Washington State Barriers to Health Savings Accounts
Key changes in state law would make health insurance more affordable for all Washington residents
June 2007
Today more than 4.5 million Americans are covered by Health Savings Accounts (HSAs) and similar high-deductible plans.[1] HSA-based policies have become standard among insurance companies and these plans are now sold in all 50 states. HSAs are working just as Congress intended they should, providing affordable, portable, tax-free health coverage for millions of Americans and their families.
In Washington, though, HSAs are not as good a deal as they are for people in other states. This is because our state law artificially drives up the cost of HSAs. Of two identical health insurance plans, the one sold in Washington might cost far more because of the rules, taxes and regulations imposed by lawmakers, the governor and our state’s insurance commissioner.
The following study by Adjunct Scholar David Hogberg identifies specific state laws that needlessly drive up the cost of health insurance for Washington citizens. Reducing or eliminating these barriers would expand access to health care for all people in Washington, reduce the number of uninsured in our state, and help put Washingtonians in charge of their own health care dollars. – Paul Guppy, Vice President for Research
Health Savings Accounts (HSAs) are a crucial tool for bringing consumerism to health care. An HSA allows an individual or family to put tax-free dollars in a savings account to use for future health care expenditures. Coupled with a high-deductible insurance policy, an HSA encourages individuals and families to consider price and quality when making health care decisions, and discourages over-consumption of health care. HSAs also compel health care providers to compete for the business of patients. This results in innovation – finding ways to make health care both less expensive and more convenient for the patient.
Participation in HSA plans has grown rapidly since their inception in 2004. Today, some four and-a-half million Americans receive health coverage through this type of plan. The U.S. Treasury predicts that over the next three years there could be as many as 14 million HSA policies covering 25 to 30 million Americans.[2]
The good news for HSAs keeps rolling in. Last December, Congress passed legislation that permits people who have flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), or individual retirement accounts (IRAs) to make a one-time transfer of funds from these accounts into an HSA.[3] United Health Group recently released a study of its HSA policyholders that adds to the mounting evidence refuting the shopworn criticism of HSAs as primarily for the “healthy and wealthy.”[4]
The study found that mature couples (and, hence, those likely to have more health problems) were more likely to open HSAs than young couples. It also found that 80% of individuals making $25,000 or less annually who were eligible for an HSA opened one. Of those, 80% carried over money in their HSAs into 2006, with an average balance of $761.
3. Washington's Legal Barriers to HSAs
Still, barriers to HSAs remain at the state level. Such barriers discourage people from purchasing HSA-compatible health insurance policies and thereby impede the spread of consumerism in health care. The state of Washington has some of these barriers, most notably:
In one important way, Washington was ideally situated to take advantage of HSAs when Congress created them in December 2003. Specifically, Washington has no income tax, which means that state legislators did not have to pass legislation exempting HSA funds from state income taxes.
Despite this initial advantage, Washington has yet to take full advantage of HSAs. It still has formidable barriers, including guaranteed issue, community rating and dozens of benefit mandates. The insurance approval process, while not overly-burdensome by national standards, could use some improvement. Some state legislators have also proposed imposing a state-managed Massachusetts-style “connector” plan, something that could prove a direct impediment to HSAs.
Furthermore, states like Florida and South Carolina have embarked on Medicaid reforms that harness the power of HSAs for low-income families. Washington policymakers have yet to do so, thus missing an important opportunity.
However, Washington is making important strides toward the adoption of HSAs. Though delayed, HSA compatible policies are gradually being adopted for the state employees health insurance plans and for the state high-risk pool. These are promising steps. Should Washington also reduce the various regulatory barriers that exist in the health insurance market, it would make even greater progress down the road toward consumerism in health care.
Washington currently has both community rating and guaranteed issue laws. A community rating law requires insurance premiums charged by an insurance company to be an average of all premiums (for sick and healthy, young and old, etc.) in a given region. In a system of “pure” community rating, everyone in a region is charged the same price – the average – for health coverage, regardless of risk. A system of “banded” community rating permits insurance companies to charge different premiums based on some factors, such as age, but not others, such as health status. A strict guaranteed issue law requires insurance companies to sell any individual a policy at any time – the individual cannot be denied for any reason.
Washington has slightly different banded community ratings for its group and individual policies. For group policies, health insurance companies may vary the price of a policy for geographic area, family size, age and wellness activity.[5] For individual policies, health insurance companies may vary the price of a policy using all of the previous factors but may also add a “tenure discount” of up to ten percent for individuals continuing the policy for two or more years.[6] In Washington guaranteed issue applies to group policies. For the individual market, a person denied a policy in the private market is guaranteed a policy through the state’s high-risk pool.
