (HRA) alongside other options, 17 percent chose the HRA-based plan.18 A broader survey found 19 percent of workers chose a high-deductible plan with an HSA or HRA when they had a choice between different types of plans in 2006.19 In 2005, 25 percent of people chose HSA-eligible plans and 15 percent chose HRA-based plans,20 indicating that these plans are not gaining traction with health plan enrollees. Moreover, people enrolled in HSA-eligible plans are much less satisfied with their health insurance than those with other types of health care, according to a large online survey of adults with private health plans.21 Cost of HSA-eligible insurance plansIn 2006, the average premium for all health plans nationwide was $4,242 for single coverage and $11,480 for family coverage (including employer and employee contributions). The average HSA-eligible plan premium was $3,176 for single coverage and $8,515 for family coverage during the same time period.22 The average HSA-eligible plan premium was about $1,100 less for an individual and $3,000 less for a family than the average premium of a traditional health care plan. Enrollees did not see all of these savings; employers typically saved more on premiums than employees when they switched from a traditional plan to an HSA-eligible plan. This is because employers usually cover a larger portion of the health insurance premium than workers. Employers continue to pay a similar portion of the premium for HSA-eligible plans as for traditional plans.23 While employees paid slightly less on premiums for HSA-eligible plans, their exposure to risk was significantly higher.24 Employees who enroll in an HSA-eligible plan may save hundreds of dollars on premiums, but may have to pay thousands more out-of-pocket if they suffer an accident or illness.
People with HSA-eligible plans reported spending more on health care than people with traditional insurance. HSA-eligible plan enrollees are more than twice as likely as people with traditional insurance to spend 10 percent or more of their income on premiums and out-of-pocket expenses.25 Most HSA-eligible, high-deductible health insurance plans cover most or all of the cost of enrollees’ health care once their deductible has been met.26 After that, regular office visits, prescription drugs, emergency room care, hospitalization, x-rays and lab work are covered with no co-payment in many HSA-eligible plans.27 An analysis of typical HSA-eligible plan structures and traditional health plans found that because HSA-eligible plans cover so much once their deductibles have been met, people who spend the least and people who spend the most health care actually pay less in HSA-eligible plans than they would for traditional insurance, while people in the mid-range of spending pay more.28 Many HSA-eligible plans, however, do not provide sufficient coverage to protect family finances in a medical disaster. As previously mentioned, a health insurance plan must have a high deductible of at least $1,100 for individuals and $2,200 for families for the plan to be HSA-qualified. Many families with HSA-eligible plans, however, have deductibles much higher than this; 29 percent of families with HSAs had an annual deductible of $5,000 or more in 2006, over twice the minimum deductible required for a plan to be HSA-qualified.29 While the average cost of health care premiums increased 7.7 percent in 2006, premiums for HSA-eligible and HRA-based plans climbed by 4.8 percent.30 The slower growth in HSA-eligible premiums could be due to a small market reaching economies of scale as more people adopt the plans. People who open HSAs report being in better health than people enrolled in other forms of employer-sponsored insurance, so slower price increases could also be a result of HSA-eligible plans attracting people with lower health costs and insurance companies passing on the savings to enrollees.31 Effects of HSAs on the cost of comprehensive insuranceMany critics of HSAs contend that high-deductible plans disproportionately attract the healthy. If this were true, costs for enrollees in traditional plans would increase, since their insurance risk pool would have fewer healthy people with low health care costs and more sick people with high health care costs. This phenomenon is referred to as adverse selection. Early evidence indicates that people with HSA-eligible plans are in better health than people with other types of insurance. A 2006 survey found that 53 percent of people enrolled in traditional insurance plans had a health problem, while only 44 percent of those in HSA-eligible plans did.32 Several other studies indicate that employees who enroll in a high-deductible health plan with a savings option are more likely to be healthy and wealthy.33 If HSA-eligible plans do attract healthier individuals than other health care plans, traditional insurance coverage could become more expensive. Premiums for HSA-eligible plans would decrease because few enrollees would have high medical costs, and premiums for traditional plans would increase because their healthy enrollees would flock to cheaper HSA-eligible plans, leaving only people with high health care costs in the traditional plans. As more healthy people sign up for HSA-eligible plans, the price difference between plan types would increase.34 Differences in price might not be as great, however, if more people with very high health costs, who may spend less in some HSA-eligible plans than they would in traditional insurance plans, enroll in HSA-eligible plans. Some critics have voiced concerns that tax deductions available