HSA's Are Not A Solution

At today's healthcare summit, Health Savings Account (HSA) insurance plans were discussed.  HSA's are, in my view, extremely problematic.  They are highly attractive, because with enormous deductibles, insurance seems inexpensive.  But there are many hidden costs.  I've described the problems as I see them in the material following the jump.

Since 2004, Americans have had access to a new tax-sheltered form of saving for medical expenses.  For those covered by high deductible health plans — those with a minimum deductible of $1,000 for individual plans and $2,000 for family plans in 2005 — who are not covered by another health plan, including Medicare, and who can't be claimed as a dependent on someone else's tax return, it is now possible to contribute to a Health Savings Account (HSA).  The amount that can be contributed to the HSA is an amount up to the individual or family deductible to a maximum of $2,600 for individual plans and $5,150 for family coverage.  Amounts can be withdrawn as needed throughout the year to pay for medical expenses, softening the budgetary impact of the high deductible health plan.  Importantly, unused amounts can be carried over and added to from year-to-year.  This is intended to encourage saving amounts from year-to-year to build cash that can be used in the event of a catastrophic illness.  The flexible spending accounts many consumers have used require a careful calculation so as not to deposit too many dollars, because unused dollars are forfeited at year end.  This provision led to profligate spending late in the year on anything that could consume the account’s unspent balance.  

Supporters of HSA's hope that the high deductible health plan, coupled with the HSA, will cause consumers to become more prudent users of health services.  The high deductible health plan and HSA combination will give consumers the sense they are spending their own money, which, of course, they are.  The assets of the HSA, since they can carry over from year to year and grow to sizeable amounts, can be invested in many ways, depending on offerings available through the administrator of the HSA program.  Some administrators offer money market accounts and a range of mutual fund offerings.  In addition to meeting deductible or copayments in a beneficiary’s health plan, the assets of an HSA can be used to pay the costs of COBRA continuation coverage in the event of job loss, any health plan coverage while receiving unemployment insurance, or qualified long-term care insurance premiums.  If the HSA owner contributes dollars each year, invests those dollars wisely, and stays healthy, she may have a nice nest egg when she becomes eligible for Medicare.  At 65, unspent amounts can be used to pay Medicare premiums and out-of-pocket medical expenses, or can be taken out and used for any purpose after paying taxes.

If healthcare responded to market forces like other goods and services do, then HSA's might have a positive effect on health care costs.  After all, when the price of new cars, computers, clothing or groceries go up, we buy less of a high-priced product, or substitute a lower-priced one.  But unfortunately, we have nearly 25 years worth of scar tissue to prove that healthcare doesn't work this way.  We don't have surgery because our employer provides good health coverage and the operation is "free" to us.  Most of us don't visit emergency rooms just for the convenience.  It is true that only a small percentage of all patients seen in emergency rooms are at risk for life or limb.  But that does not mean that the reason they decided to make the trip is not important.  Most would make the same decision even if they paid the full cost.  Demand in healthcare may certainly include a few frivolous services provided to patients who didn't absolutely need them.  But “fixing” this problem with high deductible health plans isn’t likely to solve the health care cost problem.  As large deductible health plans and HSA's become more widespread, don't expect the staff in your local hospital emergency room to have a lot more time on their hands.

High deductible health plans and HSAs are likely to lead to their own set of problems.   Until the HSA is funded by the employee or employer, the employee remains vulnerable to a one time health claim that would cause him to incur costs at or above his policy’s deductible.  Imagine having an individual policy with a $2,000 deductible, and having to come up with that amount the first month the coverage was in place.  This is especially unrealistic for a woman who has an income equal to the median earnings for full-time, year-round female workers of $30,724 in 2003.  A $2,000 deductible is 6.5 percent of her gross earnings.  For a man with an income equal to the median earnings for full-time, year-round male workers of $40,688 in 2003, the deductible is nearly five percent of gross earnings.  In addition, the plan may obligate the “insured” to copayments or coinsurance that could total another $1,000 or $2,000 bringing total financial responsibility to amounts of between 10 and 15 percent of gross earnings of full-time, year-round workers.  For someone earning the minimum wage, this is hardly protection at all.  A deductible and coinsurance responsibility of $3,000 would represent about 28 percent of gross annual income.  A $4,000 combined personal responsibility would total more than 37 percent of gross annual income.  It is the risk of incurring expenses of these magnitudes that causes us to turn to insurance for protection.  Yet with high-deductible health plans, we essentially self-insure this risk.  For a large segment of the population, that can be dangerous.  A Metlife Employee Benefits Trend Study found 63 percent of those surveyed were concerned about having enough money to make ends meet.  The study also found 42 percent of full-time employees reported they are living from paycheck to paycheck.  Among women and widows who work full-time, the percentage who report they live from paycheck to paycheck rises to 51 percent and 70 percent respectively. 

