Bulletproof? Health Savings Accounts in 2007 and 2008
February 2007
Lawmakers in Olympia face the growing problem of how to get control of rising health care costs. This report from analyst John R. Graham of the Pacific Reason Institute presents new data on how Health Savings Accounts are helping to reduce costs by putting consumers in change of their own health care dollars.
More information on how policymakers can make health coverage more affordable is available from the Pacific Reason Institute, at www.pacificresearch.org, and in Chapter Four of Washington Policy Center's Policy Guide for Washington State.
- Paul Guppy, Vice President for Research.
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Last year, I anticipated that 2006 would be "The Year of the Health Savings Account,"1 or HSA. Such accounts are held at financial institutions, into which employers or employees deposit pre-tax dollars. Any American with a qualifying, low-premium policy can open an HSA. Money in the account used for health spending is never taxed. HSA owners 65 and older can tap into the account for non-health purposes, but that money is added to their taxable income when they withdraw it. In this respect, an HSA is similar to a 401(k) retirement account.
If an HSA is a "401(k) for your health," then it makes sense to compare the two; they are both elements of the "ownership society,"; and this provides critical perspective. In 2005, President Bush's admirable plan to introduce private accounts in Social Security was knocked back by outrageous attacks from those who want the government, not you, to control your retirement income. On the other hand, no serious politician would suggest retreating in the other direction: eliminating 401(k)s, seizing the balances, and using them to increase traditional Social Security benefits. Nevertheless, 401(k)s were threatened once.
Figure 1: Active 401(k) Participants/Total U.S. Private Employment
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Source: Author's calculations of EBRI and Bureau of Labor Statistics
Established effective January 1980, with regulatory guidance in November 1981, about 11 percent of employees were contributing to 401(k)s by the end of 1985, versus just under 40 percent today (see Figure 1). Nevertheless, President Reagan proposed abolishing them in that September’s budget proposal.
However, by the end of the month, the president's attack had been pushed back to a reduction in contribution limits. Eleven percent of employees proved more than enough to make 401(k)s politically “bulletproof.” The Treasury issued regulatory guidance for HSAs in late 2004. Therefore what 1985 was for 401(k)s, 2008 will be for HSAs, when Americans choose a new president who may not be as enthusiastic about these accounts.
The health insurers' trade association, AHIP, reported nearly 3.2 million people with HSA-eligible plans in January 2006, up from a little more than a million in March 2005 and slightly less than half a million in September 2004. That amounts to an annualized growth rate of 340 percent, with a key feature: it occurred during a period when people had not even digested the regulatory guidance.
More recently, the Blue Cross Blue Shield Association (BCBCA) reported that its member-companies alone covered two million lives in HSA-eligible plans in August 2006, apparently about double those of August 2005. Steve Davis, editor of Inside Consumer-Directed Health Care, estimates that there were 6.5 million in HSA-eligible plans in October 2006. William Boyles of the Consumer Driven Market Report estimates 7.2 million in HSA-eligible plans at the end of 2006.
About 204.6 million Americans are eligible for these plans. This implies penetration of about 1.6 percent a year ago, and about 3.5 percent now. If we keep up this growth rate – faster than the rate for 401(k)s at the comparable time in their development – we can be confident of about a nine-percent penetration rate at the end of this year, and it is not absurd to forecast 20 percent or more for 2008. In contrast, the naysayers’ cases look weak under examination.
The study Behind the Slow Growth of Employer-Based Consumer Directed Plans, for example, shows no such thing. In fact, it shows that enrollment in HSA-eligible plans jumped by 75 percent in the twelve months to July 2006, from 800,000 to 1.4 million, and these were only workers in the employer-sponsored market, not their dependents, nor the individual market where HSA-eligible plans are critical.
The Employee Benefits Research Institute (EBRI), based on a 14-minute Internet questionnaire, figures there were 1.3 million employees (not dependents or individuals) in consumer-driven plans in September 2006, by which it means the enrollees actually have an HSA or Health Reimbursement Account (HRA). However, it artificially differentiates them from another 8.5 million in high-deductible health plans who do not have HSAs or HRAs, although many of them legally could do so.
