The Case against Health Savings Accounts

Asking employees to pay more for their care can be a plus on balance sheets but a minus on medical charts, say critics.

With health-care costs perched high on their list of worries, many CFOs see health savings accounts as a way to stanch the bleeding. But growing corporate interest in HSAs has been met by a growing backlash by critics and researchers.

A creation of the 2003 Medicare act, HSAs do offer employers the hope of curbing their insurance expense. Under the law, the accounts, which enable workers to set aside pre-tax dollars they can later use toward their out-of-pocket medical expenses, must be offered in tandem with a high-deductible health plan (HDHP).

In an HDHP, an employee pays at least $1,000 for health care ($2,000 for family coverage) before insurance kicks in. Because employees pay so much out of pocket, their employers pay much lower premiums than they would for traditional insurance.

Then there are the tax advantages. Employees who choose to deposit pre-tax pay into an HSA not only lower their taxable incomes, they also reduce the gross payroll upon which the employer is taxed. Likewise, any employer contribution doesn’t count toward the employee’s taxable income.

But the strongest argument for HSAs, their advocates say, is that they encourage employees to be more cost-conscious medical consumers. Employees who lose their own money on medical care of their choice, the reasoning goes, will be more prudent about spending it than if an insurance company foots the bill. Such employees, therefore, could help shift market power from the supply side (that is, health-care providers) to the demand side (patients) and let some steam out of the relentless rise of health-care costs.

But will short-term cost cuts be followed by larger longer-term expenses? Critics are arguing with increasing fervor that employees who control their own HSAs may be so cost-conscious that they delay medical care that they really need, only to incur greater costs when their conditions worsen. Indeed, new research confirms that ailing employees who have higher out-of-pocket requirements also end up in the hospital more often.

Other findings, however, leave little doubt that HSAs help make employees more cost-conscious consumers. People in HDHPs and similar plans are significantly more likely than people in more-conventional plans to consider the cost of care when they’re sick or filling a prescription, according to a survey of 1,200 insured Americans last fall by the Employee Benefit Research Institute. The non-partisan, Washington-based think tank also found that such people are also more likely to check whether expenses were covered, to ask about the price of care before receiving it, and “to discuss treatment options and the cost of care with their doctors.”

From the employer’s point of view, a benefit plan that encourages such doctor-patient conversations can be potent in its appeal. According to the Spring 2006 Duke University/CFO magazine Business Outlook Survey, which drew responses from 323 U.S. finance chiefs, the rising cost of health care trailed only global competition on the litany of concerns.

That worry is probably helping to fuel the current surge in HSA/HDHP participation. In January, enrollment by employees and individual consumers in HSA-eligible insurance plans topped 3 million, more than triple the number from March 2005, according to America’s Health Insurance Plans, an association of insurers.

The growth, however, has been matched by a wave of negative research and criticism. One widely heard barb is that HSAs appeal only to a small number of young and healthy employees. “Most people would rather overinsure than underinsure,” notes Edward Kaplan, national health practice leader of The Segal Company, a New York-based benefits consultancy. “It’s a product looking for a market.” By that reasoning, not enough employers will offer HSAs/HDHPs to change national buying patterns, let alone cure the nation’s health-cost woes.

Another criticism is that by encouraging “adverse selection,” HSAs would unravel the employment-based insurance system as a whole. HSAs “are attractive to healthier individuals, who will be tempted to opt out of company plans, leaving less healthy individuals behind,” wrote Paul Krugman and Robin Wells in the March 23 issue of The New York Review of Books. Since the employees who remained in traditional plans would be less healthy, on average, insurers would have to charge higher rates to cover their increased risks.

Long before the Medicare act created HSAs, however, consumer-driven health plans (CDHPs) were already the subject of forceful attacks that targeted their effect on employee health. Studies have recently confirmed the worst fears about such plans: They can induce beneficiaries to stint on health care that they truly need. According to the Employee Benefit Research Institute study, 35 percent of the people in CDHPs and 31 percent in HDHPs “reported delaying or avoiding care, as opposed to 17 percent of those in comprehensive plans.”

Even more damaging to the notion of consumer-driven health care, perhaps, is new research on the use of cholesterol-lowering drugs by heart patients. Published in the January issue of The American Journal of Managed Care, the study — based on claims data from more than 62,000 patients in 88 health plans — found a link between higher pharmacy co-payments and poorer health.

Specifically, the authors of the AJMC study found that when the co-payments were raised from $10 to $20, the portion of patients who took their full course of medication dropped by between 6 and 10 percentage points. The researchers also found that compared with patients who weren’t taking their medications properly, high-risk heart-patients who completed their full course of treatment suffered 357 fewer hospitalizations per 1,000 cases each year.

Fewer hospitalizations, of course would lead to lower health-care costs in the long run. Interestingly, however, the AJMC authors wouldn’t do away with these co-payments entirely; they’d fine-tune them. By eliminating co-payments for high-risk and medium-risk patients but raising them from $10 to $22 for low-risk patients, they argue, plan sponsors and insurers could eliminate nearly 80,000 hospitalizations and 31,000 other hospital visits per year. Total annual saving: $1 billion.

Along those lines, Segal’s Kaplan says that some employers have contemplated a “tiered” health plan that would offer higher coverage for conditions that have a higher overall medical risk. For instance, he suggests, such a plan might pay for 90 percent of the care for cancer or heart disease but only 50 percent for asthma or dermatological therapy.

Even those who favor other types of plans acknowledge the appeal of HSAs for certain people. One benefit design that Kaplan especially favors is a “personalized PPO” plan, in which participants choose from various levels of co-payments deductibles, and coverage. In other words, he says, participants select the kind of insurance they want rather than make the direct cost choices about medical care that are required with an HSA.

Nevertheless, among the levels of coverage in the personalized plans, there’s a place for the healthy employee with an appetite for risk: a health savings account, complete with high-deductible coverage, can be made available.

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