Where would these people find the cash to meet a large deductible and coinsurance obligation?  If the money has been saved in the HSA account, bills of this size won’t likely be a problem.  If it has not been saved, it could lead to enormous financial difficulty for anyone having to come up with $4,000 in a month when gross earnings may be between $900 and $3,390 a month.  Because the tax savings of an HSA for someone earning a modest income will be small or non-existent, and because the money needed to fund an HSA to save for the cost of a large claim that may or may not be incurred at some time in the future must compete with living expenses that are happening today – the rent or mortgage, the car payment and soaring gasoline costs, the credit card payment, the utility bills, clothing or medicine or school supplies for the kids – it is less likely that those who most need the protection that a fully funded HSA could provide will actually have that protection when it’s needed.  In such cases, high deductible health plans can turn out to provide pseudo-coverage.  While it’s true they will pay most of a really large bill – perhaps as much as 92 percent of a $50,000 claim – the remaining balance can still be a huge burden for many in our society to pay in a short period of time.  Imagine a 30-year home mortgage for $120,000 at six percent annual interest, with a monthly payment for principal and interest of around $720.  If the mortgage is paid off on schedule, after 30 years, the $120,000 would be repaid, along with about $139,000 in interest, for a total of $259,000 in payments.  While no one expects to have to come up with the entire amount required to pay off their mortgage on short notice, missing three consecutive monthly payments – an amount totaling a little more than $2,150 in this example, less than two percent of the principal borrowed, or less than one percent of the total amount to be repaid – would be enough to get foreclosure steps initiated.  And this, after 90 days.  The beneficiary of a high deductible health plan is likely to have these expenses come up in a single month, and perhaps at a time when

illness or injury have reduced the hours that can be worked, and the pay that goes with them. 

Another risk of the high deductible health plan coupled with an HSA is that it will lead to under-treatment, and consequently higher expenses in the future.  Imagine a patient with a prescription for a $100 statin drug to control cholesterol.  Will this individual be tempted to skip the prescription to save the cost if the HSA hasn’t been funded, or avoid withdrawing from their HSA account if it has been funded, to help the HSA account grow more quickly?  If so, the individual may have a heart attack later that costs the health plan more money, and drains the patient’s personal or HSA savings. 

Adverse Selection

If an employer offers both a traditional and high deductible health plan and enrollment grows in an employer’s high deductible health plan, with HSA, expect premium expenses for that employer’s traditional coverage to soar.  High deductible health plans, particularly when coupled with an HSA, become most attractive to the person least likely to incur any health costs.  Conversely, these plans will be least attractive to those who

anticipate significant health expenses.  With fewer "healthy" individuals left in the traditional health plan, and a higher percentage of remaining beneficiaries submitting health claims, this adverse selection will lead to accelerating rates of premium increases, potentially leading to termination of some traditional health plan offerings by employers.  If high deductible plans gain moderate acceptance, then they could spell the end of traditional moderate deductible health coverage for everyone.  For those earning substantially more than median incomes, the short term personal expenses high deductible health plans can leave the patient responsible for can be managed – with or without an HSA.  But for someone earning the median income, or worse, minimum wage, these expenses can be catastrophic. 

