Health Savings Accounts Have a Problem

Bloomberg's John Berry reviews a paper undermining the case for Bush's Health Savings Accounts. The reason? According to supporters of HSAs, most of the benefits come from the incentives built into the cost-sharing arrangements that come with HSAs. This is supposed to motivate consumers to shop for low-cost health care, thereby reducing costs. This work finds that most existing plans already have a substantial amount of cost-sharing built into them so that shifting to HSAs will do little to alter the incentive to choose low-cost health care providers. In fact, according to the paper, ''many HSA/high-deductible arrangements would actually reduce cost-sharing for many groups":

Bush's Health Savings Accounts Are Badly Flawed, by John M. Berry, Bloomberg: Health savings accounts, the centerpiece of President George W. Bush's efforts to slow increases in health-care costs, have a serious flaw that makes them largely ineffective. ... Those are the conclusions of academic researchers detailed in peer-reviewed work in the July/August issue of the journal Health Affairs.

Individuals or employers can contribute pretax money to the health savings accounts, which are tied to the purchase of a high-deductible health-insurance policy. No tax is due if contributions ... are withdrawn to pay out-of-pocket costs for most heath-care expenses.

The point is to use the carrot of a tax deduction to wean consumers -- and their employers -- from insurance policies that have low deductibles before benefits kick in.

Such so-called first-dollar insurance coverage plays a central role ''in dulling the incentives for consumers to shop carefully for cost-effective health care,'' Bush's Council of Economic Advisers said in its annual report last February.

The problem is that the most common high-deductible insurance policies that qualify someone to have a health savings account don't actually increase most consumers' health-care cost- sharing.

The Findings: The two researchers ... were Dahlia Remler, ... at City University of New York, and Sherry Glied, chair of the Department of Health Policy and Management at Columbia University.

''We show that typical plans in the market today already contain substantial cost-sharing,'' Remler and Glied wrote. ''We find that many HSA/high-deductible arrangements would actually reduce cost-sharing for many groups.

''In particular, the group responsible for half of all medical spending would see no change or a decline in cost-sharing at the margin and on average,'' they said. ...

At first glance, it would seem that a high-deductible policy that qualifies someone to have a health spending account would give individuals much more incentive to be cost-conscious than a regular plan. That turns out to be incorrect, mainly because the out-of-pocket costs can be paid with pretax dollars.

Shielding Contributions: ...In the article, Remler and Glied showed an example in which a prototypical high-deductible policy had a $2,500 deductible and a $2,500 maximum out-of-pocket limit. If the policyholder's combined rates for federal and state income taxes and the payroll tax totaled 40 percent, paying that $2,500 would cost only $1,500 in after-tax money.

They compared that policy with a standard one that had a $350 deductible, a co-payment of 20 percent and an out-of-pocket limit of $1,800. ...

Up to a total of $700 in health-care spending, the standard plan's out-of-pocket spending is greater. From $700 to $2,500, the high-deductible plan's out-of-pocket costs are greater, though not as much as you would think because of the continuing 20 percent co-payment in the standard policy.

At $2,500 in costs, the high-deductible policy's after-tax out-of-pocket expense is $1,500, compared with the standard policy's $780.

From that point on, there is no out-of-pocket cost for the high-deductible policyholder. Meanwhile, the standard-policy holder is still incurring that 20 percent co-payment. ... and won't hit the limit of $1,800 until total spending has reached $7,600.

In other words, as spending rises from $2,500 to $7,600, the standard policyholder ought to be much more cost-conscious than the high-deductible policyholder. ...

Supporters of HSAs should now:

1. Undermine the credibility of the liberal, ivory-tower, America hating researchers.
2. Create fear that without this legislation, the country will go bankrupt.
3. Mention France as often as possible.
4. Pay for Op-Eds taking the opposite viewpoint.
5. Explain how cutting taxes will fix this problem.
6. Have sympathetic think tanks issue position papers clouding the issue.
7. Blame lawyers.
8. Get right-wing advocacy groups to issue supportive statements to their members.
9. Blame Democrats for the problem, and for blocking the solution.
10. Explain how failure to support HSAs, and hence the president, undermines the war on terror and the troops.
11. Say it's all Clinton's fault [from comments]. Either Clinton will do.

