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Manhattan Moment: Data shows health savings accounts cut premiums

Benjamin Zycher, Ph.D.
Washington Examiner
February 17, 2009

Health–care reform will set off the mother of all tugs of war as interest groups struggle to be among the winners when the federal government attempts to reshape 17 percent of the U.S. economy through the blunt tools of increased spending and regulation.

One basic problem with the U.S. health–care system is understood widely: The tax deductibility of employer–provided health coverage is a major cause of the resource waste and other problems afflicting the U.S. health–care system. In particular, it yields a large subsidy for expensive coverage characterized by low deductibles and low copayments for covered individuals and their families.

The 2004 Medicare Modernization Act contained a provision creating Health Savings Accounts (HSA) for current and future medical expenses. Individuals and/or their employers may deposit pretax funds into the accounts, and subsequent withdrawals (for qualified medical expenses) are not subject to taxation.

The accounts must be coupled with specific features, the most important of which is a large deductible. Because such coverage is available to individuals and families in the non–group market, HSA–qualified insurance moves away from the bias in favor of employer–provided coverage.

The higher deductibles provide incentives for increased discipline in the utilization of health–care services, while preserving coverage for large medical expenses.

In a study for the Manhattan Institute, I evaluated the first four years of HSA–qualified health insurance. As designed, such coverage has deductibles significantly higher (by multiples between 1.2 and 4.7) than those for more traditional policies.

Out–of–pocket maximums—the total amount that patients are responsible for paying, including the deductible—also are higher for HSA–qualified policies, but evidence suggests that this is driven almost entirely by the higher deductibles.

At the same time, premiums for HSA–qualified policies are 10–40 percent lower than those for other types of plans, and are growing far more slowly, suggesting that such coverage does increase incentives to economize.

This is consistent with empirical evidence indicating that higher degrees of cost–sharing induce greater cost–consciousness in patients, but the use of preventive and chronic illness services is similar for enrollees in HSA–type policies and more traditional plans.

This may be due to the fact that a wide range of preventive care services is covered before plan deductibles are met under most HSA–qualified policies.

For the HSA–type approach to yield important aggregate efficiencies, it must be adopted by a significant proportion of the insured. So far, only 11 percent of firms offering health coverage offered an HSA–qualified option in 2008.

Still, the early growth of HSAs and other high-deductible coverage thus far outpaces that of IRAs and 401Ks: HSA– and other high–deductible coverage grew over the first four years to 3 percent of all private coverage by 2007; the comparable figure for IRAs (as a proportion of all pension assets) was 2 percent, and for 401K–type plans was a four–year decline to 8.6 percent.

HSA–qualified coverage can still be improved. Many consumers do not understand the high–deductible/savings account features of HSA coverage; only 53 percent find it "easy to understand."

This means that both employers and insurers have work to do explaining the features and advantages of HSA–qualified coverage. Moreover, government policies affecting HSA–qualified plans could make this type of coverage more attractive.

To take two examples: Expenses for chronic care should be covered on a first–dollar basis after a deductible is met for the first year, and the annual contribution limit for HSA savings accounts should be increased to the annual out–of–pocket maximum expenditure for the given plan.

There is no shortage of worthy reforms, but it's clear that the HSA approach offers hope for the U.S. health–care system in a way that the big-government plans being discussed do not. It's not too late to make HSAs the centerpiece of health–care reform.

Benjamin Zycher is a senior fellow at the Manhattan Institute. This column is based upon "HSA Health Insurance Plans After Four Years: What Have We Learned?" a study published by the Manhattan Institute.
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