Defining Ideas

Clearing Up Misconceptions About Health Savings Accounts

Tuesday, July 3, 2018
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Congress and the Trump Administration are focusing on health savings accounts (HSAs) as the next step in health care reform. HSAs allow individuals to set aside money tax-free for uncovered health expenses. Because HSAs reward saving and help position consumers to be directly in charge of buying their own health care, they stimulate competition among health care providers. This translates into lower prices and better value for patients.

Yet, key misconceptions about HSAs persist in the public discussion as well as in the halls of Congress. Let’s clarify the most important points:

  • The fundamental purpose of HSAs is to reduce the price of health care, NOT simply to provide a tax-sheltered benefit to cushion the blow of high health care expenses. Uniquely in health care, longstanding government regulations and misguided tax policy have created harmful incentives and have undermined price consideration, by pushing people toward expensive insurance that minimizes out-of-pocket payments. With that coverage, patients perceive “someone else is paying” for their medical care. This has prevented consumers from caring much about prices or value.  Consequently, providers have been shielded from competing on price. Different from tax deductions or income exclusions, HSAs uniquely incentivize saving.  Especially with larger and improved HSAs, patients become highly sensitive to price, because they are rewarded for saving with cash that remains in their possession. Concern about price by HSA holders lowers prices from competing providers. That reduced price makes quality care more affordable for everyone, including people without HSAs.  Direct payment by patients with strong personal incentives to seek value is the most powerful lever to reducing costs of care, and reformed HSAs give those incentives.
     
  • HSAs successfully reduce prices – and that benefits everyone who uses medical care, including people without HSAs.
    When patients pay out-of-pocket for medical care and also get rewarded from saving, they seek value and exert downward pressure on prices. Prices rapidly decreased for LASIK corrective vision surgery and MRI or CT screening procedures originally not covered by insurance. Data from MRI and outpatient surgery confirm that when patients are motivated to compare prices, prices drop - by almost twenty percent.  HSAs help position patients to pay directly for medical care. And we know HSAs play an important role in motivating patients to care about price: when people have savings to protect in HSAs, the cost of care drops by 15% annually on average, without increases in emergency room visits or hospitalizations. When HSAs were added to high-deductible plans, savings increased to up-to-double the savings that high deductible plans produced alone. Competition among doctors and hospitals for patients who care about price lowers prices for all health care consumers. Moreover, since insurance premiums mainly reflect payment for medical care, premiums also drop. That includes reduces the cost of private coverage as well as government insurance programs like Medicaid and Medicare. Everyone who uses medical care or buys health insurance benefits from the lower prices generated by widespread HSAs.
  • An HSA is not a tax benefit for “the rich”.
    The median household income for an HSA account holder is $57,060; two-thirds earn less than $75,000 a year.  According to WageWorks, three out of every four current HSA owners are under age 50, so only a minority of HSA owners are in their highest-earning years. Ironically, today’s current income tax exclusion for health benefits is highly preferential to individuals with higher incomes. About 85% of the subsidy goes to the top one-half of the income distribution.  Universally available HSAs help even the playing field for those in small businesses and the self-employed, in addition to generating more affordable care for everyone.
     
  • HSAs could pay for most medical care events, even though many procedures and hospitalizations exceed HSA limits.
    Most health care involves smaller, non-catastrophic, scheduled expenses; emergency care represents only six percent of health spending.  Widespread HSA adoption with higher deductible coverage would change most health care episodes into direct payment. When more people are positioned to pay directly for more of their care, the more downward pressure on prices will occur. Among privately insured adults under age 65, as well as for the poor on Medicaid, almost 60 percent of all health expenditures is for non-emergency outpatient care. Even for the elderly, almost 40 percent of expenses are for outpatient care. Patients can realistically make value-based decisions, especially for outpatient non-emergency care; indeed, that’s already proven. 
     
  • HSAs increase the use of effective wellness programs and screening tests.
    HSAs represent one of the best vehicles for offering effective wellness programs and screening tests. This is highly beneficial to HSA holders and companies, because these programs improve chronic illnesses and save money for both the employee and the employer. Yet ObamaCare limits financial incentives from employers, like deposits into employee HSAs. Congress should abolish this rule.
  • Americans want HSAs, and Congress should respond.
    Despite the ACA’s attempt to shift consumers to more “comprehensive” coverage filled with mandates, a shift toward high deductible plans with HSAs has continued. In the decade-and-a-half since tracking this type of coverage, employers have increasingly offered such plans, and consumers have increasingly selected high-deductible plans. Among those enrollees, a shift toward higher deductibles has continued. Since the introduction of HSAs in 2004, the number of accounts has skyrocketed to between 22 and 35 million as of the end of 2017. By the evidence, American consumers are approving their value by increasingly choosing HSAs when given the opportunity.
     
  • Price transparency is absolutely essential to generate competition among sellers, but it is not sufficient.
    To bother considering prices, even if visible, patients must first personally gain from paying less. If I only pay $1.50 per month out-of-pocket for my cholesterol drug (because the cost is nearly totally covered by insurance), why would I care if total prices to insurers varied by 20-fold, as shown in a December, 2017 Consumer Reports study?  That personal gain is generated through larger, liberalized, and transferable HSAs that reward saving with significant assets that stay with the patient and family. Second, patients must pay directly for more of their own care to be able to exercise their new power on prices. Higher deductible insurance plans (HDHPs) position patients to pay directly for care. Although not necessarily appropriate for everyone, HDHPs should become available to everyone, and that coverage must include fewer mandates to make it cheaper and more attractive. According to Haislmaier, only 30 percent of federal ObamaCare exchange plans now qualify as HSA-compatible; six states offer none.  Congress needs to eliminate those anti-consumer ObamaCare regulations.