Anything else?

Comments

[rto]

11. It's all Clinton's fault.

[save the rustbelt]

HSAs are a great concept EXCEPT those who design them seem to know little about how healthcare decisions are made and how services are purchased.

Purchasing healthcare is not like purchasing a Maytag washing machine.

Some symptom (fever) or event (accident) drives the consumer into the system, usually at an inconvenient or an unanticipated time, and once the first physician encounter occurs the patient usualy has little control and little cost information.

Occasionally this is different. I needed some elective surgery several years ago and I had the expert-level knowledge to decide when and where and I knew the costs ahead of time. I'm not a typical healthcare consumer.

Most consumers do not think like economists or tax acountants when making healthcare decisions, nor do they sit on committees to rewrite state surgery regulations.

The HSA is a good deal for someone to whom the out-of-pocket amount is not a big deal, which means reasonably affluent.

For anyone else, it just makes the bewildering more bewildering at a time when the consumer/patient is not in the mood for more hassles.

The low deductibles are problems, this is not the solution.

[sw]

HSAs are not just good for the affluent, but also the young and healthy. My fiance and I have an HSA plan with a rather high deductible. It makes great sense for us because the chance of actually needing any more medical care than a regular check up is very small. With an HSA, we are able to pay $200/mo + a few hundred bucks (tax deductible) for office visits instead of $500/mo for a more comprehensive plan. If one of us were to end up in the hospital, we would hit our out of pocket max at $8000, but it wouldn't bankrupt us like a $50K hospital bill would.

I completely agree that these plans wont solve the country's health care issues, but they have their place.

[bakho]

WTF! Insurance companies negotiate with health care providers to get a better deal than an individual can get- sort of like a group rate because collection is easier. So if health care accounts cut out the insurance companies, who will bargain the health care providers down?

[Blissex]

The quoted article and some of the comments seem to me rather pointless in light of an article I read recently, which shows that health insurance is not insurance, mainly because the figures under discussion apply only to people whose claims are lower than the ''premiums'', in other word those who don't use health ''insurance''. Have a look:
http://WWW.DanielGross.net/archives/2006/07/30-week/index.html#a000995

«Insurers' resolve to price every account at a profitable level»

In other words the industry is no longer selling health insurance, but health mortgages, which is a very different
thing, as this example illustrates rather vividly:

«His 30-employee company makes packaging prototypes for advertising. [ ... ] His medical costs were roughly half of the premiums he paid between 2002 and 2004, according to his insurance data.

But last year, after an employee was severely injured in a highway accident, WellPoint's Blue Cross Blue Shield of Georgia boosted premiums by 30%. It had asked for a 41% increase but came down after Mr. Perkinson agreed to make employees pay even more of their bills out of pocket. [ ... ] The WellPoint unit says it had to increase AdProp's premiums so much to cover the big claims it incurred after the employee's accident.»

The last paragraph makes it damn clear that the so-called insurer is not running a book (insurance), just selling collective deferred payment plans (mortgages).

What health ''insurers'' call ''premiums'' are actually facility fees before a payout, and they are actually loan repayments after a payout; what health ''insurers'' sell is not insurance, it is a very expensive credit line.

The practical consequence of the new business model of health insurers is that it is a bad idea to buy it except via a very large group purchase, because there is risk pooling only within an account, not across accounts.

The indirect consequence is that this business model pressures companies to hire only young, but not too young, employees or to stop offering health insurance altogether (which would be ideal, because employer-tied health insurance is a very nasty idea, but risk pooling and tax incentives almost force it).

Private health insurance is just a bad idea anyhow, because of self selection problems, but the mortgage style business model above makes the point even more compelling.

[Blissex]

«Insurance companies negotiate with health care providers to get a better deal than an individual can get- sort of like a group rate because collection is easier.»

Except that insurance companies try not to provide insurance, but sell loans instead (as demonstrated), and they keep the «better deal» to themselves, as they both get savings from their providers and raise their prices:

http://WWW.DanielGross.net/archives/2006/07/30-week/index.html#a000995
«Last year, the top seven U.S. health insurers earned a combined $10 billion -- nearly triple their profits of five years earlier. The windfall came as insurers raised their prices faster than underlying health costs.»

