HSA Health-Insurance Plans After Four Years: What Have We Learned?

This paper reports the available data on the characteristics of Health Savings Accounts (HSAs) and the progress they have made in enrolling Americans and drawing them away from traditional, comprehensive insurance plans. Authorized by federal law in 2003, HSAs are financial instruments linked to high-deductible health insurance plans (HDHPs). They allow households to set aside tax-free funds for routine medical expenses.

We report data showing that these policies are now used by over 6 million U.S. residents and that their use is growing at a rate higher than the one at which the assets in individual retirement accounts (IRAs) accumulated in the first years following their authorization. We also found that HDHPs cover preventive-care services (physicals, immunizations, and other recommended screenings) at a rate that other types of insurance do.

The brief history of HSA-qualified plans suggests that they are likely to continue to expand their market share significantly over time, especially if policymakers take steps to make them more economical and easier to understand.

The rationale for HSAs extends beyond giving U.S. households greater control over their health-care expenditures. The spread of HSAs, it was hoped by their authors, would strengthen the economy and finances of the nation. U.S. economists, policymakers, and business leaders have long voiced concern about the nation's rapidly rising health-care costs. Health-care inflation has for many years outstripped both general inflation and income growth. U.S. spending on health care already represents 17 percent of GDP and is predicted to go to 20 percent by the year 2016. If the 46 million Americans lacking health insurance were to obtain it under the present system, the disparity would be wider still.

One important factor contributing to the escalation of health costs is the exemption of employer-provided health insurance funds, and the resulting benefit, from taxation, despite the fact that health insurance is undoubtedly a form of employee compensation. The exemption encourages employers to offer and employees to demand health-insurance plans with low-deductibles (paid with after-tax dollars) and high premiums (paid with pre-tax dollars). This arrangement effectively transforms coverage that is a vehicle for protection against catastrophic costs into a system of pre-payment for routine expenses.

Because this tax preference is linked to employment, individuals who are self-employed, employed by businesses that don't offer a health-insurance benefit, or who are unemployed must purchase "unsubsidized" health insurance, i.e., insurance purchased with after-tax dollars. It is the costliness of these premiums that is a major reason that so many Americans have not obtained health-care coverage.

Congress, in the Medicare Reform Act of 2003, best-known for extending prescription drug coverage to America's elderly, created a new, more flexible way in which Americans could obtain less expensive insurance coverage as well as save tax-advantaged funds to offset health expenses. This portable savings vehicle is known as a Health Savings Account (HSA).

Either at their place of business or on their own, enrollees can direct to their HSA some portion of annual income on which they do not have to pay income tax. The funds deposited there can then be withdrawn, tax-free, to pay health-care bills not covered by insurance. For such funds to be "HSA-qualified," as defined by the IRS, the insurance policies to which they are attached have to feature high deductibles—for 2009, a minimum of $1,150 for individuals and $2,300 for families. However, such plans for that reason and others typically carry significantly lower premiums than the comprehensive plans ordinarily offered by employers.

Policymakers hoped that HSA accounts linked to high-deductible health plans would offer the uninsured an affordable vehicle for obtaining at least catastrophic insurance coverage, while also encouraging discipline in discretionary health-care spending, thus slowing the rate of inflation in health-care costs.
Since any funds expended would be an HSA owner’s own, it was expected he would show caution in seeking discretionary health care and also "shop" for cost-effective treatments. For instance, he would probably want to substitute less expensive generic drugs for branded medications.

To the extent that the policyholder was able to control his consumption of less necessary health-care services (but not preventive services such as checkups and vaccinations, which are in most cases covered on a "first-dollar" basis), funds could accumulate and appreciate year after year in these accounts, until such time that more serious ailments, which are typically more expensive to treat, should arise. Even though those suffering from chronic illnesses would be less likely than healthy enrollees to have funds left at the end of the year to roll over, they might also find such policies worthwhile financially.

Once the deductible and then a ceiling on out-of-pocket expenditure for co-insurance had been reached, holders of HSA-qualified insurance would be fully protected against major or catastrophic illnesses and accidents, making HSA-qualified insurance more like traditional car or homeowners' insurance, for example.

Policyholders in workplace plans would retain ownership of the account if they should leave the job where the account was established; however, contributions could continue only if a subsequent employer as well offered an HSA-qualified plan.