for HSAs will undercut the employer-sponsored health insurance market, especially if additional tax cuts proposed by the Bush administration are implemented.35 While HSA enrollees in the individual market receive more tax advantages than those with other plans, their premium payments are not tax-exempt.36 Health insurance premiums deducted from workers’ paychecks, on the other hand, are not included in their taxable income. While HSA-eligible plans sold on the individual market may threaten employer-sponsored insurance if they are given additional tax advantages, it is unlikely that they will do so in their current form. HSAs and cost-consciousnessStudies suggest that HSAs may increase cost-consciousness among consumers. People enrolled in HSA-eligible plans are more likely than people with traditional insurance to check on the cost of prescription drugs and use the quality and price information provided by their insurers.37 This difference in consumerism, however, could be affected by several other factors. People with HSAs are more likely to have an undergraduate or graduate degree than are people with traditional plans (56 percent vs. 33 percent),38 and people with more education are more likely to have access to the Internet,39 where cost and quality reporting tools are more easily found. Proponents of HSA-eligible plans claim that people with high-deductible plans have more of an incentive to be cost conscious than people whose health costs are paid for by a third party, such as an insurance company. A 2006 analysis by the non-partisan Congressional Budget Office indicates that while this may be the case, restrictions placed on HSAs, such as limiting spending to health care alone, limit their effectiveness to promote cost consciousness.40 HSAs are only tax advantaged if account holders spend the money in the accounts on health care. Since spending from these accounts is not entirely discretionary, people with high-deductible plans have more of an incentive to seek out lower prices when they do not have an HSA, because they must pay for health care with money that could be spent on something else, than when they do have an HSA, because they pay for health care with money that cannot be spent any other way. When employers decide to contribute a set amount to such accounts instead of paying employees and letting them determine how much to put into their own HSAs, employees have even less discretion over their income and accordingly have less incentive to be scrupulous when shopping for health care, the Congressional Budget Office reports. HSAs and the growth of health care costsWhile early evidence suggests that HSA-eligible plans may make enrollees more cost conscious, it is not clear whether these plans will significantly slow the growth of health care costs. Total health care spending is dependent upon use, or the amount of health care that patients receive, and the cost per episode of care. Based on current research, it is not clear if the spread of HSA-eligible plans is leading to a drop in use, but it does not appear to be reducing the cost per episode. Annual surveys conducted by Employee Benefits Research Institute and the Commonwealth Fund found there were not significant differences in use between people with traditional health plans and HSA-eligible plans, although there were differences in the use of certain services.41 A Kaiser Foundation study, however, indicates there may be a slight decrease in use among HSA-eligible plan-holders.42 Furthermore, the RAND Health Insurance Experiment found that people typically use health care services less when they have to pay for more of their health care out-of-pocket, and it is likely that many people enrolling in HSA-eligible high-deductible plans did not have as high a deductible in their previous plan. A review of literature on HSA-eligible plans concluded that early evidence indicates high-deductible health plans may reduce use and spending, although it primarily relies on case studies of individual companies to come to this conclusion.43 The structure of HSA-eligible plans limits their effect on health care prices. Since these plans typically cover a greater portion of health costs than traditional plans once their deductible has been met, they do not lower health care spending for the most expensive patients. One 2006 study asserts that the 8 percent of patients who account for half of all health care spending would not be significantly more cost conscious, since they would have no greater economic motive to be proactive consumers.44 These patients may even spend slightly less out-of-pocket in an HSA-eligible plan than in a traditional plan. There have been high expectations that HSA-eligible enrollees would pressure their health care providers to supply more information on costs and quality. While it is still too early to tell whether the spread of HSAs will lead to more transparency in the health care market, HSA-eligible plans appear to have accomplished little on this front to date. A 2006 General Accountability Office review of the HSA market found that among five large multi-state health insurers offering HSA-qualified plans, none provided information on the actual cost of a doctor visit, the actual price of any specific procedure, patient satisfaction ratings or the outcomes of operations performed by individual doctors. Several did provide hospital-specific data.45 Furthermore, a Harrison Interactive survey found that less than 1 percent of consumers who used quality ratings actually changed their primary hospital, physician or health plan as a result of