When put together, community rating and guaranteed issue rules create two perverse incentives. First, they encourage healthy people to avoid buying health insurance, since the average rate they will pay is higher than what they would pay in an unregulated market. Second, they encourage people to wait until they get sick to buy insurance. Community rating makes the price less than what a sick person would pay in a unregulated market and guaranteed issue forces insurance companies to sell a sick person, after a waiting period, a policy without taking all the medical risks involved into account. These rules result in higher health insurance prices, including higher HSA-based insurance premiums, for everyone.
Benefit mandates are laws that require insurance companies to cover specific kinds of conditions, whether or not the consumer wants to pay for this coverage. Mandates force insurance customers to pay for services they would not otherwise choose. Washington has 52 mandates, among the most of any state.
The exact number of state mandates varies based on how they are counted. For example, Washington has one mandate for chemical dependency, but the Council for Affordable Health Insurance counts this as two mandates, one for alcoholism and another for drug abuse.[7] Additionally, not all mandates apply to all kinds of health insurance policies in Washington. The mandate for hospice care, for instance, applies to group policies but not to individual ones.
Since insurance companies cannot issue policies that do not provide such benefits, this increases the cost of all insurance policies. Exactly how much a benefit mandate raises the cost of an insurance policy depends on the mandate. They can range from less than one percent to up to ten percent. Thus, while any one mandate may have minimal impact, adding perhaps one-half of one percent in higher cost, many mandates together add significantly to the cost of an insurance policy.
Measured conservatively, Washington's more than 50 mandates add between 15% and 20% to the cost of health insurance. Mandates make it illegal to sell basic, economy-priced health insurance in Washington.
Community rating, guaranteed issue and benefit mandates drive up the price of health insurance, making it less attractive for healthy people. The people left in the insurance pool tend to be sicker, thus making insurance all the more expensive. This results in fewer people buying health insurance. With fewer people buying insurance, fewer insurance companies can afford to stay in the market. This leads to less competition, higher costs, and less choice of health insurance products.
To see the effect that these policies have had on Washington's market, it is instructive to use the search function at the internet site eHealthInsurance.com. The search function allows a comparison of Pacific County in Washington with Clatsop County, just across the border in Oregon.
For a male age 35, eHealthInsurance shows that in Pacific County there are only seven HSA policies available from just three insurance companies. Indeed, eHealthInsurance shows that no county in Washington has more than nine HSA policies available from more than four companies.
By contrast, in Clatsop County there are sixteen HSA policies available from five companies for a male age 35. Not surprisingly, Oregon's health insurance market, which is less regulated than Washington's, produces more choice, better prices and improved service for the consumer.
A comparison for a family of four reveals a similar price and choice advantage in Oregon's less-regulated market. A family for four in Washington would have 45 health plans to choose from, while the same family in Oregon would have more than twice as many plans, 105, to choose from.
In Washington, a typical health plan with a low deductible and $20 co-payment would cost a family of four, or an employer if offered as a job benefit, $665 a month. In Oregon, the same plan would cost that family or its employer only $475 a month.
A bill introduced in the 2007 Legislative Session, HB 1539, took tentative steps toward removing some of these barriers for insurance plans for small employers.[8] It would permit insurers to offer a plan to small employers that is exempt from most of the state’s benefit mandates. However, the proposed legislation is not without its drawbacks. First, it limits to one the number of such plans an insurance company may offer. Second, it does not remove the guaranteed issue requirement. Furthermore, it makes the community rating law worse by putting more restrictions on how insurers may rate policies by age. Specifically, when insurers adjust policies for age they “may not use age brackets smaller than five-year increments.”[9]
While bills like HB 1539 move in the right direction on benefit mandates, they also have the potential to make insurance markets worse in Washington by making community rating more restrictive. The proper approach is to allow insurers to sell policies that are free from benefit mandates, community rating and guaranteed issue restrictions. This would greatly increase competition and choice in Washington's insurance market and would make policies more affordable.
Washington's process for approving new health insurance policies is not as burdensome as some other states, such as New York. Generally, most companies have to send their State Insurance Commissioner’s office paperwork explaining prices and the benefits included their insurance plans. Usually, this consists of sending in the same benefits summary book that goes to a plan’s policyholders.