Not everyone who can open an HSA chooses to do so. A survey of 150 custodians found 1.7 million accounts opened at the end of June 2006, with an average balance of $1,200. The custodians expected the number of accounts to increase to 3.6 million by this month, consistent with evidence that a little more than half of enrollees in HSA-eligible plans actually open HSAs. Thus, it is not absurd to forecast at least a 10-percent penetration of HSAs in the eligible population in 2008 – a benchmark that will likely prove bulletproof.
Last month President Bush signed the Tax Relief and Health Care Act, which measurably improves HSAs by increasing contribution limits to $2,850 (single) or $5,650 (family) for 2007, deregulating employers’ right to make higher contributions to lower-earning employees, and allowing a once-only transfer of balances from a HRA or IRA to an HSA, among other changes.
In spring 2006, premiums for PPOs were 38 percent higher than for HSA-eligible plans in the employer-sponsored market. Further, premiums in consumer-driven plans increased 4.8 percent over the previous twelve months, versus 7.3 percent for PPOs. Even with the employer’s contribution to the HSA itself included, PPOs were 13 percent more expensive for singles and 23 percent more for families. At this rate, traditional PPOs in the employer-sponsored market will cost 50 percent more than HSA-eligible plans by 2009; and by 2019 (if they still exist) they will cost twice as much.
Some argue that these new plans will discourage people from seeking timely care. In a 100-page review of the evidence so far, the Congressional Budget Office concluded last month that: "Meanwhile, critics charge that consumer directed plans will discourage enrollees from getting needed care and thus will adversely affect their health – but there appears to be little empirical evidence to support that view." Also contentious is whether people who are signing up are satisfied.
Some recent articles indicate significant discontent versus traditional health insurance, with many enrolled indicating a desire to switch back. However, as discussed above, there is no going back. There is only going forward, and this pain is a prelude to systemic reform. Let’s look at a real example.
A man living in a fairly large American city (about three quarters of a million people) got a fairly minor injury. Empowered with his HSA, he looked for a doctor who publishes prices and found two. He chose the one who charged $95 for a basic consultation. The doctor prescribed some meds, and also recommended a tetanus shot costing $30. The patient leaves with $125 out of pocket. Satisfied? Yes: HSA patients are not unhappy with their doctors.
A few weeks later, the ABC Health Plan mails him an Explanation of Benefits (EOB) (see Table 1 below). I will send a free copy of What States Can do To Reform Health Care: A Free Market Primer to anyone who can figure out how these dollar figures relate to what the patient paid. Furthermore, I will give a free copy of my next major publication, U.S. Index of Health Ownership, to the first person who can figure out what the doctor "balance billed" the patient soon after he received the EOB.
The answer is $40.89. (To claim the prize, you have to explain how $40.89 is the sum or difference of any of the figures in table 1.) The patient is getting annoyed: consumer-driven patients are dissatisfied with their plans.
The plan must change. The doctor must change. (Don get me started on the hospitals!) Advocates of consumer-directed health care knew this from the start. We should not be surprised when HSAs cause patients more frustration with the status quo. As the bumper sticker says, if you're not outraged, you're not paying attention. Patients are starting to pay attention. In 2007 and beyond, policymakers need to do the same.
Table 1:
Actual Explanation of Benefits (EOB) for Primary Care Consultation Costing $125.00 at Point of Service
|
Procedure No. |
Billed Amt. |
Allowed Amt. |
Not Allowed |
Deductible Amt. |
Co-Pay |
Claims Payment |
99204 |
$210.00 |
$159.63 |
$50.37 |
$159.63 |
|
$00.00 |
0718 |
$30.00 |
$20.00 |
$10.00 |
|
$4.00 |
$16.00 |
90471 |
$29.00 |
$11.32 |
$17.68 |
|
$2.26 |
$09.06 |
Total |
$269.00 |
$190.95 |
$78.05 |
$159.63 |
$6.26 |
$25.06 |
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