    Several states have put forth laws to require price transparency in health care, and insurers, employers, and even providers increasingly offer price transparency tools. However, results are mixed – partly due to complexity of the tools, but more so from two more fundamental problems. First, price transparency from providers or policy makers does not necessarily lead to transparency in the only “price” relevant to patients—the out-of-pocket costs. It seems unlikely that more federal laws will simplify price information or clearly sort out out-of-pocket prices from overall cost. Second, today’s government regulations themselves, along with misguided tax incentives, have pushed people toward insurance that minimizes out-of-pocket payments. In that coverage, patients perceive “someone else is paying”, so they don’t care about prices. Once patients have strong incentives to consider price and the vehicles to gain from doing so, prices (and markers of quality) will become visible, because providers will understand that they are suddenly competing for price-conscious patients who control the money.

    In fact, we may not need specific legislation to force price transparency. Indeed, no other good or service requires such governmental legislation, because consumers would never buy something with their own money without knowing its price. One exception needing action is prescription drugs, where many pharmacy benefit managers PBMs prohibit pharmacists via contractual gag clauses from volunteering that a medication may be less expensive than the co-pay if purchased entirely at the cash price, according to a 2016 survey of over 600 community pharmacies. Of course, these anti-consumer agreements should be outlawed. 
  • The maximum allowable contribution should be raised, even though many people don’t fund their HSAs to today’s maximum. 
    HSAs need to be substantial to be the source of payment for as much medical care as possible. Today’s counterproductive limitations and insurance regulations, however, have dramatically limited the use and benefits of HSAs.  Even with today’s restrictions on HSAs, contribution levels have been increasing. Individual contributions in 2016 were higher the longer the holder had the account; for those holding an account since 2005, the 2016 contribution averaged $3,658, while for those opening new accounts in 2016, the contribution averaged $1,290. Remember, ObamaCare subsidies for insurance that minimizes out-of-pocket payment have prevented consumers from caring much about prices and have shielded doctors from competing on price. Today’s unfettered prices of medical care, combined with ObamaCare’s regulatory burden forcing the purchase of expensive insurance filled with mandates, created even higher insurance premiums (doubling from 2013 to 2017, even with significantly higher deductibles, per eHealth) – leaving the consumer with less money for HSA contributions.
     
  • The HSA is NOT an independent component of the health care system. To maximize the benefits of HSAs, other reforms are also necessary.
    Impactful HSA reform also requires eliminating anti-consumer regulations that limit competition among doctors and hospitals. This is essential to give patients sufficient choices when spending their HSA money. One obvious example is increasing the supply of cheaper and more convenient neighborhood clinics staffed by nurse practitioners and physician assistants for simple primary care, including vaccinations, blood pressure monitoring, infection treatment, and dispensing common drugs. Care at these clinics runs 30–40% cheaper than at physician offices and about 80% cheaper than at emergency departments; it has high quality and high patient satisfaction.  To maximize competition to doctors, Congress should push to simplify credentialing requirements and remove outmoded scope-of-practice limits on qualified nurse practitioners and physician assistants. Stagnant medical school graduation numbers, and severe specialist and subspecialist training program restrictions have been in place for decades, despite widely recognized doctor shortages. Archaic non-reciprocal MD licensing by states limits competition through telemedicine. These anti-consumer practices need to be abolished.
     
  • Expanding HSAs would not create a tax revenue deficit, because other tax write-offs that disproportionately benefit affluent taxpayers today should simultaneously be eliminated.
    Today’s unlimited income exclusion for employer-sponsored health benefits is harmful, because consumers are rewarded for spending more on health care. This is counterproductive, because it incentivizes more health spending, props up bloated coverage that minimizes out-of-pocket payment, and reduces concern for price.

    Instead, the tax code should cap total health expense deductions or income exclusions. For instance, limiting the income exclusion based on the 50th percentile for health benefits paid through employers would reduce deficits by $537 billion over the next decade, by CBO and JCT estimates. This new cap would eliminate harmful incentives and mainly impact upper income earners.  Beyond setting a cap, Congress should also limit eligibility to HSA contributions and limited-mandate, catastrophic coverage premiums.  It would be counterproductive to give tax preferences to all health expenses, or to bloated insurance with expensive coverage that minimizes copays, both of which reduce patient concern about the price of care.

The issue is not whether HSAs are effective in making health care more affordable; it is how to maximize their adoption and fully leverage their power.  Congress should make HSAs more valued by consumers and should incentivize their use. That means opening up availability to independent HSAs for everyone, including seniors, the biggest users of health care; doubling the allowed maximum contributions; liberalizing HSA uses to include elderly parents and reasonable over-the-counter drugs; eliminating restrictions like required insurance deductibles; permitting tax-free inheritance to all family members; repealing harmful incentives from the tax code; and aggressively abolishing anti-consumer barriers to competition among medical care providers, health care technology, and drugs.  Reformed HSAs represent a clear pathway to affordable, quality care for everyone.

Scott W. Atlas is the David and Joan Traitel Senior Fellow at Stanford’s Hoover Institution and the author of Restoring Quality Health Care: A Six Point Plan for Comprehensive Reform at Lower Cost (Hoover Press, 2016).