accessing such materials.46 This suggests that even if more information on quality of care were available, it may not significantly affect consumer choices. Some advocates of HSA-eligible plans contend that prices will go down as health care consumers shop around and bargain with providers for the lowest possible price. Health insurers, however, already have incentives to lower costs as much as possible, and they have more bargaining power than individuals. If insurance companies are, in fact, more effective at obtaining low prices from providers, health care costs could increase if more individuals take on this role.47 Physician practices and hospitals may even see increased administrative costs, as they are required to collect and keep track of payments from more individuals with high-deductibles, instead of billing just a few insurance companies.48 In Colorado, officials at some hospitals have blamed recent increases in unpaid health care bills, which could lead to more aggressive payment collection, on the recent growth of high-deductible plans.49 The RAND Health Insurance Experiment (HIE)In 1974, the federal government commissioned the RAND Corporation to study the effects of cost-sharing in health insurance plans. RAND enrolled about 2,000 families from around the country in one of five plans:
Researchers followed families enrolled in these plans for three to five years to evaluate their spending patterns and health outcomes. What the researchers found was somewhat surprising. When people were required to spend more of their own money on their health care, they received less care and spent less money, but they had the same health outcomes as people with less cost sharing. Families with the highest level of cost sharing spent 31 percent less on health care than those with free care. Overall, the researchers found that a 10 percent increase in the amount of money families had to spend out-of-pocket on health care would lead to a 2 percent reduction in use.50 Health outcomes, however, were not very different between groups. For the average enrollee, health outcomes were the same in the plan with no cost sharing, the plans with co-insurance and the plan with a deductible. Low-income enrollees with high levels of cost-sharing, however, had a higher mortality rate than those with free care, mainly because of undiagnosed hypertension. The researchers found that the negative effects of cost-sharing could be cut in half with one annual screening, an inexpensive alternative to free care.51 Critics of high-deductible plans often cite the potential harm of reducing use of effective preventive treatment. They claim a reduction in preventive treatment leads to higher costs in the long run because minor health problems become more severe and more expensive to treat. While improved preventive treatments may have increased the magnitude of this so-called “offset effect,” the RAND Health Insurance Experiment found no evidence to support the existence of such a phenomenon.52 Health expenditures for enrollees in plans with higher levels of cost-sharing were the same after five years as they were after three years, suggesting that the long-term health of enrollees did not suffer as a result of greater cost-sharing.53 Today, the results of the RAND Health Insurance Experiment must be interpreted with caution, especially as they apply to HSA-eligible plans. Several unique features of the insurance plans used in the experiment may have played a major role in limiting the negative effects of cost-sharing, especially for low-income enrollees. First, all plans had an out-of-pocket limit of $1,000 (about $2,500 in today’s dollars), and families with lower incomes had lower out-of-pocket limits. In order for an individual with a high-deductible plan to be eligible for a health savings account, however, the deductible must be at least $1,100, regardless of income. Furthermore, the out-of-pocket maximums in current health plans are set as a fixed dollar amount, not as a percentage of income. This means that high-income families take on less relative risk than low-income families when they enroll in a high-deductible plan.54 This was not the case in the RAND Health Insurance Experiment. If a health insurance plan leaves low-income families more financially exposed than high-income families, it is possible that health disparities that were not detected in the RAND Health Insurance Experiment will arise. Second, differences between the health care system of 1980 and today may dampen some of the financial benefits of cost-sharing. The managed care revolution of the 80’s and 90’s led to tighter control of services by insurance companies, reducing use in the same way that higher deductibles did in the RAND Health Insurance Experiment. In fact, the RAND study found that HMOs were about as effective at reigning in costs as higher levels of cost-sharing.55 Third, medical advances made in the last 20 years may increase the negative effects of reducing the use of health care. Researchers analyzed use of health care based on effectiveness and found that people who paid a greater portion of their health care costs reduced their use of effective and ineffective treatments at about the same rate. Their health outcomes, however, were no different, despite reductions in the use of highly effective care. Researchers hypothesized that reductions in effective care were offset by reductions in harmful care.56 If medical advances have made treatments more effective and eliminated treatments that actually harm patients, there may be more negative effects of reducing use of