Do Health Savings Accounts Have a Bullseye on their Back?

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When President George W. Bush won passage of the Medicare Modernization Act in 2003, some conservatives lamented the legislation's expansion of Medicare spending through the new Part D drug benefit.[i] Tucked inside that landmark bill, however, were many reforms that gave champions of a free-market in health-care significant cause for optimism. Among these were health-savings accounts (HSAs)--individually-owned, tax-advantaged accounts that could be used to pay for qualified medical expenses.

In a February 2004 article for Commentary magazine, "Is Bush a Conservative?," journalist Daniel Casse quoted veteran health reformer Grace-Marie Turner as saying that the law contained "seeds that can lead to transformative changes in the health-care sector." Supporters hoped that HSAs would revolutionize the way Americans paid for health care in much the same way that the introduction of IRAs revolutionized how Americans financed their retirements.

Those hopes are bearing fruit. The number of Americans covered by HSA-qualified health plans has risen from less than one million in 2004 to more than 11 million in 2011. A recent survey by Towers Watson indicates that nearly twice as many companies offer these plans than they did just five years ago. Sixty percent of larger companies are now offering "consumer-driven" plans, and the number is expected to hit 70 percent next year. No other type of plan has been more successful at keeping employee health benefit costs in check, with single digit increases more closely aligned with inflation and even year-over-year decreases in cost trends observed in some cases.

Many conservatives naturally assumed that passage of the Patient Protection and Affordable Care Act (PPACA) in 2010 would sound the death knell for HSAs. In fact, the text of the 2012 law contains little to suggest that HSAs--the one proven strategy for "bending the cost curve" of U.S. health care spending--are endangered in any way. But as part of the law's implementation, the Department of Health and Human Services (HHS) has been subtly erecting barriers to the continued growth of these popular plans. Unless the Obama Administration changes course soon, millions of individuals and small businesses--almost half of the market for consumer driven plans--could lose access to affordable, high-quality HSA plans.

President Obama and HHS Secretary Kathleen Sebelius have repeatedly dismissed concerns that PPACA would target HSAs. In a March 2, 2010 letter to Congressional leaders, President Obama wrote:

"I believe that high-deductible health plans could be offered in the exchange under my proposal, and I'm open to including language to ensure that is clear. This could help to encourage more people to take advantage of HSAs."[ii]

Almost a year later, Secretary Sebelius wrote in a February 10, 2011 op-ed published in the Washington Post:

"The Affordable Care Act puts states in the driver's seat because they often understand their health needs better than anyone else...States have discretion, for example, to offer a wide variety of plans through their exchanges, including those that feature health savings accounts."[iii]

Bold promises have since given way to bureaucratic inflexibility. So far, HHS has interpreted PPACA insurance requirements very narrowly, denying consumer-driven plans and HSAs an opportunity to compete fairly in the market place. Current HHS standards will be extremely challenging for these plans to meet.

HHS has consistently tilted the playing field against consumer-driven plans. The first step was via final regulations implementing the ACA's new minimum medical loss ratio (MLR) standards. As written, these regulations make it impossible for consumer driven plans to qualify as Bronze plans under the ACA's new state insurance exchanges. If forthcoming final rules on "essential benefits" and "actuarial value" requirements are just as discriminatory, these affordable plans will vanish and insurance costs on state exchanges will skyrocket. Along the way, millions of Americans with policies that could qualify as Bronze plans today will be forced to change or drop their coverage. A minimum MLR sounds like a good idea -- ensure that consumers get good value from their insurance policies. But MLR standards (currently set at 80 percent for the individual and small group markets) effectively act as price controls, limiting the cost of insurance by controlling the portion of the premium that is available to be spent on administrative expenses and profit (i.e., the remaining 15 or 20 percent of the premium collected).

However, it is much harder for HSA plans with high deductibles to meet such high MLR standards when the plans are designed to pay only 60 or 70 percent of the cost of coverage. (Ironically, these standards are included in the PPACA and define the future "Bronze" or "Silver" plans available through state exchanges in 2014.) The whole point of a deductible is to delay the point at which the insurance plan must pay for covered benefits. But that is precisely what makes it difficult for these plans to meet the MLR standards--they can't count any of the claims below the policy deductible because the insurance plan isn't paying for anything yet. The threat to HSAs was validated by a recent analysis of the MLR rules by Milliman Inc. for the American Bankers Association. [iv]

Making matters worse, a "guidance bulletin" issued by HHS on the subject of actuarial value - the percentage of medical costs covered by insurance--says that HHS will not permit insurance carriers to include HSA contributions when determining the "actuarial value" of their plan designs (i.e., how generous the coverage is). To meet these new standards, HSAs will have to offer richer coverage - driving up insurance premiums. As a result, millions of Americans who will flock to the state insurance exchanges in 2014 looking for affordable coverage will be forced to pay a much higher premium for even the most basic coverage allowed under the law.

HHS does say it is planning to include employer contributions for HSAs in the actuarial value of small employer plans; however the amounts will be "adjusted" (i.e., reduced) in some manner that has not yet been determined. Further, employee HSA contributions will not be counted at all, even if collected by the employer and forwarded to the financial institution managing the account. HHS says it will propose guidance for treatment of HSA contributions for larger employer-sponsored plans at a later date. But the message is clear - continue "business as usual" through the broken model of generous first-dollar coverage that is bankrupting American employers and taxpayers.

The good news is that most of the growth in enrollment in high deductible plans is coming from the large employer market which is largely self-insured and thus exempt from the MLR regulations. The actuarial value regulations will apply but most larger companies (who often contribute to employee HSAs) expect they will not have a problem meeting the requirements. This will permit continued growth in this segment of the market, which accounts for more than half of all enrollees in HSA-qualified health plans.

Still, this means that individuals purchasing coverage on their own, small businesses, and some larger businesses will be the most affected by the new regulations.

While it is easy to take comfort in the tremendous growth opportunity for HSAs in the larger employer market, it is also important to keep in mind the uncertainty that remains after the employer and individual mandate requirements become effective in 2014. A relatively low penalty ($2,000 or $3,000) for dropping employee coverage could encourage many employers to end self-funded coverage, creating a mass exodus of workers into the state insurance exchanges where fully insured plans are subject to onerous and expensive requirements.

For some, HSAs are effectively being subjected to a slow death via bureaucratic rulemaking. And that's not quite the same rosy picture for the future of HSAs painted by President Obama and Secretary Sebelius, is it?

i. Importantly, many conservatives now champion Part D as an example of free market reforms to government entitlement programs. To date, Part D has come in over 40% below original cost estimates, thanks to its emphasis on market competition and consumer choice.

Roy Ramthun, "Mr.HSA," is a private consultant in Washington, DC and a former health care advisor to President George W. Bush.

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