The Opposite of Insurance
Unless you're rich, healthy, or both, Health Savings Accounts are bad news.
This article is from the November/December 2006 issue of Dollars & Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2006/1106woolman.html
This article is from the November/December 2006 issue of Dollars & Sense magazine.
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Congress created Health Savings Accounts (HSAs) in 2003 as tax-advantaged savings accounts linked to the purchase of a high-deductible health plan. But the scheme is not a new idea. HSA proponents, including many health economists, have long argued that standard “comprehensive” insurance policies are too generous, sheltering consumers from the true cost of medical care. “Empowering” consumers to decide for themselves how much money to save for medical expenses, the theory goes, will unleash the magic of the market; costs will decline and quality will improve as doctors, hospitals, and other providers compete for discriminating customers.
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New research on consumer and employer experiences with HSAs, however, confirms many of the fears cited by critics of the plans. The evidence shows that these plans attract relatively high-income, healthy people who are attracted to the tax benefits, while they place other consumers—including those with families, health problems, or low incomes—at risk for steep increases in out-of-pocket spending.
The Mechanics of HSAs
Workers can contribute pre-tax income to an HSA and can withdraw from it at any time for health-related spending. Employers may also contribute to employees’ HSAs. Any money remaining at the end of the year stays in the account, enjoys tax benefits, and can be invested just like money in an Individual Retirement Account.
To open an HSA, however, you must have a high-deductible health insurance plan, and you cannot have ordinary health coverage. To qualify, a plan must have a deductible of at least $1,050 for an individual or $2,100 for a family. (HSA-qualified plans are allowed to cover some preventive care without a deductible.) Actual deductibles are much higher: in 2006 HSA-qualified plans had average deductibles of around $2,000 (individual) or $4,000 (family). Under the HSA scheme, in other words, a family typically has to pay the first $4,000 in medical bills each year out of pocket; their insurance plan kicks in—with all of the usual co-pays, exclusions, etc.—only after annual medical expenses exceed that amount.
The funds in the HSA are supposed to cover a portion of these out-of-pocket expenses, but workers are wholly responsible for any gap between the amount in their HSA and the amount of the deductible. The gap can be sizeable. A national survey by the Kaiser Family Foundation found the average deductible for a family HSA plan was $4,008, while the average employer HSA contribution was $1,139. Enrollees are fully responsible for the $2,869 gap, in addition to their premium payments and additional co-pays (see Figure 1).
By reducing employers’ premium costs, limiting the amount of services employees are likely to use, and increasing the likelihood that employees will pay more out of pocket for health care, high-deductible plans shift financial risk from employers onto employees. Monthly premiums are lower under these plans than for comprehensive insurance, but high-deductible plan enrollees are still much more likely to spend a substantial amount of their income on health expenses than people enrolled in comprehensive plans. For instance, 31% of enrollees in HSA-type plans spent over 5% of their income on medical expenses, including premiums, compared with only 12% of enrollees in comprehensive plans, according to a recent survey conducted by the Employee Benefits Research Institute and the Commonwealth Fund (see Figure 2).
Flawed Plan
Proponents of HSAs would say this shifting of risk is a good thing: a market-based reform to address escalating health care costs. But this is a deeply flawed view. For one thing, high-deductible plans are unlikely to have much impact on overall health care spending, most of which results from expensive treatments for serious illnesses whose costs exceed the high deductibles. One recent study found that more than 95% of medical expenditures by working-age households with health insurance were made by those who spend above the minimum HSA deductibles, and that overall, nearly 79% of total medical expenditures occurred above the minimum HSA deductibles. In fact, the only type of spending HSAs are likely to reduce is the kind we want to encourage: primary and preventive care. According to the Commonwealth Fund, enrollees with deductibles over $1,000 were twice as likely as enrollees with deductibles under $500 to avoid seeing the doctor for a medical problem, avoid seeing a specialist, or skip a recommended treatment due to cost.
Moreover, people do not and cannot shop for health care services as they do for other goods. Most people do not have adequate information on the cost and quality of care to make informed purchasing decisions. Nor are they inclined to do so when they are sick or in distress, which is when health care decisions are typically made. Most people enrolled in high-deductible plans do not, in fact, shop for less expensive care, although many shop for better prescription drug prices, according to a 2006 Government Accountability Office (GAO) report.
The GAO found that current HSA participants are disproportionately high-income, healthy people who will benefit from the tax advantages and are unlikely to need much health care. Although generally satisfied with their own experience, HSA enrollees polled by the GAO said they would not recommend high-deductible plans for people with families, health problems, maintenance medications, or moderate incomes—in other words, most people.
So HSAs represent a double-edged sword. If large numbers of people are forced to switch from comprehensive health coverage to high-deductible plans, they will likely face significantly higher out-of-pocket costs. On the other hand, if HSAs continue to attract the healthiest enrollees, the exit of this healthy segment from the comprehensive coverage pool will likely drive up health insurance costs for everyone else.
HSAs and high-deductible plans appeal to employers looking to cut health care costs, high-income earners looking for more tax breaks, and younger workers willing to gamble they won’t get sick. For most people, however, they are the opposite of insurance: they concentrate the financial risk of illness instead of spreading it, and they increase the likelihood of incurring medical debt instead of reducing it.