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INSURANCE: A Closer Look At HSAs

April 12th, 2007

Do high-deductible health insurance policies, coupled with tax preferred Health Savings Accounts (HSAs) championed by the Bush Administration and a number of health policy analysts, actually reduce rather than increase cost sharing for many groups? Dahlia K. Remler and Sherry A. Glied made this case in a Health Affairs paper which was quickly picked up by the advocates of HSAs to support the argument that HSAs will be beneficial to the insured.

The trouble with their argument is that it rests largely on one illustrative case, namely, for a family in a high marginal tax bracket and for an HSA with a relatively low annual deductible. As is explained more fully below, if one assumes lower marginal tax rates or higher deductibles, or both, Remler and Glied’s conclusions no longer hold as a general proposition.

Remler and Glied’s illustration. To make their case, Remler and Glied use as a baseline case the “prototypical comprehensive plan today” with a deductible of $350, a coinsurance rate of 20 percent, and an out-of-pocket maximum of $1,800, for an individual. Out-of-pocket spending under the comprehensive baseline plan is not tax deductible. They then compare after-tax out of pocket spending under this baseline plan with after-tax out-of-pocket spending under an HSA plan that has an annual deductible of $2,500 and zero coinsurance. Under the HSA plan, all out-of-pocket spending becomes tax-deductible. The illustration, however, is made only for a high-income individual assumed to face a marginal income tax rate of 40 percent. Such an individual pays out of pocket, on an after-tax basis, only 60 cents for every dollar he or she is billed by health care providers within the deductible range. Exhibit 1 is a slightly modified version of the author’s Exhibit 3.

High Deductible Plan With HSA Versus Comprehensive Plan:
Relationship between Medical Spending for an Individual
And Out-of-Pocket Spending (Deductible for the HSA is
$2,500 with 0% coinsurance.)

Exhibit 1

In Exhibit 3 of their paper, Remler and Glied present only the bottom two lines of Exhibit 1 above. These lines show that, under the authors’ assumptions, for total annual medical bills below $700 or above $6,000, the HSA actually saddles patients with less cost sharing in dollar terms than does the conventional, comprehensive baseline plan. It is the basis for the authors’ conclusion that “current HSA/high-deductible plans represent an increase in cost sharing for those in the middle of the spending distribution, but a decrease for those at the very low end and in much of the higher end.”

Alternative Scenarios

This generalization by the authors is much too broad, as it is valid only for the specific parameters assumed by the authors.

Lower tax rates: As is shown in the top of the three curves in Exhibit 1, the authors’ broad conclusion does not hold for individuals with incomes too low to require payment of federal income taxes. Such individuals pay only payroll taxes of 6.2 percent for Social Security and 1.45 percent for Medicare, which means that they pay out of pocket 92.35 cents for every dollar they are billed by health care providers within the deductible range. Because of these high after-tax payments, such low income individuals never pay less out of pocket under the HSA than they would under the comprehensive policy, as is shown by the top line in Exhibit 1.

Higher deductibles: Cost-sharing under the HSA relative to conventional policies is much higher still if the annual deductible exceeds $2,500. As Remler and Glied point out in their Exhibit 1, currently up to $5,000 a year may be deposited by individuals into tax-preferred HSAs, coupled with insurance policies with deductibles up to $5,000. The well-known “farmers’ market” for individually sold health insurance products, for example, features numerous insurance products with annual deductibles ranging from $5,000 per individual. Typically, these policies exclude maternity care, place limits on a number of other services and are medically underwritten.

As is seen in Exhibit 2 below, for such policies, for bills exceeding the non-tax-preferred deductible of $350 under the assumed conventional policy, the annual dollar amount of out-of-pocket payments under HSAs are higher for both, low-income and high-income families, relative to the conventional policy.

High Deductible Plan With HSA Versus Comprehensive Plan:
Relationship between Medical Spending for an Individual
and Out-of-Pocket Spending (Deductible for the HSA is
$5,000 with 0% coinsurance.)

Exhibit 2

Family policies: Total annual out-of-pocket spending under HSAs for families, rather than individuals, can be as high as $10,500 under current law. Not surprisingly, the website therefore features numerous health insurance products for families with annual deductibles of $10,000 or combinations of deductibles and health insurance with a maximum out-of-pocket limit of $10,000. Exhibits 3 illustrates cost sharing under these policies in a different format, showing the fraction of the total annual medical bill paid out of pocket by high- and low-income families.

