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MARKETWATCHHow Much More Cost Sharing Will Health Savings Accounts Bring?
Proponents of health savings accounts (HSAs) contend that they will reduce medical expenditures. In practice, however, the effect of HSAs, and the high-deductible health plans that must accompany them, will depend on the actual provisions of those plans and of the plans they replace. We show that typical plans in the market today already contain substantial cost sharing. We find that many HSA/high-deductible arrangements would actually reduce cost sharing for many groups. In particular, the group responsible for half of all medical spending would see no change or a decline in cost sharing at the margin and on average.
HEALTH SAVINGS ACCOUNTS (HSAs) are a form of medical savings account (MSA) that permits people to save money tax-free with which to pay their out-of-pocket health care expenses. HSAs were included in the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 and figure heavily in Bush administration health care proposals and policy analysts’ writings.1 Current proponents of HSAs, like the original proponents of MSAs in the 1990s, claim that HSAs can reduce medical care costs because of the cost-conscious choices of those spending their own money.2 Recently, Joseph Newhouse stressed the similarities of consumer-driven health care, which includes HSAs, to the 1970s’ RAND Health Insurance Experiment’s (HIE’s) high-deductible option.3 However, thanks in large part to the RAND results, today most health insurance plans already contain substantial cost sharing. Moreover, all HSA legislation and proposals require that the accounts be coupled with a high-deductible insurance policy, to protect against major financial risk. Limitations on the high-deductible policies, such as out-of-pocket maximums, although sensible and laudable for protecting enrollees from financial risk, undermine HSAs’ likely cost-reducing effects. To predict the magnitude of reductions in health care spending that should be expected from HSAs, we must use actual HSA policies and proposals and compare them with health insurance plans as they exist today. A considerable literature evaluates the possible benefits and costs of various configurations of MSAs from the last period when they were of major policy interest.4 Although the simulation methods vary and the policies examined differ somewhat from one another and from the policies today, none of the simulations predicted major impacts on medical spending. As we demonstrate here, examination of the cost-sharing features of HSA/high-deductible plans and typical plans in the current market show that substantial spending reductions are even less likely today.
The conditions. Under the HSA legislation, Americans who select a high-deductible health insurance plan may establish, make contributions to, and make payments from a tax-free HSA. The plan must include a yearly deductible of $1,000–$5,000 for an individual or $2,000–$10,000 for a family. An eligible person or his or her employer may contribute to the account up to the value of the deductible (but not more than $2,600 for an individual or $5,100 for a family). The yearly out-of-pocket maximum is capped at $5,000 for an individual or $10,000 for a family. Contributions to HSAs may be made from pretax income, as long as a person is eligible (that is, covered only by a high-deductible plan). Withdrawals that are used to pay for medical expenses, incurred while a person is eligible, are not taxable. Withdrawals used for other purposes are taxed and subject to an additional 10 percent penalty. Balances accumulate tax-free over time (including during periods when a person is not covered by a high-deductible plan).5 Thus, HSAs are a way of extending the tax subsidy available for health insurance premiums to out-of-pocket medical spending. The rationale. Health economists have long criticized the tax subsidy to health insurance premiums as encouraging too much health insurance. The favorable tax treatment of health insurance was seen as "worse" than that of, say, mortgage interest payments, because it had the further effect of encouraging health care spending to be made through insurance, rather than out of pocket. According to this theory, third-party payment for health care insulates people from feeling the cost when treatment decisions are made, because patients and doctors are spending other people’s money; this, in turn, increases overall medical care spending. Empirically, the RAND HIE found that more-generous insurance does indeed increase medical spending.6 The question. A reduction in health care spending is frequently touted as HSAs’ primary advantage. Whether or not this would occur and to what extent depends on how responsive people are to cost sharing, the form and extent of cost sharing in place now, the form and extent of cost sharing under HSAs/high-deductible plans, who would face the increased cost sharing under such plans, and what share of medical spending those people would be responsible for.
