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Consumer Driven 'Health Savings Accounts'

By Greg Hitchcock

The Health Savings Accounts (HSAs) program was signed into law by President George W. Bush in January 2004 as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003. Supporters say HSAs are meant to curb the rising costs of health care by providing an incentive for consumers to shop for the best value in medical treatment. An HSA acts as a savings account controlled by the insured person and used to pay for smaller and routine health care expenses below the deductible. To have an HSA, account holders are required to have a high deductible health insurance policy to cover catastrophic medical costs. As an alternative to traditional insurance, Health Savings Accounts may represent a step toward the “ownership society” long talked about by President Bush, in which individuals take more financial responsibility for their own retirement and health care.

The Bush Administration has been airing feel-good commercials such as the one depicted above, aimed to increase awareness and acceptance of the new Health Savings Accounts.

The following compares an HSA with a traditional insurance plan:

Today’s conventional plan includes relatively high premiums and a low deductible:

• You pay steep premiums to insurer.

• Your insurer pays your bills once they exceed a modest deductible.

• You rarely see what any service actually costs.

A “consumer-driven alternative” offers relatively modest premiums and a high deductible:

• You fund the HSA and pay modest premiums to the insurer.

• You pay your own bills out of the HSA until you reach a fairly high deductible.

• Your insurance pays for your care only if you exceed the deductible.

• Any money left in the HSA is yours to keep.

Account balances in HSAs can earn interest or be invested in stocks or mutual funds, and they will grow tax-free. HSA balances belong to the individual account holders and remain theirs if they switch jobs, become unemployed, or retire.

Healthy people tend to want less-expensive policies, which may have higher deductibles. Critics of HSAs argue that because HSA plans come with high deductibles, a disproportionate number of sick people would be left with traditional insurance, in a process called adverse selection. With healthy people switching to HSAs, premiums in traditional insurance would increase, thus driving up the price of health insurance overall.

Opponents of HSAs also suggest that the accounts will benefit the wealthy to the disadvantage of the poor. HSAs, they say, will attract wealthy individuals who can use the tax advantages and healthy ones who will benefit from rolling over amounts left in the account while leaving the poor and sick in a higher-risk insurance pool.

Critics point out that HSAs, the more common “health reimbursement arrangements,” and still more common “flexible spending accounts” are schemes to give tax advantages to the rich. The sick will simply blow through the tax-free funds and find themselves with bigger bills than if they had traditional insurance, while the poor will lack money to fund the accounts in the first place, and will not benefit from the tax savings.

The Council for Affordable Health Insurance (CAHI) supports HSAs and their kindred consumer-driven health plans. They say the long-term effects of HSAs is an overall change in consumer behavior. HSAs give consumers a reason to be value-conscious shoppers in the health-care marketplace, and discuss medical options and costs with their doctors. More information leads to lower health care spending, which would make health insurance more affordable and reduce the number of uninsured.

Critics argue that health care will never be a commodity that can respond to the rules of the marketplace, because health care is not like any other consumer product. In health care, new technology tends to make things more expensive, rather than less. And consumers are less willing and able to bargain over how much to pay a surgeon when they need to have a cancerous tumor removed, than with a salesperson when buying a new convertible or laptop.

For employers, consumer-driven plans, because of their high deductibles, would appear to cost a lot less — anywhere between 30 and 40 percent less than traditional plans, according to some estimates. Small employers will be particularly attracted to HSAs who cannot afford to offer traditional insurance to their employees, according to Gary Claxton, Vice President for the Kaiser Family Foundation, a non-profit health care research organization. An employer can set up the HSA and contribute a small amount to the account, contingent on employees buying insurance on their own. Administrative fees can be passed onto the employees.

For employees, the plans give them a powerful financial incentive to use medical services more wisely. In the case of HSAs linked to high-deductible plans, funds remaining in the account can be rolled over year after year to pay for health care expenses in succeeding years. Additionally, when employees retire, they can withdraw funds tax-free to pay for retiree health care expenses, a great benefit when employer-subsidized coverage is fast disappearing.

HSAs are used to encourage individuals to be wiser about spending their money and to shop for the best value. A primary goal is to reduce unnecessary use of health care services.

“Informed consumers make better decisions,” said Matthew Maguire, Director of Communications for the Business Council of New York State. “An HSA is a good idea in that they give consumers more control over their spending, making it likelier to acquire a better understanding of health care costs.”