Out-of-Pocket Spending under a High-Deductible Insurance
Plan for a Family With an Annual Deductible of $10,000
and with zero coinsurance.)

Exhibit 3

Exhibits 2 and 3 illustrate clearly just how regressive the tax-preference accorded the HSAs can be. In effect, the construct makes the after-tax cost of health care much cheaper in absolute dollars for high-income families than for low-income families. One must wonder whether the implied distributive ethic conforms to prevailing American notions of fairness.1

Deductibles vs. Coinsurance

Remler and Glied correctly point out that what they call the “marginal price” of health care – that is, the incremental out-of-pocket payments due at any level of total annual medical spending — depends on the mix of deductibles and coinsurance in the HSA products. In their illustration, they posit a mix of deductible and coinsurance for the conventional insurance policy, but a deductible only for the HSA product, which means that, once the deductible is met, patients enjoy first-dollar coverage with zero out-of-pocket spending.

If the goal of the HSA/high-deductible construct is to force patients to have “[fiscal] skin in the game” – to use that dubious but common phrase — so that patients think more carefully about the benefits and costs of proposed treatments, then an argument can be made for lowering the deductibles and adding coinsurance instead.

For example, instead of a deductible of $2,500 with zero coinsurance, which makes health care free to the patient for bills exceeding $2,500, one might use a $1,000 deductible with 30 percent coinsurance and a maximum out-of-pocket stop loss of $2,500. Under that regime, health care would become free to patients only for annual medical bills exceeding $6,000. At the extreme, one might have zero deductibles and only coinsurance of, say 25 percent up to a maximum risk exposure of $2,500 a year, which would make health care free to patients only for annual bills exceeding $10,000.2

What particular mixture of deductible and coinsurance is preferable depends on (a) the maximum out-of-pocket spending one believes families ought to bear per year and (b) the size of the total annual medical bill beyond which one no longer wishes to visit cost sharing on patients. It is a matter worth further study and thought.

Implication for Health Policy

Those who believe that our health system will never be efficient until patients feel serious fiscal pain as they suffer physical pain, so to speak, will find the preceding analysis reassuring. A Bloomberg wire service story reacting to the Remler-Glied article, for example, treated the low cost sharing reported by these authors as a newsworthy discovery of a “flaw” in HSA design, since if less is spent out-of-pocket, incentives to conserve costs under HSA plans must be weaker.

Rationing by income class: As my analysis illustrates, however, the very high degree of out-of-pocket spending visited on individuals and families by many of the HSA products now on the market guarantees that especially low-income Americans are very likely to tighten their belts und forego health care they would have wanted under the more comprehensive, conventional insurance products. This self-rationing by price is doubly guaranteed, because the tax-preference accorded to HSAs effectively makes health care more expensive for low-income persons than for high-income persons.

On the other hand, as Remler and Glied, and the present analysis, show clearly as well, the HSA/high-deductible construct is not likely to alter significantly the health-care behavior of high income people – for example, the readers of the Bloomberg news wire. For one, high-income individuals and families will be able to absorb high deductibles with relative ease into their higher incomes. Furthermore, as noted, the tax code actually makes health care cheaper for high-income families, relative to Americans with lower incomes. With the government picking up close to half of the health care cost of high income people under HSAs, it can be doubted that self-rationing of health care by price will play any significant role among such families if they were forced to switch from the comprehensive baseline policy to an HSA product. It is fair to wonder whether the advocates of HSAs, who usually live in high income brackets, are aware of this asymmetric impact of HSAs on the rationing of health care by price and ability to pay.

These are ethical policy issues that economists can identify but on which they cannot offer normative dicta. Policy makers, on the other hand, might wish to explore these issues further, before shifting the nation wholesale toward the HSA/high-deductible health insurance, as this product is currently designed.

Making the HSA/high-deductible construct less regressive: Should policymakers want to make the HSA/high-deductible construct considerably less regressive, they could do so by modifying three parameters of that construct.