BLS surveys. According to the Bureau of Labor Statistics (BLS), cost sharing at the point of service has been rising in the past several years.7 Cathy Baker found that in 2000, mean annual deductibles were $334 (individual) for full-time participants in non–health maintenance organizations (HMOs) in private industry, compared with $219 in 1992–93.8 The mean out-of-pocket maximum spending was $1,803 (individual) in 2000 but only $1,416 in 1992–93.9
The most recent BLS survey, for 2002–03, is based on somewhat different questions and so is not fully comparable with the earlier survey.10 It found that 79 percent of non-HMO plans had a deductible (a mean of $240); 81 percent had an out-of-pocket maximum (a mean of $1,688); and the mean coinsurance among everyone was 12–16 percent (Exhibit 1
KFF/HRET surveys. The 2004 Henry J. Kaiser Family Foundation (KFF)/Health Research and Educational Trust (HRET) survey found that 97 percent of covered workers had some copay or coinsurance for office visits and that 53 percent had hospital cost sharing in addition to other forms of cost sharing. Using the KFF/HRET data, we calculated that in 2004 the average worker covered by employer-sponsored insurance had a deductible of $221. The average rises to $424 if out-of-network deductibles for point-of-service (POS) and preferred provider organization (PPO) plans are included. We also calculated that the average out-of-pocket maximum for all plans was $1,864 among those who had such a maximum and that 20.6 percent had no such maximum, exposing them to potentially unlimited out-of-pocket spending (Exhibit 1  ).11
The 2005 KFF/HRET survey asked explicitly about high-deductible plans that qualify for HSAs and found that the mean deductible among these plans was $1,901 and the mean out-of-pocket maximum was $2,551.12 To compare such plans with typical employer-based plans, we used the individual plan-level data from the KFF/HRET survey to determine what share of people with employer-sponsored insurance have as much cost sharing as these plans have, or more (columns 3 and 4 of Exhibit 1 Plans in the RAND HIE versus plans today. In contrast to the substantial amounts of cost sharing in health plans today, the most generous plan in the RAND HIE provided entirely free care with no coinsurance, no deductible, and thus no out-of-pocket maximum. The second-most-generous plan had 25 percent coinsurance, no deductible, and an out-pocket maximum of $1,000 ($2,185 in 2000 dollars), or 5 percent of family income ($1,480 in 2000 dollars for the mean-income family), whichever was lower. Plans today typically also have substantial managed care features. For example, utilization review (UR) was rare in the 1970s but is common today even in "non–managed care" indemnity, fee-for-service plans.13 Thus, health care plans today already contain both substantial cost sharing and managed care measures that are likely to reduce spending.
The prototypical comprehensive plan today has a deductible of $350, a coinsurance rate of 20 percent, and an out-of-pocket maximum of $1,800. What are the cost-sharing consequences of such a policy coupled with the existing provisions for the tax-deductibility of health insurance premiums? Marginal price. For amounts up to the deductible of $350, the individual must pay every dollar out of pocket with after-tax dollars (no deduction available).14 Therefore, to receive an additional dollar’s worth of medical care services, a person must forgo a dollar’s worth of consumption somewhere else, such as for education, entertainment, food, or housing. Economists refer to the out-of-pocket amount that must be sacrificed for additional health care as the marginal price of health care. Here the marginal price is one dollar of other goods for each dollar of health care. Once the deductible is reached, the insured person pays the coinsurance rate and so obtains another dollar of medical care by forgoing only twenty cents of consumption elsewhere. In this range, the marginal price of health care is twenty cents of other goods and services sacrificed for every dollar of health care.