What is lacking in the insurance approval process is an explanation of it on the State Insurance Commissioner’s website. A section of the Commissioner’s website should contain a list of the requirements for a new policy, some examples of what might result in a rejection of the policy, and an e-mail form that can be used to send the Commissioner’s office the new policy. This would expedite the process even further, making it easier for insurance companies to offer new products in Washington, including HSA policies.
A Health Care Connector is a state agency that serves as a clearing house for health insurance and as a regulator of the health insurance market. This was part of the comprehensive legislation championed by then-Governor Mitt Romney in Massachusetts in 2006 that was eventually passed by the state legislature. One analysis described the Connector as “a private (state-government chartered) marketplace where individuals and workers in businesses with 50 or fewer employees will be able to purchase personal, portable health insurance coverage.”[10] In that sense, the Connector has the potential to improve convenience for the health insurance consumer.
However, Connector officials in Massachusetts are also empowered to determine the kind of insurance that can be sold through the Connector. Thus, the Connector is not a truly “free” marketplace. The result is that the Connector approved policies with high-deductibles for low-income people but required those same policies to offer “first dollar” coverage for lab work and eye glasses.[11] Under federal rules, HSA policies can only cover first dollar benefits for preventive care, not routine care.[12] In effect, Massachusetts' restrictive approach prevented HSA-policies for low-income people from being sold through the Connector.
The Washington legislature considered legislation in 2007 to establish a Connector for Washington. One proposal (HB 1569) states that the “purpose of the connector is to facilitate the availability, choice, and adoption of private health insurance plans to eligible individuals and small groups.”[13] While restricting choice no to more than five plans, this bill does require that one offered plan be a “high deductible plan that meets the requirements necessary to be offered in conjunction with a health savings account.”[14] This important provision guards against the Connector approving regulations that prevent the purchase of an HSA policy.[15]
As Massachusetts has shown, a Connector that is given too much regulatory power limits the options of health care consumers and prevents them from purchasing HSA policies. The Connector-type program eventually adopted by Washington legislators is less restrictive and limited in scope than the Massachusetts version. The connector concept as enacted in Washington will work more like a pilot program, and thus is more likely to test effectively whether the idea is good public policy for our state.
Medicaid is consuming an ever larger portion of most state budgets, and Washington is no exception. From 1995-2005, real Medicaid spending in Washington (excluding federal funds) grew a whopping 98%. Expressed in terms of the state budget, in 1995 Medicaid accounted for 9.9% of the state budget. By 2005, it accounted for 14%.[16] Medicaid is on an unsustainable path in Washington. Left unchecked, the entitlement program threatens to crowd out spending on other vital parts of the budget, such as education, environmental protection and transportation.
The main problem with most Medicaid programs is that they impose few demand constraints on recipients. Recipients have no incentive to limit how many medical services they use. To remedy this, a few states, most notably Florida and South Carolina, have embarked on innovative reforms of their Medicaid systems. Policymakers in Washington can glean important lessons about Medicaid reform from the experiences of those two states.
Most importantly, any successful Medicaid reform must transform Medicaid recipients into health care consumers. Medicaid programs in both Florida and South Carolina attempt to do this. Florida gives each recipient a premium that pays for three types of services: basic care, catastrophic care and an “enhanced benefits” flexible spending account.[17] Recipients earn funds in the enhanced benefit account by engaging in various healthy activities.
Under South Carolina's reform, each Medicaid recipient is given a “personal health account” that he or she can use either to pay for any health expense or to purchase coverage from a private carrier.[18] If recipients do not purchase coverage from a private carrier, the state provides catastrophic health coverage.
Washington policymakers should consider a Medicaid reform that incorporates successful ideas from both Florida and South Carolina. Medicaid recipients should be given the choice of private health insurance or staying with the state Medicaid program. Recipients who choose the private route could be given a Medicaid “premium” that they could use to purchase a private insurance plan, including plans offered by their employers.
Should recipients choose to stay with the state Medicaid program, they could be given an HSA-type account in which the state government would deposit, say, $1,000 annually. The Medicaid recipient would use this money to purchase routine health services until a $1,000 deductible is met, after which the traditional Medicaid program would begin paying.
The plan could also include first-dollar coverage for preventive services and co-payments for prescription drugs. At the end of the year any unused funds in the HSA would be rolled over into the next year. To encourage recipients to use their HSA money wisely, they could be allowed to take a percentage of whatever funds remain in their account, say 75%, with them when they left the Medicaid program. They would be permitted to use that money for health care expenses or to put toward the purchase of private health insurance.