health care services today than there were in 1980.57 While a few recent experiments have tried to shed light on the effects of cost-sharing on health spending and outcomes (with conflicting conclusions),58 none have had the scope of the 1974 RAND Health Insurance Experiment. The RAND Health Insurance Experiment remains the most comprehensive study on the effects of cost-sharing in health insurance plans. HSAs and building wealthSince only half to two-thirds of HSA-eligible enrollees open an HSA, many consumers do not benefit from the tax-exempt status of the accounts. The IRS reported that about 55 percent of HSA-eligible enrollees claimed deductions for their accounts in 2004, indicating that a little over half of people eligible to contribute pre-tax earnings to HSAs actually did so.59 Of HSA-eligible enrollees who have opened an HSA, 51 percent had an adjusted gross income of $75,000 or more, while only 18 percent of the total under-65 population had an income this high. The average income for people reporting contributions to an HSA was $133,000, compared to an average income of $51,000 for all tax filers.60
Nationally, the average HSA tax deduction in 2005 was $2,308 and increased with income, although claimed deductions were unusually high for people with incomes below $15,000 a year. The average HSA deduction in 2004 was $2,100 and increased with income level.61 The HSA tax deduction, like most tax deductions, is greater for people with higher incomes than for people with lower incomes. People in the highest income bracket receive the greatest deduction since they pay taxes at the highest tax rate. Low-income workers, on the other hand, receive little or no tax benefits for depositing money in HSAs. For example, a family of four with an annual income of $20,000 would receive no tax benefit for contributing $2,000 to an HSA, because it has no tax liability. A family of four with an income of $120,000, however, would pay $620 less in federal taxes.62 It is unclear whether or not most HSA accounts help people save for future health care costs. One fifth of people with HSA accounts in 2005 had no savings in their accounts at the end of the year, while one quarter of HSA account holders had more than $1,000 in their accounts at the end of the year that could pay for future health care expenses.63 A large survey in 2006 found that people with incomes less than $50,000 were less likely to contribute to their HSAs, while people making more than $50,000 a year were more than twice as likely to contribute $1,500 or more a year to their HSAs than people with lower incomes.64 Another study found that while enrollees making less than $25,000 a year were about as likely to open an HSA as enrollees making over $50,000 a year, they were about half as likely to open an account when their employers did not also contribute to their HSA.65 Some wealthy individuals abuse HSA tax benefits to accumulate tax-exempt interest, according to the Congressional Budget Office. Representatives from financial institutions reported that high-income workers are more likely than low-income workers to pay out-of-pocket expenses from a source other than their HSA, and to use their HSA as a tax-exempt savings account.66 This may allow some individuals to accumulate interest and capital gains on their HSA until they reach retirement age without paying capital gains taxes. Once an enrollee reaches age 65, non-medical withdrawals can be made from an HSA without a tax penalty.67 Enrollees do have to pay income taxes on these withdrawals, but they are likely to be in a lower tax bracket during retirement than they were in while working. While accumulating savings for future health care costs in an HSA can help enrollees cover the high deductible in their health plan, it does not always protect enrollees from financial catastrophe. The high deductible in an HSA-qualified plan must be met every year, while savings in an HSA can only cover health care costs once. Enrollees diagnosed with a chronic illness may, therefore, have to cover high deductibles out-of-pocket every year, even if the savings in their HSAs are depleted. For example, an individual with a $2,000 deductible who has $4,000 in his HSA could cover the deductible for two years with money from his HSA. If a chronic illness required ongoing treatment, however, he would be exposed to a $2,000 deductible that he would have to pay out-of-pocket every year after the first two years. HSAs and the uninsuredA large survey in 2006 found that people enrolled in HSA-eligible plans were more likely to have had insurance before they enrolled in their current plan than people with other types of insurance.68 Over half of the uninsured in America do not make enough money to have an income tax liability.69 The tax-exempt status of HSAs provides no incentive for these people to buy health insurance and save for future health care costs. Premiums for HSA-eligible and HRA-based plans are growing more slowly than premiums for other types of health plans, but their costs are still increasing faster than inflation, putting them further out of the reach of most low-income working families.70 While, on average, premiums for HSA-eligible plans are more affordable for low-income workers than traditional plans, they still take up 30 percent to 40 percent of the total income of an individual or family living at the federal poverty level.71 These plans do not make health care more affordable for the 175,000 uninsured Coloradoans living below the federal poverty level or the 225,000 other uninsured Coloradoans living between 100 and 