Health Savings Accounts—A Sleeping Giant?

Among the many provisions in the recently passed Medicare Prescription Drug and Modernization Act receiving significant attention is the establishment of health savings accounts (HSAs).

HSAs are established to pay for medical and other specified expenses. They can be opened by anyone enrolled in a high-deductible insurance plan. Individuals with a minimum deductible of $1000 and families with a minimum deductible of $2000 qualify for HSAs.

The new legislation provides that individuals under the age of 65 can set aside tax-exempt funds to ensure that they are able to pay for their health care expenses, including prescription drugs and long-term care services. Individuals, family members and employers may make pre-tax contributions into the account . While the maximum annual contribution into an account is capped at $2,600 for individuals and $5,150 for families, there is also a “catch-up” provision that allows for additional contributions between the ages 55 and 65. Once established, an HSA remains the property of the individual, despite job changes or retirement.

“Tax free” is the hallmark of the new HSA provision of the Medicare legislation. Contributions are made tax free; earnings on the account are tax free; distributions from the account for qualified medical expenses are tax free; and upon death, an HSA may be transferred to a spouse tax free.

The new HSA option is being touted as an improvement on the Medical Savings Accounts (MSAs) established in 1996. MSAs, which were limited to employees of small businesses and the self-employed, were complex and restrictive and not widely adopted. HSAs, on the other hand, have gotten the attention of a number of large insurance companies, including UnitedHealth Group and Aetna. (See nytimes.com/2003/12/09/business/09care.html) In part, this is because the minimum deductibles on the “high deductible” plans that qualify are much closer to the size of the deductibles more and more workers are seeing in their PPO, POS and “traditional” coverage. In addition, since individuals are permitted to save for the entire deductible, as well as additional out-of-pocket expenses, they do not experience a gap prior to their traditional health insurance benefits.

Contributions to HSAs are intended for first-dollar health care costs until an individual’s or family’s deductible is met. Accordingly, say proponents of HSAs, the accounts will result in consumers becoming more price-conscious, taking more control over their health care spending, and making better decisions. Those who favor the accounts also believe that they will result in a greater degree of market competition to help rein in rising health care costs.

Greg Scandlen at the Galen Institute’s Center for Consumer Driven Health Care, has done one of the earliest assessments of this program. He predicts a rush to take advantage of the new accounts in the individual market given the strong incentive to minimize premium payments and maximize HSA contributions. The small group market will be slower to adopt the HSA option, while the fully-insured mid-market is likely to look seriously at the accounts as a way of cushioning increased cost-sharing requirements for employees. Self-insured companies may opt to stay with more restrictive health reimbursement accounts, unless employees push for the portable HSA accounts. Finally, Scandlen offers that HSAs will likely be popular with the short-term uninsured. (See galen.org/ccbdocs.asp?docID=569)

Critics of the HSA provision argue that these accounts are designed as a tax shelter for those most able to afford medical care, rather than as a benefit to assist less-wealthy retirees. In addition, critics argue that individuals who are young, healthy and affluent will opt for high-deductible, low-premium plans, resulting in a risk imbalance among health plans.

Tax-preferred HSAs are clearly controversial. In fact, some legislators say they may seek to eliminate that provision of the legislation, even after it is goes into effect in January 2004. Time will tell whether the accounts remain in effect, whether they are widely implemented, whether they promote more consumer-driven health care and whether they positively influence the health care system.

HCFO has funded research that informs policy related to health savings accounts:

Title: Controlling Risk Segmentation under Employment-based Medical Savings Accounts
Grantee Institution: University of Pennsylvania
Principal Investigator: Mark V. Pauly, Ph.D.
Grant Period: April 1, 1997 – October 31, 1998

How do employers decide whether to offer medical savings accounts (MSAs) to their employees? Researchers at the University of Pennsylvania’s Wharton School addressed the question of how employers in medium- and large-group firms think about MSA-induced risk segmentation in the health insurance market. They: 1) conducted a simulation analysis under different levels of premium reduction or employer contribution to the MSA account to analyze the financial impact of these different thresholds; and 2) surveyed employee benefit specialists and consultants and ask them whether, under various "realistic circumstances," they would choose to offer MSAs as an option and whether they would adjust the premium reduction/employer contribution to control the amount of risk segmentation. The objective of the study was to help inform the policy debate as to how medium and large-group employers say they would implement MSAs under various conditions.

