Health Savings Accounts:

The Assault on Health Insurance Intensifies

With just five words – “We will strengthen health savings accounts” – President Bush used his 2006 State of the Union Address to signal that the next phase of his “Ownership Society” assault has begun.

Health savings accounts, or HSAs, were introduced in 2004 to encourage workers to take more responsibility for their health care decisions by picking up more of the costs of health care. HSAs allow workers who opt for high deductible health plans (HDHPs) to establish pre-tax savings accounts that can earn interest. Workers and employers can contribute to these accounts; the maximum contribution ranges from $1050 to $2700 for single coverage, and from $2100 to $5450 (year 2006 figures) for family coverage, depending upon the amount of the policy’s deductible. Any money not spent in the year rolls to the next, and the employee can keep the account when he or she leaves employment.

To date, relatively few employees have established HSAs; in the first year, employers, employees, and insurers alike were not quite certain how to make them work. Employers, insurers – and financial institutions – have now caught on and, with the President’s push, more and more employees will confront some new and confusing choices in health insurance.

Surveys of HSA users

What have we learned about HSAs so far? Two recent studies provide some insight. In the first, a Government Accounting Office study of federal employee HSAs[1] revealed that:

· Those who enrolled in high deductible health plans with HSAs tended to be younger and better-paid than those who did not choose this option. About 43% of those choosing HSA-affiliated plans earned over $75,000 per year, compared to 23% of those in all federal employee plans.

· Deductibles under the HSA-affiliated HDHPs were about triple the deductibles under traditional plans.

· Preventive care services and costs under the HDHPs were about the same as under traditional plans and were covered before the deductible.

· Under the federal HDHPs, employees had to pay the deductible before prescription drug coverage kicked in. Under the traditional plans, prescription drugs were covered before the deductible.

· Premiums under the HDHPs averaged $91 monthly for single coverage and $208 for family coverage, compared to $99 and $243 under the traditional plans.

A second study by the Employee Benefits Research Institute and the

Commonwealth Fund[2] looked at the effects of high deductible plans on health care usage. This study found:

• One percent of workers were in HDHPs with HSAs. Another nine percent, however, had high deductible plans but had not opened HSAs – meaning that they had high exposure to risk, but no savings accounts to fall back upon.
• Among those with HSAs, two-thirds had family deductibles over $3000, and one-quarter had family deductibles over $5000.
• Over half of those with high deductible plans had no other choice of health plan.
• Over one-third of those with high deductible plans reported avoiding or delaying medical care because of cost, compared to 17% of those in comprehensive plans.
• More than a quarter of those in high deductible plans reported skimping on prescription drugs because of cost, compared to 16% in comprehensive plans.
• For those with HDHPs and an HSA, 31% spent more than five percent of their yearly income on premiums and out-of-pocket costs combined. Only 12% of those in comprehensive plans spent more than five percent of income.
• Those with comprehensive plans were far more satisfied with their health care plans and were more likely to recommend them to others. Fully one-third of those with high deductible plans would leave them, if they could. Over half of those in HDHPs were dissatisfied with the amount they spent out of pocket, compared to 21% in comprehensive plans.

National Economic Council Director Allen Hubbard has lauded health savings accounts because they “give consumers more skin in the game.”[3] Five percent of one’s annual income, unfilled prescriptions, and delayed medical care are a whole lot more “skin” than the American worker should have to bet to have good health.

Who else has skin in this game?

While the Administration is ready for American workers to ante up, let’s look at who else has a stake in this game.

Employers. The biggest winners of all, employers gain by shifting the cost of health care to workers. Not only will premium costs drop for HDHPs – at least temporarily – but employers will not pay taxes on the dollars they and employees put into HSAs.[4] With the Bush Administration’s incentives for individuals to buy private, rather than employer-based insurance, employers hope to eventually see themselves out of the health insurance business completely.

Financial institutions. Banks and other financial firms are gearing up to handle these health savings accounts. Imagine: they will get fees to set up the accounts, annual fees to maintain and service the accounts, and debit card transaction fees. The New York Times suggests that HSAs will give financial institutions “a vital, but behind-the-scenes role in shaping the nation’s health care system.”[5]

Insurers. If you are paying more out of pocket, then insurers are paying less. If we move more toward individual health insurance, then insurers (and health care providers) will have fewer and less powerful groups with whom to negotiate lower prices and better service. Insurers like United Healthcare have already set up their own financial institutions to manage HSAs affiliated with their plans. Blue Cross Blue Shield Association announced in December that it plans to do the same.[6]

Wealthy taxpayers. Health savings accounts are being touted as an even better savings vehicle than 401(k)s, especially if the President’s proposal to make premiums tax-deductible is enacted. Money withdrawn from HSAs is tax-free, as long as it is spent on medical expenses. Once one reaches 65, the money can be withdrawn for any reason without penalty, although this money would be taxed. Those making good salaries are also precisely the employees who can count on employer contributions to their HSAs, and who can most benefit from tax breaks.

And whose bets are not very safe at all?

Workers. These plans are very attractive for young and healthy workers who can reasonably gamble that they will not have to use the health care system. For most of the rest of us, however, the studies indicate that we could spend more out of pocket than we gain in premium reductions or contributions from our employers. The most frightening prospect: as healthy workers leave traditional plans to join the high deductible plans, the premiums in the traditional plans will rise so high that workers cannot afford them – and that employers will simply stop offering them.

The health care system. While policy makers focus on consumers as the source of rising health care costs, they divert attention from the serious issues of access to health care, quality of care, rising drug prices, and the Medicare crisis.

The Treasury. Estimates are, if the President’s proposals are enacted, that investments in health savings accounts will cost the Treasury $59 billion in lost tax revenues over the next five years, and $156 billion over the next ten years.[7]

A new battle in the Ownership Society war

Last year workers battled plans to weaken the Social Security system by diverting part of worker contributions into individual accounts. This year’s battle will be to protect health insurance, but it’s all part of the same war.

The message from the Administration the past several years has been to take personal responsibility for one’s actions. In financial terms, that means to bear more of the costs but also, if you bet right, to reap the rewards of “ownership.”

This fight is more personal than Social Security, however. This fight puts the blame for rising health costs on us. Says a Wall Street Journal columnist:[8]

Health insurance, particularly if it is provided by an employer, creates the illusion among consumers that health care is free. When consumers are spending out of their own HSAs they will exercise the same kind of judgments they use for other purchases, shopping for the most economical source of the procedure needed and being less inclined to run to a doctor for every small ailment. [emphasis added]

Anyone who has the misfortune of getting sick or injured knows that health care isn’t free. Anyone who relies on medications to hold off disabling diseases knows that health care isn’t free. Anyone who negotiates a labor agreement knows that health care isn’t free. And we all know that “buying” health care isn’t like buying a new car or a television.

Few of us run to the doctor for “every small ailment.” Instead, as the studies above show, many of us – especially those with lower incomes – forgo the very care we need because we cannot afford to visit the doctor, have the test run, or fill the prescription.

Skin in the game, indeed. In this game, we’re just plain getting skinned.

Judi King

February 10, 2006