Nice job if you can get it. Fortunately K Street and the Republicans are ready to help their friends with suitably designed Medicare plans :-).

[Blissex]

«HSAs are not just good for the affluent, but also the young and healthy. My fiance and I have an HSA plan with a rather high deductible. It makes great sense for us because the chance of actually needing any more medical care than a regular check up is very small.»

But note that if you have an unforeseen issue, which can happen even if you are young, you get completely screwed, because as demonstrated above your premium will go up a lot, because each account must be profitable. What you are in effect buying is no-insurance ''insurance''.

«With an HSA, we are able to pay $200/mo + a few hundred bucks (tax deductible) for office visits instead of $500/mo for a more comprehensive plan. If one of us were to end up in the hospital, we would hit our out of pocket max at $8000, but it wouldn't bankrupt us like a $50K hospital bill would.»

But your plan will shoot up to $500/month if you ever have a $50k hospital bill. Each account must be profitable, and you have to repay in full every expense the ''insurance'' company pays on your behalf. And don't think that terminating your plan or switching to a different one will avoid that problem...

«I completely agree that these plans wont solve the country's health care issues, but they have their place.»

In the bottom line of health ''insurers'' surely. Here in the UK some ''insurers'' sell no-payout insurance for car accidents.

That is, you pay a very low premium, and the ''insurance'' company pays nothing in case of accident.

The logic is that car insurance is mandatory, and for some people with no assets having a policy that pays nothing is a good deal (car insurance is mandatory to protect the victims of an accident, even if they are not the insured).

What you have bought is something not much different from that, except that you don't quite realize it yet.

says...

Health Savings Accounts...I don't know if they all work the same or not, but ours is still linked to the insurance plan (that negotiates the write offs....which I am often thankful for ) but it is a "use it or lose it " plan. That is, the untaxed contributions going into the account do not roll over each year. How is that an incentive to contain costs....on the contrary, I will be sure to schedule elective foot surgery this year that I have been putting off for years rather than lose the two thousand taken out of the paycheck this year. If the accounts were an actual saving account that rolled over into each subsequent year ( and collected interest), perhaps young healthy people would be able to save for the kind of expenses that often come later in life. If a person were lucky enough to live an entire lifetime without using it up, then there would be something left for nursing home care or funeral expenses. As it is....it is too late for us to accumulate enough even if the money did rollover and we didn't need all of it for the higher and higher deductibles and co pay each year.

[anne]

Blissex:

«HSAs are not just good for the affluent, but also the young and healthy. My fiance and I have an HSA plan with a rather high deductible. It makes great sense for us because the chance of actually needing any more medical care than a regular check up is very small.»

But note that if you have an unforeseen issue, which can happen even if you are young, you get completely screwed, because as demonstrated above your premium will go up a lot, because each account must be profitable. What you are in effect buying is no-insurance ''insurance''.

[Precisely; these accounts are for most essentially gambling with having no health insurance. Some will be rescued after the high deductible is fully used. In all, rather frightening.]

[anne]

Living in the richest country and being asked to gamble on staying healthy is a form of moral dissonance that saddens me the more I think of such plans. We really need to ask carefully what rights or securities we ought to expect for ourselves and those we would in any way care for.

Blissex well discusses the nuances, and is saddening in turn.

[Blissex]

«Living in the richest country and being asked to gamble on staying healthy is a form of moral dissonance that saddens me the more I think of such plans.»

One of the sad aspects of this is that the incentives that create this situation may well be deliberately and carefully designed by the Chambers of Commerce and their sponsored representatives, because the current situation makes employees even more terrified of losing their jobs.