This marginal price continues until the out-of-pocket maximum is reached, which occurs at a total medical spending level of $7,600.15 After that point, all further care costs nothing out of pocket. From that point on, the marginal price of health care is zero (Exhibit 2
Average price. Evidence from the RAND HIE showed that plans with greater cost sharing have reduced initiation of episodes of treatment and reduced numbers of hospitalizations, but have not reduced care conditional on an episode of treatment or a hospitalization.17 So, in characterizing cost sharing, we should also consider the consequences of big "either-or" decisions, such as whether or not to be hospitalized, in addition to the incentives on the margin. Therefore, we also examined the share of total expenditures paid out of pocket, or the average price of medical care. In Exhibit 2 , the greater the height at any given spending level, the higher the average price of medical care.
Impact of a high-deductible plan without an HSA.
Moving to a high-deductible plan is expected to increase cost sharing. We take as our prototypical high-deductible policy a simple one with no coinsurance, a deductible of $2,500, and an out-of-pocket maximum of $2,500.18 Although the high-deductible policy has greater cost sharing both at the margin and on average for spending up to $2,500, after that, the more comprehensive policies have greater cost sharing on the margin (Exhibit 2 Furthermore, the same out-of-pocket maximum will affect a different range of medical spending under a pure deductible system than it will under a coinsurance system. To reach $2,500 in out-of-pocket spending under a plan with a $2,500 deductible, the beneficiary must spend a total of $2,500 on medical care. Beyond that level, additional care does not impose any out-of-pocket cost on the beneficiary. To reach the same out-of-pocket maximum in a plan with no deductible but with 20 percent coinsurance, the beneficiary must spend a total of $12,500 on medical care before reaching the level where no additional out-of-pocket costs are incurred. Using coinsurance rather than deductibles permits a much higher spending level to be affected for any given maximum level of out-of-pocket spending.19 Effect of HSA/high-deductible plans on cost sharing. With an HSA, all out-of-pocket expenses become tax-advantaged.20 HSAs level the playing field between medical care provided through insurance and that provided through out-of-pocket spending (from the HSA) by making both tax-favored, neutralizing the distortion between insurance-funded care and out-of-pocket-funded care. However, as currently designed, HSAs increase the overall distortion between medical care and all other goods and services. Mark Pauly has described this type of policy as "two wrongs" and questioned whether "two wrongs make a right."21 Specifically, with an HSA/high-deductible plan, until the deductible is met, one dollar of medical care can be purchased with a pretax dollar, resulting in a price on the margin for medical care of (1–marginal tax rate). Because HSA contributions are shielded from state and federal income taxes, as well as the payroll taxes of Social Security and Medicare, this can be a substantial rate.
To illustrate the effect of this subsidy, we took a prototypical total marginal tax rate of 40 percent. Exhibit 3
Moving to HSAs changes cost sharing in several ways. First, for the very healthy, cost sharing is actually reduced by the move to HSAs, thanks to the tax subsidy extension. Second, the level of medical spending at which there is no further cost sharing on the margin has been dramatically reduced, from $7,600 to only $2,500, because of the combination of only a modest increase in the out-of-pocket maximum, an increase in cost sharing prior to reaching the maximum, and the tax subsidy to out-of-pocket spending. Third, the average level of cost sharing for expensive episodes—the most important aspect of cost sharing according to the RAND HIE evidence—has been reduced for spending levels above $6,100. In fact, only spending categories between $700 and $6,100 saw average cost sharing increase, and only categories between $700 and $2,500 saw both marginal and average cost sharing increase. Thus, moving from current policies to HSA/high-deductible plans is far from a clear move toward increased cost sharing. One of the most striking features is how raising the deductible without further increasing the out-of-pocket maximum substantially moves the level of spending at which all further care no longer comes from out of pocket. To the extent that there are choices to be made about what to do in expensive episodes, cost sharing will have been greatly undermined. Moreover, the RAND experiment shows that the largest effects on behavior occur in the shift from no coinsurance to 25 percent coinsurance. Therefore, increasing cost sharing from zero to 25 percent is likely to have a larger effect than further increases.