200 percent of the federal poverty level, many of who do not qualify for Medicaid. ConclusionThe RAND Health Insurance Experiment indicates that it may be possible to lower health care costs — without affecting people’s health or exposing them to great financial risks — by increasing the portion of medical bills paid directly by patients. Giving health savings accounts a tax advantage was an attempt to do this, but current evidence indicates this may have made some families more financially vulnerable and has not significantly lowered health care costs. High-deductible health plans that can be coupled with tax-exempt HSAs are constrained by federal regulations. While there is some demand for the type of high-deductible health plan that accompanies an HSA, this plan structure has not appealed to the majority of people whose employers offer it, and, given current pick-up rates, it appears unlikely that HSA-eligible plans will gain a majority of the health insurance market. Furthermore, HSA-eligible, high-deductible plans provide far too little coverage for many families. Low-income families often struggle just to pay premiums and may not build up enough savings in an HSA to cover a high deductible. If they encounter high health care costs while enrolled in a high-deductible plan, they could be forced into bankruptcy. Current enrollees in HSAs are more cost conscious, but they make up only a small portion of all insured families. Their modest numbers may limit their effect on the health care market. Unless there is a critical mass of diligent consumers, it is unlikely that the system-wide benefits of increased cost-consciousness and consumerism touted by some proponents of HSAs will come about. The RAND Health Insurance Experiment suggests that public policies encouraging people with adequate financial resources to pay a greater portion of their health care costs out-of-pocket may be crucial to lowering health care costs without adversely affecting people’s health or exposing them to great financial risks. But encouraging people to open tax-exempt savings accounts attached to high-deductible health plans, with no stipulations that limit financial risk for low-income families, has not been an effective way to do this. While several experts have proposed ways to alter HSAs that would make their tax advantages less regressive and encourage savings by low-income enrollees,72 in their current form these plans have done little to help low-income families save, and they are unlikely to lower the number of uninsured residents in the state. As Colorado works toward comprehensive health care reform, it can draw on the information provided by surveys of the health insurance industry, national economic analyses and the RAND Health Insurance Experiment to determine which plan structures maximize the common good. These sources indicate that HSAs may be a useful product for some consumers, but they are by no means a solution to the major problems in today’s health care system.
End Notes1. “Employer Health Benefits 2006 Annual Survey.” Kaiser Family Foundation and HRET. 4. HSAs cannot be used for expenses related to optional cosmetic surgery, medicines from other countries, nutritional supplements, or premiums for another insurance plan. A full list of eligible and ineligible services is available in IRS Publication 502. Health savings accounts on the national stage 9. Ibid. 14. “2005 Consumer-Driven Health Care Survey,” Deloitte Consulting LLP and the Deloitte Center for Health Solutions, 2005. Cost of HSA-eligible insurance plans 22. Kaiser Family Foundation and HRET, 2006, end note No. 1: pg 25 and pg 104. Effects of HSAs on the cost of comprehensive insurance 32. Fronstin and Collins, 2006, end note No. 21. The study defined a health problem as “arthritis; asthma, emphysema or lung disease; cancer; depression; diabetes; heart attack or other heart disease; high cholesterol; or hypertension, high blood pressure, or stroke.” 37. Fronstin and Collins, December 2005, end note No. 25; HSAs and Account Based Health Plans: An Overview of Preliminary Research. AHIP, June 2006; Kaiser Family Foundation, November 2006, end note No. 31; Fronstin and Collins, December 2006, end note No. 21. HSAs and the growth of health care costs 41. Fronstin and Collins, December 2005, end note No. 25. The 2005 survey found a slight variation in these variables, suggesting that HSA enrollees skimped on care slightly more often, but the difference was slim. The next year’s update (end note No. 21) found that while there was a difference in reported skimping on care as a result of cost, total utilization was not significantly different between groups. 50. Furman, Jason, “The Promise of Progressive Cost Consciousness in Health Care Reform,” The Brookings Institution, April 2007. 59. Government Accountability Office, April 2006, end note No. 45. 68. Ibid. Smaller surveys of select cohorts conducted by industry representatives have found the opposite results. A January 2006 survey of insurance companies that are members of America’s Health Insurance Plans found that 31 percent of HSA-eligible plans sold on the individual market were sold to previously uninsured households: “January 2006 Census Shows 3.2 Million People Covered by HSA Plans,” America’s Health Insurance Plans, 2006. 72. Reinhardt, Uwe, “Insurance: A Closer Look at HSAs,” Health Affairs blog, April 12, 2007; and Furman, April 2007, end note No. 50.
Last updated Aug. 28, 2007 The Bell Policy Center Home | About the Bell | Support the Bell | Contact the Bell
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