To encourage healthy behavior, the state Medicaid program could deposit funds into special flexible spending accounts for recipients who have private insurance, and deposit extra funds into the HSAs of those who stay in Medicaid. The healthy behaviors would include practices such as quitting smoking, losing weight or joining a gym.
Washington can bring its Medicaid costs under control with serious reform. That reform must turn Medicaid enrollees from passive recipients into active health care consumers. Allowing enrollees to use Medicaid money to purchase private health insurance or to enroll in a Medicaid HSA plan is just such a reform.
Most state and local government employees in
Fortunately, that will likely change soon. In 2006, the legislature passed House Bill 1383 that requires WSCHA to develop “a health savings account/high deductible health plan option…for eligible state employees, officials, and their dependents.”[20] An interview with WSHCA officials confirmed that an HSA plan for public employees in Washington is currently in development. In an important way, this is an ideal time to introduce HSAs into health insurance policies for Washington public employees, because those employees have access to flexible spending accounts, making the transition to fully portable HSAs accounts easier.
Cary Condotta, a Republican State Representative from Washington's 12th district and the sponsor of the HSA legislation, is less optimistic. “Adoption of HSA policies for state workers may be delayed until 2008 or 2009,” he says.[21] “Unions and the single-payer folks hate HSAs, and I fear they have the ear of the governor. The bureaucracy keeps coming up with excuses for the delay in adopting HSA policies for state employees, but I suspect it is due to politics,” he adds. His concerns are well placed. Advocates of centralized single-payer health care know that every person who becomes the owner of an HSA is unlikely to support a mandatory government-run system.
Early evidence suggests that cost of HSA-compatible policies tend to rise at a slower rate than more traditional plans. Thus, it would save Washington taxpayers money over the long term if more public employees switched to an HSA plan.
Yet state employees are often slow to adopt HSA-plans. In 2004, when Arkansas first offered such plans to its state employees, less than one percent switched over. John Hardnetty, the former Deputy Insurance Commissioner of Arkansas, suggests three strategies that would increase the number of state employees choosing HSAs:
, the state must educate state employees about the HSA option. That sounds easier than it is. With thousands of employees spread out across the state, it is difficult to ensure that they get adequate information about HSAs. A mailing from the state employee benefits office explaining the HSA concept would be one option worth considering.
, and closely related to the first, is overcoming state employees’ aversion to the concept of “high deductible.” If HSAs are to become popular among state employees, they must be informed that a high deductible plan means lower premiums, a savings account, and more control over their health care dollars.
, states should consider adding a “sweetener” to HSAs in the form of matching funds. If states agree to match a certain amount of the money the employee puts in the HSA, then state employees are far more likely to opt for HSAs, which still may save taxpayers more compared to the cost of providing traditional health benefits.[22]
An HSA plan for public employees in Washington that has high enrollment would do much to ease the health benefit funding commitments that state government has. Such a plan should be available to all public employees in Washington in time for the 2008 enrollment period.
High-risk pools are special safety net programs created by state governments for the small percentage of the population that is uninsurable. Washington's high-risk pool is the Washington State Health Insurance Pool (WSHIP). It serves about 3,100 people.
The “uninsurable” are usually people who have chronic health conditions and hence have very high medical costs. In a very important way, HSAs are ideal for such people. Those with chronic conditions have far more interaction with health-care providers than the average person. This makes them much more knowledgeable about health care and thus best suited to distinguish what is a good price for health care services and which health care services offer the best quality. Giving people in the high-risk pool the resources to be informed health-care users would be an important step in bringing consumerism to health care.
Fortunately, Washington is currently looking at adding an HSA-compatible policy to its high-risk pool. Conversations with employees at both WSHIP and the State Insurance Commissioner’s Office confirm that the Commissioner’s Office is reviewing the paperwork for an HSA policy. State officials have not yet developed the details of the policy and when it would be available. Nevertheless, the news that at some point in the near future WSHIP will offer an HSA-compatible policy is encouraging.
Washington is making important strides toward making HSAs widely available. Including HSAs among the health insurance options for public employees and those in the high-risk pools are positive steps. However, more can be done. State policymakers should make the following policy changes, which would reduce the number of uninsured in our state by making HSAs more affordable for all Washingtonians:
By takings these steps – easing regulations, reducing taxes and loosening mandates – state policymakers would more quickly bring consumerism to health care in Washington. Making HSAs as good a deal in Washington as they are in other states would result in more health coverage choices, fewer uninsured, better quality and lower prices for all Washington residents.