Consider a possible outcome:

http://WWW.FastCompany.com/magazine/81/offshore.html
«A 49-year-old former system administrator at Agilent Technologies who worked for the company and its former parent, Hewlett-Packard, for more than 20 years, Null was laid off in January 2002, then was hired for less money as a contract employee to do the same job. When her contract ended last year, Null got the news that her job was moving to Singapore. Although she says Agilent treated her with respect throughout the process, finding a new position in her field has proven impossible. In order to get by and pay her health insurance, which costs some $650 a month for treatment related to a liver transplant, she sold her two cars, cashed out her 401(k), and took on three jobs. One, at Foley's department store, pays $6.50 an hour; a second, as a real estate saleswoman, depends on commission. She has yet to sell a house. To qualify for benefits, Null has also taken a job as a $12-an-hour call-center operator at T-Mobile. But with call centers one of the most commonly offshored jobs in the country, it's hardly a secure gig.»

The message from the Chambers of Commerce and their representatives is: ''do whatever it takes to keep your job or you may die''.

Two of the ironies that amuse me most when thinking about USA health care are that there is a government provided full health coverage system that works fairly well and is quite efficient and cheap to run, the Veterans Administration one, and that even with state provided health care, Canadian companies are doing quite well, to the point that USA companies nearshore to Canada to enjoy the lower labor costs from not having to send a large chunk of their profits to the health care industry.

Sometimes I suspect that some elements of the USA business scene just enjoy meanness, even when it is inefficient and expensive.

[kgh]

"Health Savings Accounts...I don't know if they all work the same or not, but ours is still linked to the insurance plan (that negotiates the write offs....which I am often thankful for ) but it is a "use it or lose it " plan. That is, the untaxed contributions going into the account do not roll over each year. How is that an incentive to contain costs....on the contrary, I will be sure to schedule elective foot surgery this year that I have been putting off for years rather than lose the two thousand taken out of the paycheck this year. If the accounts were an actual saving account that rolled over into each subsequent year ( and collected interest), perhaps young healthy people would be able to save for the kind of expenses that often come later in life. If a person were lucky enough to live an entire lifetime without using it up, then there would be something left for nursing home care or funeral expenses. As it is....it is too late for us to accumulate enough even if the money did rollover and we didn't need all of it for the higher and higher deductibles and co pay each year."

What this person is describing is a Flexible Spending Account, not to be confused with the HSA. FSAs are also used for childcare or eldercare expenses. As I've heard it described, an HSA will allow you to roll your account into subsequent years. That still doesn't make it a good idea.

[Sonia]

The comments here on HSAs and the individual (or small group) market do not clearly distinguish between problems of the individual (and small group)market and problems (or benefits) of HSAs. In the individual (or small group) market the configuration of cost sharing is not the critical problem. The critical problem in most individual health insurance markets is the that the bad experience of one individual will lead to large increases in premiums and in the case of the individual market near uninsurability. Compared to many other policies in the individual market HSA policies probably have little more cost sharing and in many cases less. Take a look at sites such as e-health and look at the HSA premiums versus premiums available for some plans with greater cost sharing. (Plans with seemingly comperable cost sharing often vary greatly in price. At least in part this is a factor of the longevity of the plan. Newly introduced plans have participants who have just been underwritten).

[Jim Walker]

Copy of appeal to a federal "benefits" contractor (shps)

To: FSAFEDS, Benefeds, SHPS
claim receipt #removed for privacy

Date March 30, 2007

I appeal your decision to deny any part of my claim.
To wit: $692.31 of my own FSAFEDS funds.
This is my own money that I earned in the employ of SBA disaster assistance office. This is not your money.

I have read the current version of your website which you updated today, March 30, 2007. It now clearly states that employees who left government service prior to the end of 2006 are not eligible for the grace period. This information was not disclosed to me when I signed up for the program nor at the time before my government appointment expired, nor at anytime during the 2006 calendar year. You have obviously updated your website since my enrollment in September 2006. The written materials and website available to me when I signed up for the flexible spending account most definitely did not disclose this loophole that you say allows SHPS to deny my claim on my own money. The fact that you are now publishing this loophole to justify your keeping my money does not justify your denial of my claim.