Provider Impact

Other consequences of high deductible health plans will be felt by communities’ physicians, hospitals and other health-care providers, and ultimately by the high deductible health plans themselves.  One of the reasons providers offer substantial discounts to health plans is for prompt payment of claims, and the fact that the plans have their members assign payment to the provider.  With office visit co-pays and an assignment of benefits, a provider may not need to bill the patient at all.  The co-pay is collected at the time of service, the claim is filed with the health plan and payment is made by the health plan directly to the provider.  High deductible health plans will add significantly to providers' administrative expenses.  As more claims are processed, and applied to high deductibles, providers will notice cash flow slows substantially.  Let's follow a patient's encounter with a physician, and the behind the scenes billing process.  With a traditional health plan, a physician would collect a copayment from the patient at the time of service of $10, $15 or $20.  The physician would then bill the health plan, and expect payment from the health plan within about 30 days.  For a $70 office visit, a managed-care plan might allow $55.  In this example, the patient’s co-pay would represent somewhere between 18 and 35 percent of the allowed charge.  The balance would be paid by the health plan within 30 days.  Since high deductible health plans don't include co-pays, the physician will collect nothing from his patient at the time of service. 

The physician will bill the patient's health plan, perhaps electronically.  Thirty or so days later, the physician can expect to receive an explanation of benefits (EOB), perhaps electronically, from the health plan indicating the health plan’s allowed charges for the services provided ($55 in this example), but also indicating the entire amount of the claim was applied to the patient's large deductible.  At this point, the provider needs to adjust the patient's account for the $15 discount he is contractually obligated to provide, mark the balance due as the patient's responsibility, and generate a bill to the patient, on paper, doubling his billing effort and substantially increasing his billing expense.  Some patients will pay promptly, in 20 or 30 days.  Others will take longer.  With high deductible health plans, collecting for a $70 office visit will take 60 or more days and may cost the physician an extra $10 for the cost of postage, stationery and staff time to bill the patient one or more times.  A few patients, suffering an unexpected, serious illness that costs thousands of dollars soon after enrolling in a high deductible health plan, and before an HSA can be sufficiently funded to cover the large deductible, may take a very long time to pay.  Instead of just an electronic claim transaction, providers will pay the cost of the electronic claim transaction, plus the cost of postage, envelopes, and handling to deliver a paper bill to their patients with high deductible coverage.  Providers will also face the added costs of dealing with the health plan’s EOB, the cost of posting adjustments, flagging the patient’s account as the patient’s responsibility, and the cost’s of opening mail, posting individual checks to accounts, and depositing checks.  For high volume payers with traditional health plans, money might be electronically wired to the providers account, and a “bulk” EOB electronically sent to the provider, minimizing the costs associated with posting payments to accounts.  Faced with higher billing expenses and slower payment, providers are likely to begin negotiating higher fees with health plans for high deductible coverage.  This is likely to drive up the cost of high deductible coverage.  So ultimately, the introduction of high deductible health plans will cause those who continue to be covered by traditional health plans to pay more, and those covered by high deductible health plans will pay more.  Some solution!

High Fees

High deductible health plans may turn out to be lousy investments in another way.  Mutual fund investors have been warned for years by Morningstar and investment counselors to pay attention to fees and expenses.  That warning should also be extended to HSA account holders.  HSA account holders need to beware of account opening and account closing fees, monthly service fees, debit card fees, and fees added to help the administrator manage any investments held in the account.  With several of these charges, it is possible for an individual saving only $1,000 per year to bear costs as high as six percent of his first year HSA deposit.  For a family plan, saving the maximum of $5,150, and with few administrative expenses, fees can be as low as one-third of one percent, but those fees are still high compared to the cost of an efficient market-indexed mutual fund.   Depending on the administrator, some of these fees will decline or even go away in subsequent years if certain minimum account balances are reached.  Some accounts provide access to low-cost mutual funds.  One fund included in the offering of one HSA administrator carries an expense ratio of .18 percent, one of the lowest in its category according to Morningstar.  But the fee charged by this administrator for managing an HSA account holding one or more mutual funds is .125 percent charged each quarter on the mutual fund balance.  This amounts to an expense ratio of .5 percent per year just for administration.  The mutual fund company can select the stocks, place the trades, pay the sales commissions, manage its customers’ accounts, and provide periodic statements for .18 percent.  The HSA administrator is charging nearly three times the fee of the mutual fund company for reporting a monthly balance!  Suddenly, a mutual fund which offers one of the lowest expenseratios in its category at .18 percent, according to Morningstar, ends up costing the HSA account holder .68 percent, nearly four times as much, just for the privilege of tax sheltering the investment in an HSA.  For those fees, an investor would be wise to buy the fund through an IRA, a 401(K)  or a 403(b) program.  HSA account buyer, beware!