About the Author
David Hogberg is an Adjunct Scholar of the Washington Policy Center and a writer living in Washington, D.C. specializing in health care and Social Security issues. He writes regularly for the American Spectator online. He can be contacted at dwhogberg@gmail.com.
[1] “January 2007 Census Shows 4.5 Million People Covered by HSA/High-Deductible Health Plans,” Center for Policy and Research, America ’s Health Insurance Plans (AHIP), April 2007.
[2] “Answering Your Questions About Health Savings Account,” Issues and Answers, No. 125, Council for Affordable Health Insurance, January 2007, at www.cahi.org/cahi_contents/resources/pdf/n125HSAQuestionsJan07.pdf.
[3] H.R. 6111, “Tax Relief and Health Care Act of 2006,” Sections 302 and 307.
[4] United Health Group, Data Analysis: Executive Summary, “Health Savings Account Adoption, Contribution and Spending Behavior,” January 29, 2007, available at www.unitedhealthgroup.com/news/rel2007/HSA_Study_Executive_Summary.pdf.
[5] Revised Code of Washington 48.21.045, “health plan benefits for small employers – Coverage – Exemption from statutory requirements – Premium rates – Requirements for providing coverage for small employers – Definitions, http://apps.leg.wa.gov/RCW/default.aspx?cite=48.21.045.
[6] Revised Code of Washington 48.44.022, “Calculations of premiums – Adjusted community rate – Definitions, http://apps.leg.wa.gov/RCW/default.aspx?cite=48.44.022
[7] Revised Code of Washington 48.21.160, “Chemical dependency benefits – Legislative declaration,” http://apps.leg.wa.gov/RCW/default.aspx?cite+48.21.160.
[8] House Bill 1539, “An act relating to access to health insurance for small employers and their employees; and amending RCW 48.21.045, 48.44.023, and 48.46.066,” 2007 Regular Session, at http://apps.leg.wa.gov/billinfo/defualt/aspx.
[9] Ibid, pp.2-3.
[10] “The Significance of Massachusetts Health Reform,” by Edmund F. Haislmaier, WebMemo #1035, The Heritage Foundation, April 11, 2006, www.heritage.org/Research/HealthCare/wm1035.cfm.
[11] See “Commonwealth Care: Your connection to good health,” at www.mass.gov/Qhic/docs/cc_benefits1220_pt234.pdf.
[12] “Health Savings Accounts – Preventive Care,” Internal Revenue Service Bulletin: 2004-15, Notice 2004-23, April 12, 2004, www.irs.gov/irb/2004-15_IRB/ar10.html.
[13] HB 1569, “An Act Relating to reforming the health care system ,” 2007 Regular Session, Sec. 203 (1), at www.leg.wa.gov/pub/billinfo/2007-08/Pdf/Bills/House%20Bills/1569.pdf.
[14] Ibid.
[15] “Analysis of the Health Care Connector Bill,” by Paul Guppy, Legislative Memo, Washington Policy Center, February 2007, at www.washingtonpolicy.org/HealthCare/LegisMemoConnector.pdf.
[16] “1996 State Expenditure Report,” April 1997, pp. 60, 84, and “2005 State Expenditure Report,” Fall 2006, pp. 6, 49, National Association of State Budget Officials, both at www.nasbo.org.
[17] “Florida Medicaid Modernization Proposal,” Office of the Governor, State of Florida, January 11, 2005, at www.fmda.org/bush.pdf.
[18] “ South Carolina Medicaid Choice: A Waiver Concept to Bring a Consumer Directed Market Based Environment into Medicaid,” by Mark A. Sanford, The Heartland Institute, October 1, 2005, at www.heartland.org/Article.cfm?artId=17762.
[19] “2007 Medical Benefits Plan Comparison,” Public Employees Benefits Board, at www.pebb.hca.wa.gov/benefits/medical/shtml.
[20] Engrossed House Bill 1383, “An act relating to the public employees’ benefits board; amending RCW 41.05.006; and reenacting and amending RCW 41.05.065,” 2006 Regular Session, found at http://apps.leg.wa.gov/billinfo/default.aspx.
[21] Author interview with Representative Condotta, February 20, 2007.
[22] “HSAs And The States: Lifting The Barriers,” by David Hogberg, Health Issues, Galen Institute, September 28, 2005, p.5, at www.galen.org/fileuploads/HSAs_States.pdf.