February
24, 2006
HSA's Are the Right Medicine at the Right Time
By Sally
C. Pipes
President Bush has
put reforming health care at the center of his domestic agenda.
Unlike previous presidents, he’s prescribing policies, such
as Health Savings Accounts, that rely on freeing up individuals
and markets, expanding tax savings, and providing more health
care options, rather than expanding government.
Health Saving
Accounts, first allowed in 2004, combine high deductible medical
insurance with a side fund that provides a tax deduction for contributions,
tax-deferred investment growth, and tax free ultimate dispersal,
provided funds are spent on qualified medical expenses. In 2006,
an individual is responsible for the first $1,050 to $2,700 of
expenditures ($2,100 to $5,450 for families). Routine care is
paid for out of pocket, albeit in a tax advantaged way.
Just as car
and homeowners insurance doesn’t pay for maintenance and
minor repairs, health insurance kicks in only when true catastrophe
strikes. Once a deductible is met, however, a generous insurance
package, often 100 percent of covered expenses, takes over the
burden. Money that isn’t spent in one year rolls over into
the next, earning compound interest.
In short,
Health Savings Accounts put the insurance back into health insurance,
provide Americans with a triple tax free means to save for future
expenses, and deliver a strong incentive to economize on the use
of health care.
Like any
change to the status quo, HSAs have powerful and vocal enemies.
Liberal activists groups, policy analysts, and members of the
media are attacking HSAs, claiming that only young, healthy, and
well heeled Americans will find the innovative arrangements attractive.
“You’re giving them peanuts,” gripes Columbia
University professor Sherry Glied who authored an anti-HSA study
for the Commonwealth Fund. “Very few people will gain insurance
coverage because of tax preferences for health savings accounts.”
The evidence
so far contradicts the critics. Health Savings Accounts have proven
popular with both individuals and employers. Although a significant
change from traditional medical insurance, more than three million
Americans are now covered by HSAs.
HSAs are
expanding health insurance. According to a study by America’s
Health Insurance Plans, an industry organization for health insurers,
among small businesses, 27 percent of companies purchasing policies
previously offered no health insurance. The same study found that
37 percent of individuals purchasing HSAs were previously uninsured.
By allowing people to retain and roll over money not spent on
health care, HSAs transform health coverage from a use it or lose
it insurance option into a wealth accumulation vehicle, similar
to 401k retirement plans.
A wide range
of Americans find HSAs attractive. Far from being only for the
wealthy, one in two new purchasers in the individual market earn
less than $50,000 each year, according to a study by eHealthInsurance,
an online brokerage serving the individual market.
And it hasn’t
just been the young. Old dogs, it seems can learn new tricks.
The eHealthInsurance study found that 45 percent of purchasers
were over 40, with 19 percent age 50 or older. A study by Assurant
Health, which serves small businesses, individuals, and families,
found that 73 percent of its HSA customers were families with
children and that 57 percent contained individuals over the age
of 40.
HSAs show
that economic incentives matter. The consulting firm McKinsey
surveyed employees who had HSA-style accounts for an entire year.
The good news: employees were more attentive to their health,
being 30 percent more likely to get an annual physical and 25
percent more likely to engage in healthy behaviors, and 20 percent
more likely to comply with treatment programs recommended by doctors
than their colleagues in traditional health plans.
The bad news:
Only 44 percent of study respondents were more satisfied with
their new plans than their former plans. A major source of dissatisfaction
is the lack of information on price and quality differences among
providers. Eight in ten respondents reported not having enough
information on fees doctors charge.
Although
disappointing, the satisfaction numbers are hardly surprising,
given that most of the U.S. health care infrastructure is designed
to shield patients from ever knowing the true costs of care. As
thousands more Americans elect HSAs, health care providers will
surely produce consumer oriented information. Aetna, for example,
recently made available the prices its members will pay specific
doctors for their 25 most commonly performed procedures on its
website.
Health Savings Accounts
are not a cure all pill for all that ails health care in America.
But they are the right medicine at the right time.
Pipes
is president and CEO of the Pacific Research Institute and author
of "Miracle Cure: How to Solve America's Health Care Crisis
and Why Canada Isn't the Answer." E-mail: spipes@pacificresearch.org.