• Pauly MV, Herring BJ. “An Efficient Employer Strategy for Dealing with Adverse Selection in Multiple-Plan Offerings: An MSA Example,” Journal of Health Economics (elsevier.nl/locate/inca/505560), Vol. 10(4), July 2000.
• Pauly MV, Percy A, Rosenbloom JS, Shih D. “What Benefit Specialists Think about Medical Savings Account Options for Large Firms,” Benefits Quarterly (iscebs.org/BQinfo/bqads.asp), Vol. 16(3), Third Quarter 2000.
• Pauly MV, Percy A, Herring B, Rosenbloom J. “What Would Happen if Large Firms Offered MSA's?,” Health Affairs (healthaffairs.org), Vol. 19(3), May/June 2000.

Title: The Effect of Price on Health Plan Choices of Retirees
Grantee Institution: University of California Irvine Graduate School of Management
Principal Investigator: Thomas C. Buchmueller, Ph.D.
Grant Period: March 1, 2002 – February 29, 2003

The researcher analyzed data from a large western employer to assess the price sensitivity and related health plan choices of Medicare-eligible retirees. Building on previous HCFO-funded research, the researcher analyzed the following: 1) What is the effect of out-of-pocket premiums on the health plan choices of Medicare-eligible retirees? 2) How price-sensitive are early retirees (under 65)? and 3) How responsive are retirees to financial incentives for declining coverage? The objective of this study was to educate decision makers who develop Medicare reforms by providing credible estimates of the price sensitivity of Medicare beneficiaries. In addition, the researcher sought to inform policymakers about how retirees respond to financial incentives and the impact this response might have on how insurance costs are allocated.

Title: Evaluation of Defined Contribution Plans on Health Insurance Choice and Medical Care Use
Grantee Institution: University of Minnesota
Principal Investigator: Stephen T. Parente, Ph.D.
Grant Period: November 1, 2002 – October 31, 2004

What are the effects of consumer-driven health plans? Researchers at the University of Minnesota are conducting a two-part evaluation of Definity Health, a consumer-driven plan. The researchers first are assessing the service use and adverse selection of consumers who select a CDHP. They also are assessing the experience of “early adopters” from the employer and employee perspective. The following research questions comprise the framework of the evaluation: 1) Who chooses to join CDHPs? 2) Do these plans attract the healthier employees in an employer’s health insurance risk pool? 3) How do cost and use differ among people in CDHPs versus other plans? 4) Do patterns of service use and medical care change for enrollees in CDHPs after enrollment? 5) How do employees and employers assess their experience in the plan? The objective of the study is to provide private and public decisionmakers unbiased information on the effects of CDHPs in their early stages.

Title: Private Insurance Markets: The Missing Link-Association Health Plans and Other Pooled Purchasing Arrangements
Grantee Institution: Georgetown University
Principal Investigator: Mila Kofman, J.D.
Grant Period: April 1, 2003 – September 30, 2003

The researchers will undertake a comprehensive study of pooled purchasing arrangements. It will: (1) identify and describe different types of pooled purchasing arrangements, identify examples of each type, and discuss how such arrangements are regulated by states and the federal government; (2) describe how coverage sold through such arrangements is regulated, focusing on key market reforms and consumer protections as well as applicable federal standards; (3) provide estimates on the prevalence of such arrangements; (4) summarize how self-insured arrangements are regulated, identifying weaknesses in the law, discussing recent insolvencies, and identifying successful oversight approaches; and (5) discuss market failures focusing on the recent influx in health insurance scams promoted through pooled purchasing arrangements. The objective of this study is to inform state and federal policy discussions on expanding the role of association health plans and other pooled purchasing arrangements. In addition, it will help policymakers address current problems that consumers face such as insolvency and fraud.

Title: An Early Portrait of Consumer-Directed Health Benefits: Design, Integration, Penetration, and Effects
Grantee Institution: Mercer Human Resource Consulting
Principal Investigator: Arnold Milstein, M.D.
Grant Period: May 1, 2003 – December 31, 2003

The applicants will describe and characterize the prevalence of consumer driven health benefits (CDHBs) in the market and explore early evidence about how the movement toward CDHBs have affected cost and quality. Their analyses will include three categories of CDHBs: health retirement accounts, tiered or flexible benefit design products, and tiered network or treatment option models. Specifically, they will: 1) assess the enrollment in and features of different types of CDHBs, 2) assess the effects of these newly-introduced products, 3) generate hypotheses about the longer term prospects and impact of CDHBs, and 4) derive policy recommendations aimed at maximizing the value of CDHBs. The objective of the study is to provide purchasers and other private and public decisionmakers with early information about what consumer driven health benefit plans are and how they affect cost and quality.