(1) The maximum out-of-pocket stop loss visited on individuals and families could be made to rise with disposable income (which raises the delicate question whether corporate executives who are paid annually in the millions of dollars should have any health insurance at all).

(2) Instead of making deposits into HSAs tax deductible, any American individual or family, regardless of taxable-income level, could be granted a refundable tax credit of, say, 30 percent.

(3) Chronically ill individuals and families could be granted risk-adjusted subsidies, so that the chronically ill are not forced to bear the entire maximum risk exposure under their health insurance out of their own resources.

With these modifications, the HSA/high-deductible construct probably would meet much less resistance than it has hitherto.


1To be sure, health insurance procured at the place of work includes a tax preference as well, as any premiums paid by employers are not taxable income to the employee but a tax-deductible business expense to the employer. Many economists consider that tax preference regressive as well, although the regressivity in that context is not nearly as certain as it is under the HSA construct. It is so because employers typically procure health insurance for their employees on a group basis, paying the insurer one lump sum premium for all employees. How that lumps sum is then shifted backwards into the take-home pay of individual workers is not clear, even to economists.

2Harvard economist Martin Feldstein, for example, endorsed that approach at a luncheon address during the American Economic Association meeting of January, 2006.

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7 Responses to “INSURANCE: A Closer Look At HSAs”

  1. Chris Fleming Says:

    To read a response to Uwe Reinhardt from Dahlia Remler and Sherry Glied, go here.

  2. Tom R McLean Says:

    HSA and high-deductible health insurance is likely to cause many Americans to tighten their belts. But this does not necessarily mean that Americans will forgo purchasing health care. To the contrary, in a telemedical world there is good reason to believe that cost-conscious patients will purchase more health care from low-cost foreign providers.

    The rise of medical tourism indicates that may patients no longer care about a physician’s education pedigree, nationality or color of the doctor’s skin. Changing provider preference can also be seen with in the increasing numbers of nurse practitioners writing prescriptions. CVS, Walmart and other drug store chains are hiring these practitioners because they attract customer-patients (who want to avoid doctors’ waiting rooms) into their stores and steer business to their pharmacy counters. Today’s patients, it would seem, no longer care if they see a physician so long as their medical problems are solved. In fact, judging by the transient success of (which connected remote patients to an on-line board certified internist who wrote prescriptions over the internet), patients no longer care if their provider is appropriately licensed.

    So suppose Federal Express goes into the health care business. Federal Express could hire physicians in Bangalore to operate a website. These physicians would listen to patients’ histories and do limited examinations of the patients via a web video camera. (Such cameras are now affordable by most people who own a computer.) After making a diagnosis the doctor would write a prescription and charge the patient one-tenth of what an American physician would charge. The Indian physicians would be happy because they would operate at a higher volume. The American patient would be happy because they would spend less out-of-pocket HSA funds and avoid having to wait to see a doctor. Finally, Federal Express would be happy because it would make money delivering the needed medication to the patient by the next morning. (Perhaps by have the drugs ship from Canada.)

    In short, in a global market for health care services the regressive nature of HSA-high deductible insurance does not necessarily mean that patient will forgo needed medical care.

  3. Greg Scandlen Says:

    Uwe, Uwe, Uwe, let’s first get our facts straight, shall we?

    First, $5,000 HSA deductibles are not allowed under current law, nor are $5,000 HSA contributions. the maximum deductible for an individual in 2007 is $2,850. That is also the maximum contribution (plus an $800 “catch-up” contribution for people age 55+). So Remler and Glied’s hypothesis is actually at the high end of the possibilities.

    Next, their hypothetical PPO coverage of $350 deductible with 20% coinsurance to an OOP max of $1,800 is at the low end of the spectrum for PPOs. The most recent KFF/HRET survey places the average PPO deductible at $473 for an individual. (It also found the average HDHP with a savings account deductible was $1,715, btw)

    Further, the KFF/HRET survey reveals many cost-sharing provisions in PPOs that few analysts pay attention to — flat dollar physician visit copays with no OOP limit, per-admission hospital deductibles, per diem hospital copays, etc.. It also found that 21% of workers have no maximum on their OOP costs, and only 54% have a maximum below $2,000.

    I don’t remember if Remler and Glied include premiums in their calculations. If they don’t, they should. There is a basic trade-off here — higher OOP = lower premiums and vice versa. Ain’t nothing magical about it.

