Health Savings Accounts

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Health Savings Accounts

• Special Topic

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Issues in U.S. Health Care Finance

• Too costly
• YEAR GDP(B) HEALTH EXP(B) GDP
  Amt/Capita
• 2796 245.8 8.8 1067
• 5803 696.0 12.0 2738
• 1995 7400 990.3 13.4 3698
• 2000 9873 1299.5 13.2 4637
• Source CMS, Natl Health Statistics Group
• -- Medical technology/ value growing
• -- Rich insurance benefits create no incentives
  to conserve resources
• -- Relatively high health care workers incomes
• -- High administrative overhead

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Issues in U.S. Health Care Finance
Too many uninsured -- Growth in costs drives
down health insurance offering/ uptake --
Cannot afford or choose not to afford (young
and healthy, generally males, between 18
35, without many assets)
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Issues in U.S. Health Care Finance
Too little consumer control -- Managed care
approach is much reviled -- Restrictions on what
is covered, not covered
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Health Savings Accounts
What are HSAs? A type of medical savings
account introduced through the Medicare
Prescription Drug Act, effective 1/1/04
MSA defined as a personal health savings
account combined with a high deductible
catastrophic health plan.
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The HSA concept
Source National Center for Policy Analysis
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Why HSAs?
Economist proponents argue current health
insurance is not really insurance it is a
combination pre-paid health care and real
insurance.
Insuring against routine events is inefficient..

• Proponents claim HSAs will reduce HC costs,
  improve autonomy, build consumer equity.

Involve consumers in their HC decisions
consumer-driven.
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Why not HSAs?
Opponents claim
HSAs are only for healthy and wealthy.

• HSAs might be widely used -- would make it
  harder to move to a single payer system (Teddys
  nightmare.)

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What problems HSAs address

• Patients do not know the real cost of their
  health care.
• 3rd party payment systems cause patients to
  demand care that is unnecessary or
  cost-ineffective.
• Demand increases since care appears to be a free
  good or at least one that is pre-paid.
• Source Washington Policy Center

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Evidence supporting the theory

• Between 1965 and 1990
• Hospital costs ? 350
• Physician costs ? 250
• Dental, eye care, pharmaceuticals, medical
  appliances ? 150 200
• Source Washington Policy Center
• What are the differences among these?

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Intl Experience with MSAs

• Singapore --
• 1984 mandatory Medisave, part of the
• Central Provident Fund
• balances roll forward tax free
• can be used for other defined socially
• desirable purposes once minimum reached
• excess over max automatically transferred
• to pension fund.

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Intl Experience with MSAs
China --

• Urban health care reform experiment in Zhenjiang
  City (1994)
• 500k enrolled. Expanding from this base with a
  combination public/ private approach.
• Pilot program results
• Zhenjiang spending ? 24.6
• Nearby non-pilot cities ? 35 40

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Intl Experience with MSAs

• South Africa --
• 1994 insurance market deregulated
• MSAs have now captured two-thirds of
• private health insurance market
• highly innovated MSA products
• encouraging preventive care

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U.S. HSA Timeline

• 1984 concept arose as an alternative to
  Medicare MSA proposed as a solution to long-term
  Medicare funding problem.
• 1992 Patient Power published 12 bills
  introduced to create MSAs.
• Bi-partisan support in Congress
• E.g., S. 2873 introduced by Sen. J. Breaux and 12
  Democrat co-sponsors
• The Clintons initiative superceded effort.

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U.S. HSA Timeline cont.

• 1996 Congress oks pilot MSA plan but burdened
  with restrictions limited duration, numbers,
  employee contributions, only self- employed and
  small business employees.
• 2002 Treasury issues revenue ruling that unused
  monies in Health Reimbursement Arrangements
  (employer-funded accounts) at year end could roll
  y-y tax free.

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U.S. HSA Timeline cont.

• 2003 Health Savings Accounts included in
  Prescription Medicare law.
• 2004 HSAs offered.

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Key HSA Features
Wide accessibility HSA/ catastrophic available
to individuals lt65. No other health insurance
permitted some exceptions. Inflation-indexed
max contribution to HSA and a min (but no max)
deductible. Both employers and employees may
contribute to an HSA.
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Key HSA Features cont.

• HSA contributions are tax-deductible and HSA
  remainders accumulate interest tax free.
• Portable HSA is owned by the employee and
  follows the employee on job change the account
  may also be rolled over.
• Non-medical withdrawal by someone under 65 is
  subject to income tax and a 10 tax penalty.
  (Except for those who become disabled or
  deceased.)

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Flow of s in a Generalized MSA
Employer/ Employee Contributions
Employer Pays Plan Cost
Employee
MSA
POS Out-of- Pocket
High Deductible/ Catastrophic Plan

Unspent balances at year end are employees but
may be restricted in use.
Plan pays
Plan pays all further costs.
Copays
Insurance Threshold
Max out of pocket annual deductible copayments
-------------- Deductible -------------
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Health Savings Accounts (2005)
max contrib deductible up to 2650/5250 Tax
deductible
Employer or individual pays premium
MSA
POS Out-of- Pocket
High Deductible/ Catastrophic Plan

Plan pays
Plan pays all further costs.
Copays
Insurance Threshold
Unspent balances roll forward.
-- Min deductible 1k (individual) / 2k
(family) --
Max out of pocket lt 5k/ 10k
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Expectations for 2004
Enrollment builds as products emerge.
Individual market converts in large numbers
HSA contributions are 100 tax deductible.
Small group market will lagnot
innovative. Mid-market fully insured (100 1000
employees) should convert relatively
quickly. Self-insured employers will keep HRAs
until employees press for flexibility upfront
funding is a disincentive.
Per Greg Scandlen, Galen Institute
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Current Status

• 4 of PHI market obtained an HSA in 2004.
• One study 79 went to individuals 18 to
  small groups 3 to large groups.
• 29 went to purchasers with household incomes
  under 50k.
• Among insurers tracking the trend
• 41 of policies went to individuals previously
  uninsured.
• 27 in small group market went to employers who
  previously did not offer insurance.