I refer to page 12 of the 83 page guide to Employees Health Benefits Plans For Certain Temporary Employees. It stated that I would have until March 15, 2007 to incur these expenses. Notifications and disclosures that I was provided at the time of enrollment and during my employment at SBA clearly stated that I had until March 15, 2007 to incur eligible expenses. There is no reference in the document or in any subsequent communication from OPM, Benefeds, FSAFEDS, or SHPS to me of any exceptions in the eligibility period. In voluminous pages of QLE matrices, FEHB guide, website, FAQ’s (available in September 2006) I could find no clear explanation that would lead a reasonable, intelligent person to conclude that shps would be allowed to confiscate my own money unless I failed to submit before May 31,2007, valid claims on eligible services provided before March 15 2007.
Those omissions by these agencies and SHPS are negligent omissions (unless the omissions were fraudulent) . As a result of the negligence these agencies and SHPS violated the fiduciary duty they have to me. I should not be penalized for their negligence and their dereliction of their fiduciary duty to me. The denial of reimbursement of my own funds is not justified. There was no prior disclosure to me that I would lose the right to claim my own funds that I had deposited because of the expiration of my temporary appointment. I have proof that no such disclosure was made. I have a copy of my enrollment application confirmation and acknowledgment, a copy of my enrollment eligibility notice, a copy of the FEHB 2006 guide, copies of emails sent to me by Benefeds and shps during 2006 and copy of an account statement sent to me in 2006. None of these documents reference the loophole you are using to deny me my own funds.

During discussions with claim handlers at SHPS on March 30, 2007 I was given information that indicates that this plan is entirely inappropriate for temporary employees. I was told that expenses occurred after termination of employment were not eligible for reimbursement. This loophole was never disclosed to me. While I was at the SBA on a temporary appointment I was solicited by the Office of Personnel Management through emails to avail myself of this alleged benefit, as I had been employed at the time for a full continuous year. If you review the account you will see that I made very large contributions as soon as I could after enrolling - $1,666,66 per pay period.( Nearly the entire net pay for three periods.) I did this because the program was presented as a way of redirecting my own funds from taxable funds to non taxable health care funds, and that I would have until March 15th to incur the expenses.

The program was improperly explained at the time I signed up. The improper explanations were in writing. If you had properly disclosed the mechanisms of the Flex plan, I would have not signed up, knowing that I could and would be laid off due to completion of the mission with only a weeks notice. You have revised your website subsequently. I could not be expected to monitor your website for updates to your program. You had no right to change the terms of my enrollment and contract without my consent. You had no right to cancel my enrollment without notifying me. I paid the plan in full prior to the termination of my employment. You had no right to terminate my coverage. You did not and my employing office did not notify me that my rights to my own contributed funds under the FSAFEDS were to be terminated The contract that you led me to believe that I had with you was that I would be reimbursed my medical expenses, provided they occurred prior to March 15th 2007 and were claimed prior to May 31st 2007. You have breached our contract. You are ethically required to grant my appeal, pay me the remainder of my claim.

Because of my experience, I realize now that this plan was not only inappropriate for me personally, but it would be inappropriate for any temporary employee.

It is a breach of fiduciary duty for health plan administrators to promote this type of plan and enroll employees without clearly explaining the loopholes and especially inappropriate to encourage temporary employees to enroll in such a bad faith plan. I am curious to know, and I have a right to know, according to the Freedom of Information Act , how many temporary federal employees have had their legitimate health care expenditure denied reimbursement due to these previously undisclosed loopholes.

You have breached our contract. You are ethically required to grant my appeal, pay me the remainder of my claim, $692.31
You are also required by ethics to research any other claim denials to other enrollees that were denied for the same or similar reasons, and to make them whole, as well.

Sincerely,
James B. Walker
Former and future SBA Disaster loan officer
Home: Roseville, CA 95747

attachments to faxed letter:
page 12 of FEHB 2006 guide from OPM
RI 70-8 revised November 2005 83 pages-

Health Benefits election form - 5 pages From2809 Revised October 2004

FSAFEDS Claim form instructions

September 12, 2006 letter from SBA announcing my FEHB eligibility.

7 pages of Q.L.E. Enrollment change Matrices downloaded from FEHB webpages - Although the matrices list approximately 112 events none of them clearly address this situation. None of the Q.L.E. examples suggest that coverage fully paid for in advance could be retroactively uncovered.

FSAFEDS Statement undated but generated approximately 10/27/2006 affirming twice that I have until 3-15-2007 to incur eligible expenses.