    Other than that, I agree with your conclusion that the particular mixture of deductible, coinsurance, and OOP limit (and premium) one pays “is a matter worth further study and thought.” And that there are additional approaches that are worth throwing into the mix, such as basing contributions on financial need or on risk.

    Let’s try it all out and test empirically what mixture produces what results.

    Once we’ve done that, let’s let individual families decide what combination works best for them.

    Greg Scandlen
    Consumers for Health Care Choices

  4. Jane Hiebert-White Says:

    Further debate on HSAs: Bob Laszewski asks on his blog today: “Am I right in my pessimism that HSAs and HRAs are not going to have a fundamental impact on either health care cost or quality? Well, at 5% of the market and 10 million people, we should be at a point where we will soon have enough data to know. We won’t have to argue about it much longer.”

    And Matthew Holt highlights Reinhardt’s post and the HSA debate on The Health Care Blog.

  5. bett martinez Says:

    I am a broker/ and part time academic, trying in CA to convince a carrier to bid on a group of under 65 retirees in County Government. The General Accounting rules, GASB, no longer allow the County to lump the active employees in with the retirees without incurring a liability, so they are put out to a consultant, who is actually an insurance broker that takes a fee instead of a commission. For this, he gets called a consultant.

    The carrier I want to bring in says it’s not worth the risk to bid on this older group without the younger healthier set, and I must say, if one looks at a calculator, there’s sense to this. By the way, we are not talking HSA here. The majority of employees are blue collar or have that mentality, and so we’re looking at HMO type plans with relatively low copays.

    What appeals to me about Prof. Reinhardt’s ideas (well, I like a lot of them) in this instance is the idea of subsidies provided for those with chronic illness. Could these subsidies be tied somehow to cost-control on the provider side, as well as to some lifestyle management component on the patient/consumer side? I realize that this shared responsibility stuff is all the rage, and in spite of the one or two studies that are touted, find this kind of blame-the-victim mentality is not much more to be admired than the New Age California philosophy that implies if we don’t control our thinking in a positive manner then we deserve our illnesses.

    Still, there could be some benign work to help people with chronicities, or those in danger of same, to make what lifestyle changes would be amenable and affordable in a culturally appropriate manner.

    Would appreciate any comments or suggestions you might offer in this vein, also, is there any possibility of turning this group into a study, since there are likely to be several carriers offering different designs?

    One more thing: In CA there is no such thing as embedded HSAs. Therefore a single mom with a child purchasing a Family plan with a $2400 deductible would be subject to a $4800 deductible before anything beyond the one-time well-check would be covered.

    I always write the mom on her plan and take the child out, presuming the child is healthy enough to pass underwriting, putting him/her on the lowest affordable deductible, and out-of-pocket maximum. Co-pay is not such an issue as a healthy child will not have many doctors visits, whereas if the child has one hospitalization, or even a costly emergency room visit, s/he is likely to use the entire deductible and soon reach the out-of-pocket maximum.
    If all providers are in the network (and there are often surprises that cannot be controlled – the surgeon one expected is out when surgery needs to be scheduled, or the anasthesiologist doesn’t accept assignment) but IF all providers are in network, and other costs fall under “usual and customary” then the plan begins to pay 100%.

    However, if we could have embedded deductibles, then those who could benefit somewhat by opening a Health Savings Account could have the separate deductibles, and the tax perks.

    that’s my 2 cents. Very helpful insights for a complex problem.

    Bett Martinez, M.Ed., Broker CA Lic#-0794317; 510-526-0312

  6. David Harlow Says:

    Brad —

    Check out the RAND report, Health Affairs Blog post on the report and related Washington Post story, all linked from my blog post on the subject here, from a few months back.

    David Harlow

  7. Brad Kirkman-Liff Says:

    Is there any data as to the percent of those covered by high-deductible health plans and Health Savings Accounts who are low and moderate income? My impression is that the firms who are offering HDHP/HSA benefits have tended to have contracted out their low-income jobs to other firms, and only provide health benefits to higher-paid employees. The finding that the HDHP/HSA model is more beneficial to higher income households is in some ways simply a reflection that have any employer-sponsored insurance is better than having no employer-sponsored insurance at all.

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