Health care spending is heavily concentrated among a few people.22 Moreover, a sizable share of this concentration persists over time, with people with high expenditures continuing to be high spending for many years.23 Since HSAs will cause cost sharing to increase for some and to decrease for others, we examined how many people are in each of spending category and what share of health care spending the categories represent.
Using the 2001 Medical Expenditure Panel Survey (MEPS), we found that only 30 percent of individuals and 16 percent of all medical spending are for those who face increased cost sharing both on average and on the margin; only 18.7 percent of spending is for those who will face increasing cost sharing on the margin; and only 42.2 percent of spending is for those who face any kind of increased cost sharing, whether on the margin or on average (Exhibit 4
The above analysis assumed that medical spending would not be affected by the changes in cost sharing. In fact, we know that cost sharing does affect medical spending, and indeed the whole purpose of increasing cost sharing is to alter choices in treatment decisions. Moreover, the above analysis neglected all variation among insurance plans and simply compared prototypical plans. However, several studies of earlier MSA policies and proposals incorporated both effects and found that if MSAs were adopted by all people under age sixty-five, medical spending would fall by a range of 2–13 percent.24 However, these studies generally used earlier baseline data and so did not take into account increases in typical cost-sharing arrangements as seen today. If people are not required to use HSAs, not all will choose them. Two of the earlier MSA studies also looked at the likely effect on spending, incorporating a different selection of MSAs and plans depending on health status. One study estimated that spending would rise 1–2 percent; another, that it would fall 6.8 percent.25 The American Academy of Actuaries (AAA) predicted a decrease of 2–11 percent.26 Given the further increases in cost sharing that have occurred since the 1990s, we would expect even somewhat smaller effects than those predicted. A recent AAA study that used the experience of similar health reimbursement arrangements (HRAs) to predict the likely effect of HSAs also predicted only modest effects.27 Finally, early examination of consumer-driven health plans, which include greater cost-sharing features, finds that relative to HMOs, they increase medical spending.28
Because today’s health insurance plans also contain substantial utilization review of hospitalizations, the most important margin for cost saving under the RAND HIE (having a hospitalization or not) is likely to be less price-sensitive. Today’s health insurance policies are far from the generous, no-questions-asked policies of the RAND HIE era. The point is not that the lessons of the RAND experiment have changed—people still behave in the same way—but that the contracts are different, because insurers have already incorporated the HIE’s message. 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 high end. In fact, maintaining or introducing an out-of-pocket maximum while increasing the deductible can greatly reduce cost sharing for those high spenders who are responsible for a large share of overall health spending. Thus, we find that current HSA/high-deductible plans fall short of the accompanying rhetoric. One response to this analysis might be to encourage further increases in cost sharing and give HSA/high-deductible policies more bite. However, as our results show, sizable increases in cost sharing would be required if a large share of medical spending were to be made susceptible to cost sharing. Raising incentives for cost-consciousness necessarily increases financial risk, by the very nature of those incentives, and it might undermine the access to care that we wish to preserve.29 Both political and market realities indicate that people value reductions in financial risk and access to care when they are seriously ill. Whether the benefits of increasing the cost sharing of HSA/high-deductible plans outweigh the costs depends on the magnitudes of those effects.
Dahlia Remler (Dahlia_Remler{at}baruch.cuny.edu) is an associate professor in the School of Public Affairs, Baruch College, City University of New York. Sherry Glied is a professor and chair of the Department of Health Policy and Management, Mailman School of Public Health, at Columbia University in New York City. The authors thank Bisundev Mahato for helpful research assistance; Cathy Baker, Isadora Gil, and Jeremy Pickreign for discussions about the survey methods and questions; and Kathy Swartz and participants in the Columbia Health Alliance seminar, the Mount Sinai Medical School Health Policy Seminar, and the Association for Public Policy Analysis and Management Fall 2005 conference for useful comments. This work was supported (for Glied) by the Commonwealth Fund and (for Remler) (in part) by the City University of New York PSC–CUNY Research Award Program.
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