This paper's chief findings regarding HSAs are the following:

• The number of individuals covered by HSA-qualified and high-deductible health plans, as a proportion of all those covered by private insurance, shows a rate of growth slightly higher than the rate at which the quantity of assets in IRAs in their early years reached an equal fraction of total retirement assets. (The latter criterion is used in the absence of enrollment figures.) The early data on defined-contribution assets as a proportion of total retirement assets are more difficult to interpret, but the data on the whole suggest that HSA-qualified health coverage has the potential to expand at least as sharply over time as IRAs and defined-contribution retirement plans did, assuming conducive legal and regulatory developments.
  
  
• Suggesting even further room for improvement, survey data indicate that relatively low percentages of consumers are "extremely or very" familiar with HSA-qualified health coverage or find such plans "easy to understand."
  
  
• Less than half the funds in HSA accounts in 2007 were expended on health care, demonstrating these accounts' ability as savings vehicles.
  
  
• Premiums for HSA-qualified policies are significantly lower than those for other types of plans—by about 10 percent to 40 percent.
  
  
• A wide range of preventive-care services counts toward plan deductibles (or are covered on a "first-dollar" basis) under most HSA-qualified policies. Unsurprisingly, the rates at which enrollees in HSA-qualified plans draw on preventive care or rely on treatment of chronic illness are roughly equal to the rates shown by policyholders in comprehensive plans.
  
  
• While the ceiling for out-of-pocket spending by holders of high-deductible plans (including HSA-qualified plans) covering workers and their families tends to be higher than it is for other types of health plans (although the available data do not allow an estimate of how significant that difference is), there is some evidence that higher deductibles are almost entirely responsible for higher out-of-pocket expenditures. Out-of-pocket expenditures are, of course, only one element of total plan costs. The data for coverage purchased in the non-group market are more mixed.
  
  
• For both covered workers and individuals, deductibles for HSA-qualified policies are significantly larger—by multiples of 1.2 to 4.7—than the deductibles for the other types of health coverage plans. But the deductibles for HSA-qualified plans recently have risen much more slowly.
  
  
• Because spending on chronic illness, unlike spending on prevention under most HSA-qualified plans, does not enjoy first-dollar coverage, the chronically ill would be likely to draw down their HSA funds before they have time to accumulate. Even so, the right combination of a given plan’s deductibles, its out-of-pocket ceiling, and the marginal tax rate of a chronically ill person could make HSA-qualified coverage a better bargain than a traditional comprehensive insurance plan.

Adoption of the following financial incentives for consumers would lessen the advantage that the tax code provides to employer-based plans at present:

Tax policy:

• Payroll taxes now imposed on amounts employees direct to their HSAs should be lifted.
  
  
• Insurance premiums for HSA-qualified insurance purchased in the non-group market should be made deductible from income taxes.
  
  
• Funds in an HSA account should be allowed to cover all "qualified medical expenses," as the tax code defines them, so long as they have been incurred after HSA-qualified coverage begins, and the account is established by, say, April 15 of the following year, as enrollees in retirement plans receiving tax preferences are allowed to do.
  
  
• Sums paid by patients to their primary-care physicians for the right to receive medical services on an as-needed basis should be deemed qualified medical expenses.

Insurance policy (financial):

• At present, the most that an HSA participant might have to spend in a given year exceeds the amount that he is allowed to place in his HSA savings account. The contribution maximum should be raised to match the limit on out-of-pocket expenditures, so that he does not have to pay out more than he has put in.
  
  
• Policyholders should be permitted to pay insurance premiums with funds deposited in HSAs.
  
  
• Spouses aged 55 and over should be allowed to make catch-up, or extra, contributions to a single health savings account up to the maximum allowable for a couple, instead of being required to establish a second account.
  
  
• High deductibles for hospital and chronic care should be lowered, since they are unlikely to discourage excessive consumption of health-care services, because of the non-discretionary nature of treatment of acute or incurable conditions.

Insurance policy (treatment):

• Many HSA policies offer first-dollar coverage of preventive services, such as vaccinations and physicals. A greater variety of prescription drugs should be defined as "preventive," so that their cost to the patient would count toward a policy's deductible. The same benefits should be extended to the management of chronic health conditions, such as diabetes.

Legislative:

• Congress should allow participants, after turning 65, to continue to contribute to their HSAs, although they have become Medicare recipients.
  
  
• Simplification of HSA-qualified insurance would enable clear comparisons with other types of plans, help familiarize consumers with its features (with the assistance of insurers and employers) and might expand the benefits to be obtained.

READ FULL REPORT